Comparative Study of Traditional Budgeting and Activity-Based Budgeting

The assignment requires a comparative analysis of traditional budgeting and activity-based budgeting, discussing their strengths and weaknesses. Additionally, it involves an examination of balanced scorecards as a tool for performance evaluation. The study aims to provide insights into the effectiveness of these approaches in managing resources and achieving organizational goals.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Objective of budgeting ..........................................................................................................3
Process of preparing budget for the company........................................................................3
Advantages and disadvantages of traditional budgeting........................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Budgeting refers to prepare the plan for future growth and arrangement of finance to
accomplish the organisation goal and objectives. It helps them to take the right decision for the
growth of the company. The report highlights the role of budgeting in management of
organisational activity and the different budgets like sales budget, operational budget, material
budget etc. It explains the different types of traditional budgeting and the various new budget
like balance score card, Activity based budgeting etc. The aim of the study is to explain the
advantages and limitation of budgeting. Budgeting provides a guideline to accomplish the goal
and work towards the vision of the company.
MAIN BODY
Budget : It is a statement to estimate the total expenses and income of the company in
particular accounting period (Rubin, 2019). It provides the information related to the company
activities and its performance to achieve the company goal and target and improve the
productivity and profitability.
Objective of budgeting
 To estimate the income and expenses of the company.
 To evaluate the performance of the employees to achieve the company objectives.
 To reallocate the resources and collect the sources of finance from different channels.
Process of preparing budget for the company
Establishing goal : The first step of budgeting is to define the goal of the company that
what they want from the customers and the employees. Manager gathers various data related to
financial and non financial activities and evaluate them to make effective and useful for
preparing budget.
Formulating expectation : The second stage of budgeting is to form the expectation
based on the experience and review the past budget. It helps to prepare budget closer to the
actual expenses (Miller, 2018).
Prepare budget : The third stage is to preparing budget for the company. It refers to
estimate the expenses and income of the company based on the gather data and information and
the experience of the managers.
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Monitor outcomes : After preparing the budget of t eh company the role of manager is to
evaluate the performance by monitoring the outcomes from the budget. Tit help them to get the
area of improvement and find the issues related to the company budget.
Adjust budget : The final stage of budget process is to adjust the budget and goal of the
company on the basis of the evaluated outcomes. It provides the framework to perform task and
measure the outcomes.
Budget provide an idea and guideline to plan the activities and control and monitor them
to get the result which was required by the company. It works as road map which direct the user
to perform activities according the framework. It also helps the company to provide a way to
accomplish vision and mission.
The budget is based on certain assumption and market condition. The change in market
condition or any unexpected condition largely affect the budget of the company. It also indicates
that budget is not relevant in each and every situation and condition.
Advantages and disadvantages of traditional budgeting
The traditional budget like sales budget, performance budget, operational budget has several
advantages and disadvantages which affect the business.
Advantages
 It helps the company to achieve the goal and objectives. The preparation of budget is
based on certain data and information which increases the reliability of the budget and
encourage the employees to improve the performance and work towards a common goal
of company.
 The evaluation of budget provides the various information and issues in the company.
The estimation of income and expenditure provides a guideline to complete the task
within the given budget (Reome and Sinclair, 2017).
 Budgeting provides the various data and information to plan the activities and compare
them to get the effective result. The comparison of expected budget to the actual budget
help to address the various issues and focus on the activities or area which needs
improvement.
 It provides the long term planning to control the activities and reduces the wastage of
resources and money. By controlling the activities of the company they can achieve the
target within the budget (Asogwa and Etim, 2017).
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 Budgeting help to prepare the money spending plan by allocating the find to the different
activities. Sales budget help the company to estimate the sales and adopt some changes
like promotional activities to increases the sales and get higher outcomes.
 A proper budget plan increases the productivity and profitability of the company and
address the various issues to improve the performance of the company. The company
faces the issues in budget like improper management of resources, deficiency in the
performance of employees etc.
Disadvantages
 Budgeting is based on certain assumption and experience of the manager which does not
reflect the true and accurate financial position of the company which result to decrease in
the performance and profitability (Polko, 2015).
 The aim of preparing budget is to minimize the cost of the activities and get the effective
result but some times it results to compromising in the quality of the product and services
to complete the task within the budget.
 The preparation of budget is based on the financial data which does not include the non
financial transaction such as the performance of workers, their dedication toward work,
motivation of employees etc.
 The preparation of budget encourages the illegal practices like manipulation of data to
increase the profit of the company to get the investment (Lefering and et.al., 2017.).
 It is prepared for long term basis, the fast change in organization activity reflect the
budget and its planning to increase the profit. Many organizations such as non for profit
company review the budget on annual basis so the change in the business environment
make huge impact on the performance.
