Traditional Budgeting and Standard Costing: Benefits and Limitations

This report discusses the effectiveness of traditional budgeting and standard costing in the current business scenario. It explores the benefits and limitations of these processes and their impact on business performance. The report also suggests ways to enhance business using these processes.

Running head: COST AND MANAGEMENT ACCOUNTING
Cost and Management Accounting
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Introduction
The development of various technologies and changes in the economic scenarios globally
has led to the companies and the enterprises to analyse their management process and their
financial and budget process. For the purpose of proper performance of the companies that are
sustainable in the economy, the stakeholders of the company has to make full use of all their
resources and this done by creating proper controlling and planning plans (Kokubu & Kitada,
2015).
It is due to this fact that the process of budgeting is regarded as one of the most effective
process with the help of which the companies can plan and control their performance and attain
their organizational goals. Budgeting is known to the process with the help of which evaluation
is undertaken in order to understand the performance and this motivates the employees (Chak &
Fung, 2015). This process is initiated with the help of proper co-operation, co-ordination and
communication among the various departments and even among the upper level management
and the lower level management of the companies.
The development of various technologies has indicated the fact that traditional budgeting
has grown to be a divisive factor and therefore its use in the companies are reducing as well
(Kamal, 2015). There are several authors who have gone against this budgeting process and have
highlighted that various new budgeting techniques like beyond budgeting etc have the capability
to eradicate traditional budgeting process.
In this report, the process of traditional budgeting will be taken into consideration and its
effectiveness in the current business scenario can be understood. It has been observed that with
the development of benchmark costing, the organizations have been making use of this process

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due to several factors and it is seen to be stock valuation, reduction in expenses, cost controlling
and the budgeting process. On the other hand, standard costing is recognised to be a process of
costing among the management of the companies as this system helps in the development of
undertaking decisions (Hopper & Bui, 2016). It has even been observed that standard costing is a
process that is hard to understand among the employees due to is complexity.
The current paper will therefore look to assess the benefits and the limitations of standard
costing and traditional budgeting in the working environment in the current economy. The paper
will even analyse the impact these processes have on the performance of the business and which
are the processes that can be incorporated by the companies in order to enhance their business.
Significance of Traditional Budgeting
The process of traditional budgeting is known to the process and explanation of the action
that will be undertaken by the companies. The budgeting process comprises of the goals that are
related to the costs, liabilities, assets and cash flows for a mentioned timeframe. This budget
process is prepared by incorporating the implicit values which includes the increase in sae prices
rise in costs in the annual budget that is prepared for a specific year.
Top down process is undertaken in order to proceed with traditional budgeting. This
reveals the fact that the upper level management who undertakes the decision making process
prepares a budget initially as per the plans and process for each department and their sub
divisions and thereafter conveys the budget as per the needs and requirement (Hope & Fraser,
2003).
The stakeholders who are in agreement with traditional budgeting highlights that this
budgetary system is significant for the development of values and sustainable development

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among the organizations. This process leads to the generation of advantages like taking care of
the companies like forecasting and planning for the coming time period, creating motivational
strategies, developing co-ordination, assisting performance evaluation, price associated decisions
and creating better communication.
The budgeting process is a communication process within the managements and
departments and this process assists in the development of plans regarding profit and costs.
There are three sections in the process of budgeting and they are segmented as evaluation, follow
up and enhancement. Otley, (2016) cited that the development of any budget is the estimation of
the future costs and profits and on the other it has been argued that budgeting is the estimation of
sales and this leads to the development of an effective budget. The construction of budget is a
development stage for the process of budgeting for any organization.
The following step is the budget follow up and this is known as the analysis that creates a
discussion of the budget with the actual result. The final stage is evaluation that creates an idea
and chance for the organizations to attain profit from the budget performance for the future years
to come.
Chak & Fung, (2015) recommended that budget is incorporated in order to reveal the
internal and external factors within an organization. It leads to the development of space that
leads to better performance within the employees and creates a productive aspect for the
enhancement of decisions within a company. Most of the companies consider budgeting as an
advantage for the limitations that are expressed by the associated stakeholders of the
organization. The stakeholders who are in motion with traditional budgeting have expressed their
views over the benefits of traditional budgeting and not over their challenges.

