Budgeting in Management Accounting: Objectives, Process, Advantages and Limitations

This report provides an overview of budgeting in management accounting, including its objectives, process, advantages, and limitations. It also discusses two journal articles that examine budgeting in real-life organizations in Nigeria, highlighting similarities and differences in their findings. The report concludes with implications for management accountants in Australia.

RUNNING HEAD: MANAGEMENT ACCOUNTING
Budgeting

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Executive summary
The report summarizes about the two journal article based on management accounting topic
budgeting. First part of the report contains a detail explanation of budgeting. It explains about its
objectives, process, advantages and disadvantages. The report suggested that budgeting is the
important aspect of management which is to be applied at every level of the organization. In the
further part, the findings, purposes and research questions of both the articles are been discussed.
First article is related to the impact of budgeting on the performance of Cadbury Nigeria Plc and
other focus on the budgetary control practices in government corporations of Osun state. All the
similarities and differences in the findings are summarized followed by the outcomes of each
article. In the last, a conclusion is provided that concludes the whole discussion done in the
report.

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Contents
Introduction.................................................................................................................................................4
Requirement 1.............................................................................................................................................4
Requirement 2.............................................................................................................................................8
Requirement 3...........................................................................................................................................10
Requirement 4...........................................................................................................................................12
Conclusion.................................................................................................................................................13
References.................................................................................................................................................14

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Introduction
Budgeting is considered to be the vital function of management and is used as a performance tool
in the companies to evaluate and determine their performance. Budgets are been prepared by all
the private, public, profit and non-profit organization with an objective to make their operations
effective and efficient. Another objective is to detail their actual performance compared with the
standard one. The process of budgeting include preparation of various types of budgets that
include some fact s and figures which are estimated and forecasted for the coming future. The
data reflected by budgetary report help the management and executives to take corrective actions
and formulate suitable strategies for the future course of action. Budgets help the organization in
meeting its targets and achieving its objectives in an efficient and effective manner. It provides
direction to the employees and managers in order to work in the best interest of the company so
as to book future growth and success (Baiocchi and Ganuza, 2014).
The report includes a brief introduction about the selected topic budgeting and provide insights
about the facts like its process, benefits and limitations and others. In the later part, the two
journal articles which articulate the budgeting system in real life organization are been explained.
It includes the discussion of the purpose and research question, similarities and differences in the
findings and the outcomes or lessons learned from the articles that will be useful for the
management accountants in Australia. In the last, a conclusion is given which comprises of the
finding of the report.
Requirement 1
Explanation of budgeting

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Budgets basically refer to the formal statements that communicate the predetermined goals,
objectives, strategies and policies of the organization to its employees and other individuals.
Generally, companies operate through different departments and segments and for each of them
different types of budgets are been prepared like sales budget for sales department, cash budget,
material purchase budget and others. The definition of budgets given by Institute of Cost and
Management Accountants is that they are quantitative statements prepared in advanced with a
purpose of reflecting or communicating the set policies and procedures, which are required to be
followed by the company in order to achieve their predetermined targets. Among the various
features of budgets, one of the characteristic is that it provides proper guidance to the people of
organization so that they can work in an efficient and effective manner and can achieve their set
targets in the provided time frame (Bogsnes, 2016).
Budgeting refers to the procedure of creating budgets which is pursued by the management at all
levels. It is very important for the managers to undertake such responsibility so that they can
easily figure out their company’s future income and expenses. All the small, large and medium
sized companies follow budgeting in their business and use the same as a tool to measure their
performance and position. Budgeting allows them to know the variance that have occurred while
comparing the actual and standard performance and guide them to take appropriate steps.
The process of budgeting comprises of some steps which are followed by each and every
organization. At the first stage the goal and objectives are defined and set for the business and
after that the core activities are determined which are to be performed for the purpose of meeting
the objectives. The third stage involves the allocation of resources to each activity identified.
Once the resources are allocated, the amount of expenditures and income are estimated to
calculate the profit figure. The last step involves implementation of budget prepared and constant

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monitoring of the same. The performance of all the departments is reviewed at the last according
to the budgetary reports (Gallani, et. al., 2018).
Purpose of budgeting
It is the responsibility of every company to maintain a balance between its assets or resources
and time so as to conduct smooth function of the operations. In lieu of completing such duty,
they need to make proper plans and establish suitable control system. All this can be facilitated
by the preparation of budgets and applying budgeting system in the organization. It is considered
as a vital tool as it helps in utilizing the available resources in the most optimal effective manner.
The objectives of budgeting are as follows:
 Used as a decision making tool
Preparation of budgets deals with the formation of a framework which helps the managers and
executives to take appropriate and suitable decisions that will be beneficial for the company. By
looking at the set figures and facts, managers can decide about the possible course of action
which can be taken and formulate the strategies that can be applied to the organization (Isaac,
Lawal and Okoli, 2015).
 Business performance review
Another objective is to use it as a tool for reviewing and comparing the performance of the
business. The budgets prepared allow the companies to manage and monitor their operations and
performance as a whole. It helps in identifying the gaps between standard and actual figures
which facilitates the managers to figure out the areas which require improvement so that overall
function of the organization can be improved (Kelly and Rivenbark, 2014)