The limitation of traditional budget encourage the company to adopt some changes in the
organization and prepare modern budget to neglect the traditional budget issues and achieve the
objective and increase the profitability. The modern budget like balance scorecard budget,
activity based budget help the company to overcome the issues of traditional budgeting.
Balanced scorecard budgeting : It is a performance metrics which is useful in strategic
management in order to improve various operations of the organization in order to gain desired
results and outcomes (Lubis, Torong and Muda,2016). It is a very powerful framework which in
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turn helps in making strategic decision for future growth and development of the company
(Balanced Scorecard, 2019).
Activity based budgeting : Activity based budgeting takes into consideration all the cost
incurred by the activities to attain the cost of the particular unit. This tool takes into
consideration all the overhead cost (Ohemeng, 2016). This method does nor take into
consideration past years budget in order to arrive at current year budget plan. It takes into
consideration various cost drivers to help determine the specific set of budget plan. It helps in
controlling the cost of each activity which in turn helps in higher operational growth. It is very
useful in effectively allocating the resources to the various activity of the company
(Rogulenkoand et.al., 2016).
Non- financial performance are quantitative measures which helps in expressing various
monetary units. It helps in improvising the strength of the company in order to strengthen the
quality of production and employee satisfaction (Mahaland Hossain, 2015). It is very useful in
progressing the customer requirements which in turn leads to attainment of higher profitably. It
also leads to more competitive strength and attainment of long term goals and objectives. Non-
financial performance is useful in improving the risk management and also helps in higher
competitive advantage.
Balance scorecard is used to set the performance target and results which is classified into
financial, customers, operational and learning (Muda, Erlina, I.Y. and AA, 2018). The financial
factor takes into consideration the financial aspects of the organization in order to evaluate the
performance and control expenses. Customer perspective is a non- performance indicator as it
helps in tracking the customer satisfaction, attitude and knowledge in order to attain desired
goals and objectives. Operational performance is also very useful in order to track the
operational efficiency and productivity of the company (Harden, and Upton, 2016). It helps in
determining factors which affect the performance and operations of the organization.
CONCLUSION
From the above study it has been summarized that, Budgeting helps in future planning in
order to attain the set budgeted plan and in case of any variation take necessary action
accordingly. It is useful in estimating the income and expenses, performance of the employees,
etc. this study further concludes, advantages and disadvantages of traditional budget. It provides
the long term planning to control the activities and reduces the wastage of resources and money.
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On the contrary, traditional budgeting does not include the non financial transaction which leads
to in effective results and outcomes. This study further concludes, balance scored card and
activity based budgeting. Balance scorecard is used to set the performance target and results
which is classified into financial, customers, operational and learning.
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REFERENCES
Books and Journals
Asogwa, I.E. and Etim, O.E., 2017. Traditional Budgeting in Today's Business
Environment. Journal of Applied Finance and Banking, 7(3). p.111.
Harden, J.W. and Upton, D.R., 2016. An Introduction to the Use of the Balanced Scorecard for
Performance Evaluation by Financial Professionals. Journal of financial service
professionals, 70(2).
Lefering, I., and et.al., 2017. Uncertainty budgets for liquid waveguide CDOM absorption
measurements. Applied optics, 56(22). pp.6357-6366.
Lubis, A., Torong, Z.B. and Muda, I., 2016. The urgency of implementing balanced scorecard
system on local government in North Sumatra–Indonesia.
Mahal, I. and Hossain, M.A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better
Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.
Miller, G., 2018. Performance based budgeting. Routledge.
Muda, I., Erlina, I.Y. and AA, N., 2018. Performance Audit and Balanced Scorecard
Perspective. International Journal of Civil Engineering and Technology, 9(5), pp.1321-
1333.
Ohemeng, F.L.K., 2016. 5 Reforming the Ghanaian Budget System from Activity-based
Budgeting to Performance-based Budgeting: Eureka, or another Reform
Illusion?. Public Budgeting in African Nations: Fiscal Analysis in Development
Management, p.114.
Polko, A., 2015. Models of participatory budgeting–the case study of Polish city. Journal of
Economics & Management, 19. pp.34-44.
Reome, C. and Sinclair, T.A., 2017. Better Budgeting Is Good Governance. Shared Governance
in Higher Education, Volume 2: New Paradigms, Evolving Perspectives, 2. p.121.
Rogulenko, T and et.al., 2016. Budgeting-Based Organization of Internal Control. International
Journal of Environmental and Science Education, 11(11), pp.4104-4117.
Rubin, I.S., 2019. The politics of public budgeting: Getting and spending, borrowing and
balancing. CQ Press.
Online
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Balanced Scorecard. 2019. [ONLINE]. Available
through:<https://www.investopedia.com/terms/b/balancedscorecard.asp>
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