Relevance of Standard Costing and Traditional Budgeting in Contemporary Business Environment

This article discusses the relevance of standard costing and traditional budgeting in the contemporary business environment. It explores the importance of cost and management accounting in predicting future expenses and improving profitability. The article also highlights the weaknesses of traditional budgeting and the need for adopting modern budgeting techniques. While traditional budgeting is still used by some companies, the article suggests that beyond budgeting methods are more suitable for meeting the challenges of the present business environment.

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
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 (de Campos and 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. 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 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.
The process of the traditional budgeting results in wastage of the time, distort the decisions, and
turn down the honest managers as the schemers (Cantador and at.al., 2018). Corporate budgeting
consumes 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. 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 (Henttu-Aho, 2016). 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 receives 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 (Nuhu, Baird and Appuhami, 2016).
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 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 (Silva, Fortunato and Bastos,
2016). 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 receives 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 (Santiasih, 2018). 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 dopes 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 (Soares and
et.al., 2019). 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 environment
(Bhimani, Sivabalan and Soonawalla, 2018). 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 (Emerling and Wojcik-Jurkiewicz, 2018). 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 go for 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 (Klimaitiene and Ramanauskaitė, 2019). Traditional budgeting manages the number in
the organizational culture, however, beyond budgeting creates value of the firm in the market
worldwide. 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 companies cultures and the 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 (Ewens and van der Voet, 2019). Therefore, it could be concluded
that generally in current business environment, traditional budgeting is not relevant for the
organizations but some companies still uses this approach as they find it relevant.