Advantages and Disadvantages of Planning Tools in Management Accounting

This report discusses the advantages and disadvantages of various planning tools in management accounting, such as budgets, fixed budgets, flexible budgets, incremental budgets, zero-based budgets, and variances analysis. It also explores the use of these planning tools for preparing and forecasting budgets, adapting management accounting systems to respond to financial problems, and how these systems can lead to long-term sustainable success. Additionally, it highlights the importance of planning tools in avoiding financial problems.

Management
Accounting.

Contents
INTRODUCTION.................................................................................................................................3
TASK 1.................................................................................................................................................3
A. Advantage and disadvantage of various types of planning tool....................................................3
B) Use of various planning tool for preparing and forecasting budgets.............................................7
C) Adaptation of management accounting system to respond financial problems.............................7
d) Management accounting system lead to long term sustainable success.........................................9
e) Planning tool to avoid financial problem.......................................................................................9
CONCLUSION...................................................................................................................................10
REFERENCES....................................................................................................................................11

INTRODUCTION
Management accounting is considered to the techniques of manager that help them
determine, organise, report and make effective decision (Anderson and Sedatole, 2013). This
collected information helps them in preparing management reports and accounts which
further provide them appropriate and timely financial and performance information about
worker and company. To understand the importance of management accounting Airdri is
taken into account.
In this report advantages and disadvantages of different planning tools are
implemented to control budgetary process and their effectiveness to solve financial problems
is described. Report also shows the importance of management accounting system to respond
the financial problems.
TASK 1
A. Advantage and disadvantage of various types of planning tool.
Budget:
It is defined as the financial plan which is a microeconomic idea that demonstrates the trade-
off made when one product is traded for another. In business term it is defined as an internal
tool used by management and is frequently not required for reporting by outside parties. A
financial plan is valuation of income and expenditures over a predefined future timeframe.
Budgets can be made for an individual, a household, group of personnel, a firm, for
government, country and international companies that all are willing to spend money and
making profit. In Airdri, manager makes use of different kind of budgets as a planning tool
that further helps in solving and overcoming various kinds of financial issues (Drury, 2015).
There are various advantages of budget that help in maintaining the budgetary control process
in Airdri. Budgetary control process is related to the actual comparison of income and
expenses by manager of company with the planned revenue and spending. Some of the
common advantages and disadvantages are explained below:
Advantages:
 Budgets transform planned strategies into action of achievement. They state
the assets, incomes and events required perform the executed plan for the specific
period of Time.
 It supports to have a great record of companies business activities.
 Budgets improve communication with employees and help them to overcome any
problems.

 It support in improving resources distribution because all requests for every
department are explained and acceptable.
Disadvantages:
The main problem happens when budgets are realistic and are applied automatically and
strictly that hinder the decision making of manager (Hilton and Platt, 2013).
 An inflexible budget structure decreases creativity and innovation of other worker at
lower levels, so it is very difficult for companies to make money for new ideas thus
companies faces financial issues.
Fixed Budgets:
A developed fixed budget is about a basic instrument to evaluate the achievement of
private companies both long and short term period of time. Further, a fixed budget
supports in keeping the whole business monetarily careful when making little and
expenses. In companies like Airdri, this budget is prepared by manager to determine the
spending for a single business activity. The execution report is set up by contrasting
information from open tasks. Fixed budgets don't change when manufacture level
changes within an organisation. Some of the basic advantages and disadvantages are
described below:
Advantages:
 Fixed budgeting helps manager to teach other employee, as they had a clear
difference between the things they need to do with their workforce.
 A fixed budget permits a commercial firm to measure both short-term and long-
term finances resources that are required on single project.
 The steady, fixed budgeting sanctions small business holders to have record each
changes and also changes the profitable model accordingly to take benefit of
helpful monetary variations of economy.
Disadvantages:
 Flexible budgets also are not correct way to record expenditures. In detail, all they do
is gives a simple standard that will be hard to follow, should revenue or costs change.