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 Estimation of income and expenses
One of the motives of using budgeting is to determine the amount of expenses and income which
are likely to be incurred in future. The main purpose of this process is to forecast and predict the
future profits, income and expense of the company. It provides the same in a statement
comprising all the predicted income and their corresponding expenses.
Benefits of budgeting
 It facilitates efficient and effective utilization of available resources so as to make high
profits and make the operations cost effective.
 It helps the management of the company in taking proper decisions for the future growth
and success of the business (Rubin, 2016).
 It estimates all the income and expenses in order to predict the profitability of its
operations and the company as a whole. It determines the areas which can produce more
money for the firm and find out some profitable opportunities.
 It allows the managers to think and plan for a longer term. Budgeting stimulates
comparative analysis of the financial position of the company which eventually assists
the managers to plan accordingly.
 The main advantage is that it facilitates the evaluation of the company’s performance by
setting the targets for each department in advance. It makes the comparison easy and
reliable (Rubin, 2016).
Limitations of budgeting

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 Creation of budgets is a very expensive and time consuming process. It includes expert
skills and extra labor for making correct estimations and predictions. For the companies,
operating at big and large scale, budgeting is a very complex process.
 The figures included in budgetary reports are rigid in nature and cannot be modified as
per the changing business environment and market conditions. Any variations in the
market do not allow the managers of the company to modify their budgets accordingly.
Moreover, they cannot change their policies and strategies which are already formulated
in advance (Wildavsky, 2017).
 Chances of manipulating the budgets are high as they are prepared manually. The top
management and senior executives can change the facts and figures according to their
own interests and reflect a faulty image of the budgets. They can intentionally increase
the expenditure and decrease the income as per their own will and to make them fit into
the budget.
Overall, the term budgeting is a very important element of the management function as it provide
the complete guidance to the people and employees in order to ensure that all the predetermined
objectives and goals are met and the company is able to earn profits in future. Therefore, it can
be said that it is very much necessary for the companies to apply budgeting in their system so
that they can work in the most effective and efficient manner and achieve high growth and profit
in future (Wildavsky, 2017).
Requirement 2
This section explains the two articles which are selected for the analysis. The articles have
conducted research on the budgeting in real life organization. They are been taken from journals

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named as IOSR Journal of Humanities and Social Science and Journal of Business Management
& Social Sciences Research. The purpose and research question set out by the two studies is as
follows:
Article 1: The Impact of Budgeting and Budgetary Control on the Performance of
Manufacturing Company in Nigeria.
The purpose of conducting this research is to study the impact of budgeting practise and
implementation of budgetary control on the performance of a Nigerian manufacturing company
named as Cadbury Nigeria Plc. The article focuses on the practices adopted by the firm in order
to satisfy their needs in the most cost effective manner and fulfill their responsibility of
stewardship towards their stakeholders at the same time (Siyanbola, 2013).
Following are the research questions set by the article:
 What is the importance of budgeting tools and techniques in the manufacturing company
operating in Nigeria?
 How budgeting helps in planning the profit for the Nigerian company?
 What is the effect or impact of budgetary control on the performance of the employees
working in the manufacturing company?
 What is the reason behind the lack in having adequate skill for formulating appropriate
policies and procedures for the smooth functioning of the enterprise?
 The article also sets out the research question which states that why Nigerian company
operating in manufacturing sector is not able to plan and control their process of policy
implementation and control(Siyanbola, 2013).

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 What is the manner in which the inadequate and inappropriate data and records create
problems for the entity while implementing effective budgeting techniques?
Article 2: Budgetary Control and Performance in Public Corporations in Osun State
The purpose of the study is to determine the relation between the estimated and actual revenues
and expenses. The research is conducted on the five parastals working in Osun state which
includes the evaluation of their budgeting performance for the financial years starting from 2007
to 2011 (Olaoye and Ogunmakin, 2014).
The research question sets out by the article is that it is based on the premise that the
accomplishment of budget is far away from the reality and the differences between budget and
its accomplishment in real are very wide and are kept on increasing day by day. Moreover, the
government corporations prepare their budgets keeping in mind the social and public welfare so
that their mission of social development can be achieved smoothly. On basis of this, the study
formed a question that whether the relation between actual and estimated expenditure incurred
and income earned is weak or strong. Also, what are the implications of having a weak or a
strong relationship on the performance and position of government corporations operating in
Osun state of Nigeria (Olaoye and Ogunmakin, 2014).
Requirement 3
Similarities in the findings
The main similarity of both the articles is that both are focused on studying the implications of
budgeting and budgetary control activities on the performance of companies having their
operations in Nigeria (Siyanbola, 2013). Both of them suggested that there is a growing need for