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Hopper & Bui, (2016) have cited four main factors for the budgeting mechanism and they
have been segmented to short term process like planning and performance and long term process
that comprises of communication and strategy.
Limitations of Traditional Budgeting
The benefits of traditional budgeting is renowned in all the economies, however the
organizations are not satisfied with the weakness that is existent with the traditional budgeting
mechanism. The prime weakness of traditional budgeting has been its time consuming nature and
budget gaming (Endrikat et al., 2017). There are other weaknesses as well and each one of them
have been sub-divided and have been explained in the following sections.
Competitive Strategy
Budgets generally do not concentrate on the strategies and policies and therefore they
contradict. Such budgets look towards cost reduction and not on creating value. Budgets do not
create responsiveness and flexibility and do not led to transition in the performance of the
companies (Oboh & Ajibolade, 2017). Budgets incorporate little value and therefore are
diplomatic and so do not influence any kind of innovative thoughts.
Operations of Business
Schaltegger & Zvezdov, (2015) explained that budgets are time taking and expensive
when associated together. Budgets are constructed annually and thereby the performance
efficiency of the companies gets lowered. Budgets are constructed on the basis of forecasts and
suppositions that are not assistive and hence are inaccurate. Negative attitudes are created by
budget and leads to the development of gaming with the help of budgeting.

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Ability of the Organizations
Budgets are incapable of revealing the enhanced network process that the organizations
implement. Budgetary process strengthens the weakness of the departments and thereby restricts
the sharing of knowledge process. Employees are hence overlooked during the preparation of
budget.
Budget in the current time period
Budget is a general process for all the organizations that operate in all the economies
globally as with the help of this process the companies are able to reach their goals. Assistance is
taken by the companies from the process of budgeting from the incorporation of the company to
the incorporation point. The budgeting process is reliant on the information of performance and
target as well as the cost policies with the help of which the managers can understand the
functions that are important and thereby use their limited resources (Malmi, 2016). Budgets have
the ability to control and monitor the organizational performance, assists in the attainment of the
better controlling and communication process within the company in an efficient manner.
The responsibility departments are guided with the help of the allocation budget which
addresses the estimations and mission of every unit. Budget ensures that the target that is
prepared are reached within a time period. Budget is an efficient tool in performance evaluation
development and implementation of the strategies and plans and supervising the operations and
taking care of the operational process (Harrison & Lock, 2017). Budget is regarded as a linkage
within the organizational goal and their performance so that the companies reach their vision and
point out their weaknesses. This system even develops communication of the performance and

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even constructs target for the management and organizes the favourable performance and thereby
eliminates any kind of loose ends.
Standard Costing
This process is a mechanism that has been in use for a very long time and in the current
time period this process has been evaluated with the new costing process which is known as
Activity Based Costing. Standard costing is a conventional mechanism and this process is
undertaken by preparing the expenses by taking help of the historical data and estimating the
future expenses and on the other hand activity based costing is an innovative process and this
mechanism focuses mainly on the present expenses and costs (Scienpress.com, 2019).
The advantages of standard costing is that the organizations can implement this
mechanism with the help of a simple process as this process is attuned with any other
management processes one of the instances being benchmarking. Guenther et al., (2015) cited
that standard costing does not have the ability to evaluate all the expenses that any companies
face. Therefore, it can be highlighted that in case the organizations are looking to sustain
consistency then the process of standard costing is an effective tool.
Standard Costing Significance and Results
Standard costing process has been accused of being incapable of providing the data that is
essential for the development of the performance of the companies that are operating currently.
There has been an observation that the companies that operate globally utilise the process of
standard costing. Kind et al., (2017) explained that in the present time the organizations
incorporate a process that includes both ABC costing method as well as standard costing process
and the dual mechanism has been beneficial as it has been observed standard costing is

