Comparison of Budgeting Techniques

The assignment requires a comparative analysis of different budgeting techniques, focusing on their characteristics, advantages, and limitations. It also involves an examination of the relevance of these methods in today's business environment and their potential impact on organizational performance. The study should provide insights into the most effective approaches to budgeting, considering factors such as sustainability control systems' integration and rolling budget forms.

Cost and Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
Discussion relating to the relevance of the standard costing and the traditional budgeting in
the contemporary business environment. ...................................................................................1
REFERENCES ...............................................................................................................................7

INTRODUCTION
Cost and the management accounting is been designed for enabling the owners of the
business in predicting the future expenses of the business. The main objective of this form the
management accounting is to avoid for getting over budget which in turn helps the firm in
gaining higher revenues. It aims for improving the profitability of the company by controlling,
eliminating and managing the expenses (de Campos & Rodrigues, (2016)). Cost and the
management accounting facilitates the data and assess the reports that could be utilized by
managers for making suitable decisions that results in attaining the long term goal and the
growing success. The present study describes about the importance and the issues that are
present in the business environment due to the application of the traditional budgeting and the
standard costing technique.
Discussion relating to the relevance of the standard costing and the traditional budgeting in the
contemporary business environment.
Cost and the management accounting is been designed for enabling the owners of the
business in predicting the future expenses of the business. The main objective of this form the
management accounting is to avoid for getting over budget which in turn helps the firm in
gaining higher revenues. It aims for improving the profitability of the company by controlling,
eliminating and managing the expenses (Ditillo & Lisi, (2016)). Cost and the management
accounting facilitates the data and assess the reports that could be utilized by managers for
making suitable decisions that results in attaining the long term goal and the growing success.
The present study describes about the importance and the issues that are present in the business
environment due to the application of the traditional budgeting and the standard costing
technique. Technological changes and the changing trends of world forces the organizations for
reviewing their systems and the management. For maintaining the sustainability of the enterprise,
management of an entity must use its available resources optimally through effective planning
and the controlling function.
Mostly, company uses the cost and the management accounting tool for making the
planning more realistic and controllable is the budgeting (Asogwa and Etim, 2017). The basic
purpose of budgeting is to evaluate the performance and strives for attaining increased
motivation among the employees by building coordination and the better communication
between the companies’ subsections. In accordance with this study, the relevance or usefulness
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of the traditional approach of budgeting reflects the controversies as the opponents of this
approach analyzed that the modern techniques of the budgeting are better than the traditional
budgeting and in today business environment, an entity must adopt for beyond budgeting
techniques for adjusting the changes within the organization.
Traditional budgeting is the method of preparing the budget on the basis of the past year
allocations by making adjustments based on the inflation rate, market situation and the consumer
demand. The process of the traditional budgeting results in wastage of the time, distort the
decisions, and turn down the honest managers as the schemers (Berland, Curtis & Sponem,
(2018)). Corporate budgeting consumes a lot of time of the executives and forces them to engage
in the endless rounds of the dull meetings or the tense negotiations. It indulges the mangers in
unethical practices that includes lie, cheating, low balling the targets, inflating results and resist
them in telling for the truth. The business decisions turned out as the elaborating exercise that is
present in the gaming. This budgeting creates conflicts among the colleagues, distrust and the ill
will. Today's contemporary environment refers to the competitive market that changes at a fast
pace and business owners must have to understand the developments that need to be adopted for
remaining with the current trend. Traditional budgeting consists of many weaknesses and is not
counted as the relevant approach in today's contemporary environment of the business. Under
traditional budgeting, the budgets are not strategically focused which often leads to contradictory
in nature (Bhimani, Sivabalan & Soonawalla, (2018)). Such budgets majorly concentrate on the
cost reduction and not focuses on creating value. It constrains the flexibility and are often
considered as the barrier to implement the change within the enterprise. In the incentive system
of the traditional budgeting relating to the pay for performance, the total compensation in terms
of cash of the managers is constant till it reaches the minimum hurdle performance which is 80%
of the targeted budget. The targets may be regarding the sales, production and the profits,
managers receive the bonus when it exceeds the hurdle. The increment in the bonus will depend
upon the further performance until it is capped for the maximum level, which is usually 120% of
target (Cantador and et.al., (2018, September)). This overall system is called as the “typical
compensation plan of the executive”. The kinks present in the system creates the incentives for
gaming the system. As the performance of the managers approaches the target of minimum
hurdle, he will be receiving the strong incentives for accelerating the gaining of the revenue and
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the profits. On the other hand, when his performance beat the cap, then he has the strong
incentive for pushing down the profits and the revenues for the coming year.
For getting out the kinks from the performance system, a linear compensation plan must
have to be adopted where the mangers are rewarded for the better or the good performance, but
the condition is that the rewards given are not dependent or are independent of the budget target.