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the organization to form and implement budgets in their system so that they can earn high profits
and make their working effective and efficient. Another similarity is that the studies were
conducted on the companies of Nigeria so they have undertaken the market and other conditions
of the same country. The findings suggested that budgets do assist in measuring the performance
of the entities by comparing their actual and budgeted data. It helps in identifying the areas
where more investment is required and the parts from which the expenditure can be cut down
(Olaoye and Ogunmakin, 2014),
Differences in the findings
The major difference occurs from the methodology used by both the articles. Article first used
the methods like direct interview, questionnaire and observations. Some direct and indirect
inquires were also made to the staff and management of the company (Siyanbola, 2013). On the
other hand, article second used analytical techniques of simple correlation that is applied for
computing the relationship between the actual and estimated revenues and expenditures
generated by five selected government corporations. The variation in the methodology eventually
brings a difference in the findings of both the articles (Olaoye and Ogunmakin, 2014).
Another difference is that findings of one study suggested that Cadbury and its departments have
a well defined approach to implement budgets in its systems and all of the segments are involved
in the process of budgeting (Siyanbola, 2013). The findings of second study suggested that Water
Corporation, agriculture department and college of education of Osun has weak relationship
whereas a strong relation between income and expenses was observed in case of Osun State
broadcasting Service Corporation and property Development Corporation. Apart from this, the
article one shows the research only one company of Nigeria named as Cadbury Nigeria Plc

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whereas article two conducted a research on five government corporations named as Agricultural
Development Corporation, College of Education, Broadcasting Service Corporation, Osun state
water corporation and Property Development Corporation (Olaoye and Ogunmakin, 2014).
Moreover, the research done on Cadbury include the analysis of primary data and on the other
side, the research of article two was based on secondary data derived from the annual reports of
corporations.
Requirement 4
Outcomes from study 1
 It is very important for the Nigerian manufacturing company to implement budgeting in
their process so as to meet their financial objectives.
 Cadbury prepare its budgets on annual basis and review and control the same on periodic
basis (Siyanbola, 2013).
 Being a multinational company, Cadbury follow a structure through which
responsibilities are assigned for the purpose of controlling the performance of employees.
 The feedback taken from every division is compared with the budgeted results and
variances are noticed (Siyanbola, 2013).
Overall, the outcome from study 1 states that in Cadbury, few numbers of employees were aware
about the budgetary system and by implementing the same, the company can motivate its work
force to satisfy its needs (Siyanbola, 2013).
Outcomes from study 2

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 The corporations like agriculture development, college of education and Water
Corporation have weak relationship with correlation -0.28, -0.41 and -0.33 respectively.
 The property development and broadcasting service corporation has strong relationship
with -0.58 and -0.64.
 The revenue generated by each corporation was not in accordance with the budgets and
therefore more investments and policies reorientation are required.
The lesson learned from both the articles is the creation of budgets and implementing a
budgeting system is the vital practice that has to be followed by the managers of the company.
The studies provide insights to the management accountants about the importance of budgeting
in a private and Government Company. They suggested that budgeting can be used as a
performance measurement tool as well as a technique to implement control in the business. The
accountants learn that practicing budgeting in their profession is very important as it is the need
of hour and every organization requires such technique in its system to work successfully in
future.
Conclusion
The report concludes that budgets and budgeting both are very much necessary for the
companies operating in Nigeria. It also states that the management and employees should work
in accordance with the budgetary allocation so as to meet the targets on time and achieve high
profits. In Cadbury Plc, many of the employees were aware about budgetary practices whereas
the government corporations failed to work as per their budgets. Therefore, it is recommended
that companies should prepare budgets and work according to achieve growth in future.

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References
Baiocchi, G. and Ganuza, E., (2014) Participatory budgeting as if emancipation mattered.
Politics & Society, 42(1), pp.29-50.
Bogsnes, B., (2016) Implementing beyond budgeting: Unlocking the performance potential.
United States: John Wiley & Sons.
Gallani, S., Krishnan, R., Marinich, E. and Shields, M.D.,(2018). Budgeting, Psychological
Contracts, and Budgetary Misreporting. United States: John Wiley & Sons.
Isaac, L., Lawal, M. and Okoli, T., (2015). A systematic review of budgeting and budgetary
control in government owned organizations. Research Journal of Finance and Accounting, 6(6),
pp.1-11.
Kelly, J.M. and Rivenbark, W.C., (2014) Performance budgeting for state and local government.
California: Routledge.
Olaoye, F.O and Ogunmakin, A.A., (2014). Budgetary Control and Performance in Public
Corporations in Osun State.IOSR Journal Of Humanities And Social Science, 19(7), pp.59-62.
Rubin, I.S., (2016) The politics of public budgeting: Getting and spending, borrowing and
balancing. Chicago: CQ Press.
Wildavsky, A., (2017) Budgeting and governing. California: Routledge.
Siyanbola, T.T (2013). The Impact of Budgeting and Budgetary Control on the Performance Of
Manufacturing Company In Nigeria. Journal of Business Management & Social Sciences
Research, 2(12), pp.8-16.