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incorporated for the direct expenses and ABC costing for the indirect expenses and it can be
stated that standard costing cannot be regarded as a conventional costing method but it can be
cited an efficient process when the costing method is updated with the new standards and
policies.
Cao et al., (2017) have explained in their articles that higher percentage of the companies
in South Asia have been incorporating the standard costing mechanism. Standard costing has
been incorporated even in various other developing and developed nations and even thereafter
this process has been accused regarding its ineffectiveness. There have been changes in the
costing processes and even in the use of technologies but the use of standard costing has not lost
its significance.
The main function of standard costing is to construct a benchmark for the actual and the
present performance and in this manner the performance of the companies can be supervised.
There have been several instances that the effective figures of accounting are known to be
historical in nature and so very insignificant amount of notice is given towards the process of
decision making that is completed internally. The process of standard costing expands the issue
into a larger point of view but it is seen that this mechanism after a certain time period is
regarded to be a critical mechanism.
At the initial period is vital to create a different between standard costing and traditional
budgeting. Christ & Burritt, (2015) explained that both the processes are related to each other as
budget relates to the actual concept and standard costing showcases same information but on the
basis of each unit. Standard costing associates to the costs that are predetermined and the cost
related to an individual unit and it is again sub-divided volume and expenses. This is therefore

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regarded as a point of initiation and therefore enacts an effective performance mechanism for the
management.
Standard costing relates to the actual probability of a product or service irrespective of
whether it is related to volume, expenses or combined and this done in order to bring out the best
output (Chenhall & Moers, 2015). The tool undertaken in order to prepare a standard can have an
effect on the relevance and effectiveness of the management process.
Standard costing is incorporated in order to simplify the accounting and the costing
mechanisms by mitigating the labour and their associated expenses. An efficient and perfect
process of costing is associated with the standardization of the operational activities of
production.
The goal of standard costing has always been to support with the implementation of the
control of budget process in the operational field and this assists the organizations to enhance
their operational activities and gain understanding in creating profit and going ahead with the
business process. The assessment of the performance is even initiated with the incorporation of
the standard costing process. The system even encourages the utilisation of labour and material
overhead in a decisive manner (Clarke et al., 2019). The process even helps in the development
of motivation among the employees, which improves their performance and the performance is
enhanced with the standards that have been pre-determined.
The process of standard costing helps the management of the organizations in providing
the key data and information related to costs with the help of which determination of the selling
price is undertaken by the companies. The inventory valuation process is even undertaken by
taking assistance of the costing procedure. Standard costing is therefore looked upon as a

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supportive process for the management with the help of which their developmental process can
be maintained. The management can therefore undertake effective and better decisions with the
help of this process and therefore standard costing will be beneficial for most of the
organizations (Maas et al., 2016). One can therefore state the fact that standard costing at this
point of time has extensive level of significance and the organizations that are performing all
over the globe are using this costing mechanism so that they can have an idea about their
performance and in this manner can construct effective plans and incorporate decisions with the
help of which the performance of the companies can improved and developed.
Conclusion
The current paper has been therefore supportive in establishing an idea and knowledge
about standard costing and traditional budgeting process in the current field of the economy and
the companies operating within it. Both the techniques have their own traits and characteristics
and this has been the factor that most of the companies have incorporated this process and have
been still using it for a long duration. The paper has highlighted the fact that there have been
development of various new costing and budgeting techniques that have come into existence, but
the management and the companies consider the traditional processes within their operational
activity simply due to their advantages. Costing and budgeting are interrelated to each other and
hence the incorporation of traditional budgeting as well as standard costing leads to the
development of the companies in the current economic scenario. A connection among the costing
and budgeting process has to be sustained so that equilibrium can be maintained among the
indirect and direct costs and development n the performance and consistency within the
company. One can therefore signify the fact that standard costing as well traditional budgeting

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have extensive role to play in the enhancement in the corporate environment in the current time
period.

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