The manager receives bonus for the given performance will remain constant at all the target
whether the goals are set at target 1 or 2 which states the below and above actual performance
level. Moreover, this schedule rewards the people for their performance (Emerling & Wojcik-
Jurkiewicz, (2018)). This plan helps in removing the incentives in gaming the system due to the
unit managers does not get the cash for performing beyond the target and this leads to eliminate
falsified information that is presented by the managers in the process of budgeting. By linear
compensation plan, executives receive the unbiased anticipations relating to the
accomplishments in the future. The quality of the coordination and the planning also improves
through the linear compensation plan. Although, it is not easy for the managers to adopt this plan
as the bonuses based on the target are ingrained in mangers minds and in codes of the managers
in the majority of the organizations (Henttu-Aho, (2016)). However, the benefits of this system
are very great in context of attaining long run success in terms of economic and the
organizational health of the company.
Another system that can be adopted by the enterprise is the Curvilinear plan for
compensation which does not provide for any plans relating to the curing of the gaming. The
managers encourage for increasing variability in the performance from one period to another
(Saliterer, Sicilia, & Steccolini, (2018)). In this plan the manager achieves more by reaching the
80% of the target of budget and the next for 120% by beating the targets for both the years. In
the linear plan, manager would be earning same in both of the scenarios. In the budgeting even
when the mangers get convinced that the liners schedule of bonus is desirable, they might argue
for the compromise plan which again allows the target for the budget in influencing the
compensation. Thus, each line manager has to understand and choose for new systems and
theory so that it could run the operations of the organization smoothly within the changing
environmental conditions in the overall business.
For conducting efficient budgeting, mangers must opt for beyond budgeting methods
rather than for traditional budgeting in meeting or matching with the present business
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environment (Silva, Fortunato & Bastos, (2016)). Beyond or modern budgeting tools facilitates
for setting the rewards in new ways. Many leaders of the organization believe in power of the
individual rewards. They look the enterprise as the machine whose spare parts could be managed
by determining the cause and effect relationship among the employees. By providing the
financial inducements, extrinsic motivation infuses among the people within the organization
which leads to fine-tuned performance. However, the approach that relates with paying on the
basis of performance must be applied when the output generated can be measured. This approach
is used by those modern organizations for which the success is wholly dependent on the
innovation, customer service, design and quality. With the application of the better budgeting
techniques assist the firm in using the cost drivers in the process of budgeting and aims for
perpetual progression in relation to the cost and the performance. Beyond budgeting emphasizes
on developing the budgeting process and resolving the problems present in the traditional
budgeting (Ditillo & Lisi, (2016)). It brings out the radical changes in the budget and provide for
solving the problems regarding the measurement of the performance under the traditional
budgeting. Traditional budgeting includes the incremental targets and the fixed incentives while
beyond budgeting is described as the set of principles which helps in decentralization of the
corporate and act as the mechanism of decision making as it strives for stretching goals, relative
targets and the rewards. Traditional approach is based on the fixed plans and the variance control
whereas the modern budgeting runs on the basis of continuous planning by using key
performance indicators and the rolling forecast. The resources are allocated based on the prior
allocations in the traditional tool but in beyond budgets, allocation of resources in based on the
demand (Berland, Curtis & Sponem, (2018)). Traditional budgeting manages the number in the
organizational culture, however, beyond budgeting creates value of the firm in the market
worldwide. There are various methods of traditional budgeting that includes incremental
budgeting, static budget etc. Thus, beyond budgeting is more useful for the organization than the
traditional budgeting in today's world as it aims for three major objectives that is executing a
mentality of adaptive management in the changing conditions and preventing from the
dysfunctional behavior of management. On the other side, traditional budgeting is popular and
used by many organizations as some managers believes that better control, coordination and
communication can be ascertained by the traditional approach without any sharing of the
authority with the subsections of the company. In reality, most of the company’s cultures and the
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mentalities suits the traditional budgeting as it provides consistency and easy to frame.
Moreover, the weakness present in the traditional budgeting can be eliminated by the firm by
using the different approaches for the budgeting (Cantador and et.al., (2018,)). Therefore, it
could be concluded that generally in current business environment, traditional budgeting is not
relevant for the organizations but some companies still use this approach as they find it relevant.
Traditional budgeting contains very less relevant that is its relevancy is low.
Relevance of standard costing- It is the costing system that focuses on evaluating and
managing the performance through budgeting and the variance analysis. Under this method of
costing the actual cost is compared with the budgeted cost and the deviation occurs is been
analyzed by taking corrective action. The difference could be used for assessing the performance
of the cost centered employees. The organization that is best suited by the standard costing are
those who produces large production of the homogeneous products. This large scale of the
repetition in the production allows for the average use of the resources that is to be identified. In
modern times or in the current business environment standard costing is not considered as a
suitable or relevant approach because it could not measure the performance in case the goods
produced are non-identical and where the items are not standard (Bhimani, Sivabalan &
Soonawalla, (2018)). Standard costing is irrelevant as it becomes outdated on a frequent basis
with the change in the business environment. This means that the standard costing need to be
reviewed continuously which leads to increase in the cost for operating the system of standard
cost but if up-gradation in the standards is not made timely then it will be of no use for the
controlling and the planning purposes. For example- an analyst identifies that for producing the
one unit, one pound of the raw material is required that amounted to $2 and the labor costing for
per hour is $15. These assumptions are based on the historical data.