 These are less flexible budget and with the use of this budget manager may faces
problem and conflicts with other macroeconomic factor.
Flexible Budgets:
A flexible budget is a defined as a plan that regulates or bends for changes in the
capacity of business motion. It is more cultured and useful than a fixed budget, which rests at
one amount irrespective of the volume of activity (Innes and Mitchell, 2015). The important
advantages of flexible financial plan are as follows:
Advantages:
 A flexible budget allows the manager of company to analyse the deviation of
real output from predictable production.
 The management can match definite costs at the definite capacity with the budgeted
costs at the real book.
Disadvantages:
 Flexible budgets need more preparation in order to record expenditures and modify
for any differences between ages.
 It is a confuse things that comprise additional rules that can simply be bent or cracked
by somebody who is stressed to break within the limitations.
Incremental Budgets:
Incremental budget is a significant measure of management accounting based on the
evidence of making slight changes to the existing budget for arriving at the new budget. Only
incremental totals are added to arrive at the new planned figures. In Airdri, this Also help in
overcoming different financial problems that help in achieving predefined goals. Some of the
advantage and disadvantage are described below:
Advantages
 Incremental planning guarantees that there is continuous flow of fund through
department of company without much full enquiry of funding necessity.
 Incremental budgets method confirms no large deviations are seen in the budget year
as if requirements changes after that year in companies. With this type of budgeting, a
manager of Airdri is possible to have constant budgets year on year.

Disadvantages
 This method may incline to make executives use more and can lead to excessive
spending of monetary resources which may not be acceptable.
Due to this management may face the situation of called as budgetary slack, whereby they
incline to build lower income development and advanced expense growth so as to have
positive adjustments (Ittner and Larcker, 2012).
Zero-based budgets:
Zero-based budget or budgeting is a technique of planning in advance about
all expenditures that must be right for each new period. The procedure of zero-based
budgeting starts from a "zero base," and each purpose within company like Airdri is
examined for its requirements and costs. Budgets be situated the most then assembled around
according to the needs of future period, anyway of whether each financial plan is advanced or
lower than the earlier one. In Airdri this budgets have various advantages and disadvantages
that are explained below:
Advantages
 This helps in efficient allocation of resources (department-wise) as it does not look at
the historical numbers but looks at the actual numbers.
 It leads to the identification of opportunities and more cost-effective ways of doing
things by removing all the unproductive or redundant activities.
Disadvantages
Zero-based budgeting is a very time-intensive exercise for a company or government-funded
entities to do every year as against incremental budgeting, which is a far easier method
(Advantages and disadvantages of zero based budgets, 2017).
 Explaining every line item and every cost is a difficult task and requires training the
managers.
Variances analysis:
In business firm, while performing accounting a variance is the dissimilarity between
planned total and an actual total. Variance analysis goes to recognise and clarify the
details for the difference among a budgeted amount and definite amount. It is typically

related with a producer's product expenses. This method tries to classify the causes of the
differences between manufacturers. In Airdri it is considered to an effective planning tool
that helps manager to ease the process of budgetary control. Some of the basic
advantages and disadvantages are described below:
Advantages
 This help in comparing more than two groups of data or information that are result
after an experiment.
 Variance analysis supports capable budgeting action as manager needs to have lower
expenses from the budgeted expenses.
Disadvantages
 Ii is very important to consider each factor; otherwise the budgeting application may
be lightly done which is bound to turn from the real figures.
 It is an activity of manager within company that is based on financial outcomes which
are released much later.
B) Use of various planning tool for preparing and forecasting budgets.
In business world budgets play an important role, as it help companies to paned about
future expenses and makes a clear vision. With the formation of Budgets Companies like
Airdri are helpful in planning about future business activities by knowing the expected
outcome and expenses on a particular project (Roslender, 2016). There are various kinds of
budgets that are equally important in planning about future such as Fixed Budgets, Flexible
Budgets, Incremental Budgets, Zero-based budgets and Variances analysis. It is necessary for
manager of Airdri to make proper use of these planning tools in effective manner as they can
determine the total expenses and count the revenues to be earned from different project runs
in company. This helps them in achieving predefined goals. Mainly budget are made from the
last year expenses and determine to be effective if the planned result are matched.
C) Adaptation of management accounting system to respond financial problems.
Management accounting is the basic function that involves collecting of useful
information and distributing that data to decision maker of company. Responsible internal
accountant provide that relevant information to higher management so that they are able to
make faithful policies, standard to operate operation. In recent time it has been noticed that
management accounting has evolved from its existing application. So the role of management
accountant has transformed a lot such as the gathering of information to meet the uncertain of
business environment. They also play the role of business partner and information analysts
enabling manager of companies to have an effective decision making partner in business.
Business environment means all internal and external surrounding of company that can affect
the performance of business activity executed.