Under standard costing, highly automated technique of production is been used with the
assumption that the control could be exercised by focusing on the workplace efficiency. In
reference with the highly automation, the production rates of the output and the consumption of
the material are entirely controlled by machinery else the workforce. Sometimes, the estimations
relating to the budgeted figures are not appropriate which leads to incorrect evaluation of the
performance and the variance cannot be calculated adequately (Henttu-Aho, (2016)). The
company which focuses on the continuous improvements, standards costing is inconsistent to
those firms as it does not facilitate continuous improvement. For ensuring effective control over
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the management and detailed information is required by the present business environment,
standard costing is not a suitable approach as it is carried on the aggregate basis.
Variance analysis provides the control report to the managers at the periods end while in
modern environment information is required after the occurrence of each event. Costs under this
approach are been set by viewing the actual performance over the standard performance and
communicating the variances to managers who are responsible. Under this costing technique the
senior management or the top executives become reluctant in sharing the responsibilities for the
budgeting. The process of setting the standard is considered as time consuming (Silva, Fortunato
and Bastos, 2016). Sometimes the staff who sets the standards as per his wish or for which he
wants to achieve and not set the challenging targets. The mangers may try for building the slack
in the budget. The process under standard setting results in the conflict and does not enhance the
cooperation and the collaboration. Sometimes, staff may felt that the suggestions provided by
them had been ignored which lower down the morale of the employees. Moreover, standard
costing encourages the employees in setting the higher standards for goal achievement and the
staff become more likely in accepting the standards which act as the base for their performance.
It improves the actual and the morale of the employees which in turn enhance the level of
performance. The staff under this costing method has the clear understanding of the what has
been expected by them. Thus, standard costing is not a perfect fit for every industry. The
relevancy of standard costing is also very low.
CONCLUSION
From the above report it can be summarized that the traditional budgeting consumes lot of
resources and the time of the management. It does not provide for the accurate formulations and
very much prone to the errors in the data entry. This technique is not suitable as it does not
facilitate the conducting of the reviews on a regular basis which results in lower responsiveness
towards the change in the business environment. It fails in motivating the employees for acting in
accordance with the interest of the company. It encourages high level of gaming and the
unprofessional attitude in the budget. Rather than enforcing the sharing of the knowledge, It
provides for the departmental barriers. Traditional approach creates disconnection of the
organization from its strategic plans as the managers are highly obsessed in hitting the right
numbers, they forget the strategic objectives of the budgeting which reflects that lower priority is
been given to the strategic initiatives. However, in some organization it is relevant as it is the
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part of the organizational culture for many companies and considered as the framework for
keeping the control over the resources of the firm. Standard costing is counted as an expensive
system in terms of its installation as a lot of funds is needed for analyzing the output
requirements in context of the material, overheads and the labor. In times of the fast changing
trends of the business environment standard become outdated and this results in losing the
control and the effects of motivation.
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REFERENCES
Books and journals
Asogwa, I. E., & Etim, O. E. (2017). Traditional Budgeting in Today's Business
Environment. Journal of Applied Finance and Banking. 7(3). 111.
Berland, N., Curtis, E., & Sponem, S. (2018). Exposing organizational tensions with a non-
traditional budgeting system. Journal of Applied Accounting Research. 19(1). 122-140.
Bhimani, A., Sivabalan, P., & Soonawalla, K. (2018). A study of the linkages between rolling
budget forms, uncertainty and strategy. The British Accounting Review. 50(3). 306-323.
Cantador, I., Cortés-Cediel, M. E., Fernández, M., & Alani, H. (2018, September). What's going
on in my city?: recommender systems and electronic participatory budgeting.
In Proceedings of the 12th ACM Conference on Recommender Systems (pp. 219-223).
ACM.
de Campos, C. M. P., & Rodrigues, L. L. (2016). Budgeting Techniques: Incremental Based,
Performance Based, Activity Based, Zero Based, and Priority Based. Global Encyclopedia
of Public Administration, Public Policy, and Governance. 1-10.
Ditillo, A., & Lisi, I. E. (2016). Exploring sustainability control systems' integration: The
relevance of sustainability orientation. Journal of Management Accounting
Research, 28(2). 125-148.
Emerling, I., & Wojcik-Jurkiewicz, M. (2018). The Risk Associated with the Replacement of
Traditional Budget with Performance Budgeting in the Public Finance Sector
Management. Ekonomicko-manazerske spektrum. 12(1). 55-63.
Henttu-Aho, T. (2016). Enabling characteristics of new budgeting practice and the role of
controller. Qualitative Research in Accounting & Management. 13(1). 31-56.
Saliterer, I., Sicilia, M., & Steccolini, I. (2018). Public budgets and budgeting in Europe: state of
the art and future challenges. In The Palgrave Handbook of Public Administration and
Management in Europe (pp. 141-163). Palgrave Macmillan, London.
Silva, J. O. R. D., Fortunato, G., & Bastos, S. A. P. (2016). Operating cost budgeting methods:
quantitative methods to improve the process. Production. 26(4), 675-687.
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