In every company there is a situation of financial problem that hinder the performance.
Financial problem refers to a situation when company do not have sufficient amount to run
their daily business project (Schaltegge and Csutora, 2012). They lack the amount to pay
salary to their staff, make payment of outstanding bills etc. sometime company also face
these issues just by spending excess amount on other activities. In Airdri manager uses
various techniques to determine different financial problem that are explained below:
KPI: A Key Performance Indicator (KPI) is a calculable importance that
determines in what way successfully a business entity is attaining key business objectives.
Large or small companies use key performance indicators at numerous levels to estimate their
achievement at realization of targets. In Airdri, Manager uses this technique to determine the
financial problem of more spending than earning.
Benchmarking: In business world, benchmarking is a method in which a
firm compares its goods and approaches of business with other most effective companies in
same industry, that help them to improve its own performance. The main aim of
benchmarking is to recognize and calculate the present position of a business in relative to
best practice and to ascertain areas performance improvement. In Airdri manager uses this
method to detect the financial problem related to lack of money management.
Ratio analysis: This ratio analysis is a measurable examination of data controlled in a
company’s economic statements. It is used to estimate various features of a company’s
working and financial presentation such as its productivity, fluidity, profitability and
creditworthiness. With the help of this approach company determine the financial issue of
High debt level.
Comparison of two companies.
System Airdri A David & Co Ltd.
Cost accounting This system help in
controlling cost and
expenses involved in
production process. So
management of Airdri uses
this system by keeping
detail information of total
amount spends of
production and promotion
activities (Ward, 2012).
Thus help in overcoming
the issue of more spending
than earning.
With the help of this approach
company is able to resolve the
financial issue of late payment
of bills.
Price optimisation This system means fixing
the best price in industry
This is an effective system that
helps company in overcoming

of a product that will
increase the sales by
attracting more customers.
So manager of Airdri uses
this technique to overcome
the issue of High debt
level. As more customer
buys goods on cash bases
because of low price.
the issue of lack of money
management.
Inventory control With the help of this
system company is able to
record all stock available
in warehouse and finished
goods. They overcome the
issue of lack of skilled
money management.
Company is able to determine
and overcome the issue of non-
maintenance of stock in
warehouse that increase the
debt level.
d) Management accounting system lead to long term sustainable success.
Financial problem are need to resolve at the time of their occurrence, otherwise it will
lead to decrease the performance and productivity of company (Wickramasinghe and
Alawattage, 2012). Different management accounting system plays significant role in
overcoming various financial problem. Such as cost accounting systems determine and
resolve the issue of unexpected expenses. Price optimisation help to increase the sales volume
and overcome the high debt level in Airdri. Manager of Airdri have proper knowledge about
inventory control management system, thus it makes them to control and record stock. And it
also helps in solving financial issue of lack of managed staff member.
e) Planning tool to avoid financial problem.
Every company wants to avoid the situation of financial problem, as it reduces the
market place and decrease the profitability of companies. In recent time business
environment keeps on chaining as it comprise of various internal and external factors.
Manager of Airdri tries to resolve the different financial problems with the help of different
planning tools. They prepare budgets from the last happening, so that actual result could be
determined. Manager prepares various kinds of budgets according to their importance during
a situation (Windolph and Moeller, 2012). They makes budgets such as, fixed, flexible, zero
based, incremental in order to overcome the issue of companies like proper flow of fund, late
payment of bills, mismanagement in records etc.
CONCLUSION
From the report above it has been concluded that, planning tool plays crucial role in
budgetary control process. It also helps in detecting and solving financial issues of company.

Management accounting systems are helpful in overcoming various kind of financial
problem.

REFERENCES
Books and Journals:
Anderson, S. and Sedatole, K., 2013. Management accounting for the extended enterprise:
Performance management for strategic alliances and networked partners.
Drury, C., 2015. Management accounting for business. Cengage Learning EMEA.
Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Innes, J. and Mitchell, F., 2015. A survey of activity-based costing in the UK's largest
companies. Management accounting research. 6(2). pp.137-153.
Ittner, C. D. and Larcker, D. F., 2012. Quality strategy, strategic control systems, and
organizational performance. Accounting, Organizations and Society. 22(3-4). pp.293-
314.
Roslender, R., 2016. Relevance lost and found: critical perspectives on the promise of
management accounting. Critical Perspectives on Accounting. 7(5). pp.533-561.
Schaltegger, S. and Csutora, M., 2012. Carbon accounting for sustainability and management.
Status quo and challenges. Journal of Cleaner Production. 36. pp.1-16.
Ward, K., 2012. Strategic management accounting. Routledge.
Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches
and perspectives. Routledge.
Windolph, M. and Moeller, K., 2012. Open-book accounting: Reason for failure of inter-firm
cooperation?. Management Accounting Research. 23(1). pp.47-60.
Online
Advantages and disadvantages of zero based budgets. 2017. [Online] Available Through:
<https://efinancemanagement.com/budgeting/zero-based>