Management Accounting-Budgeting

This report aims at illustrating how budgeting is applied in management accounting for various purposes such as control and planning. It will also focus on cases in the organization where budgeting has been used as a toll in management accounting.

Running head: MANAGEMENT ACCOUNTING-BUDGETING 1
Management Accounting-Budgeting
Student’s Name
Institution Affiliate
Date

MANAGEMENT ACCOUNTING-BUDGETING 2
Table of Contents
Executive Summary.........................................................................................................................3
Introduction......................................................................................................................................3
Purpose of Two Studies...................................................................................................................4
Research Questions..........................................................................................................................4
Budgeting.........................................................................................................................................4
Process of Budgeting...................................................................................................................4
Determination of Flow of Information.....................................................................................4
Decision on What to Measure..................................................................................................5
Collection of Historical Data....................................................................................................5
Preparation of Projections........................................................................................................5
Determination of the Break-Even Point...................................................................................6
Purpose of Budgeting...................................................................................................................6
Types of Budgeting......................................................................................................................7
Zero Budgeting.........................................................................................................................7
Incremental Budgeting.............................................................................................................7
Hybrid Budgeting.....................................................................................................................7
Program Budgeting...................................................................................................................7
Role of Budgeting in Management Accounting..........................................................................8
Behavioral Implications of Budgeting in an Organization..........................................................8
Similarities and Differences of the Journals....................................................................................9
Accounting, Auditing and Accountability Journal......................................................................9
The Organization....................................................................................................................10
Journal of Applied Management Accounting Research............................................................11
Learning Outcomes of the Journals...............................................................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................15

MANAGEMENT ACCOUNTING-BUDGETING 3
Executive Summary
Budgeting is often used in the organization for various purposes. The vital purpose of
budgets is control and planning. The budgets tend to serve a role in the prediction of profits,
communication of certain matters in the organization and allocation of resources and these
constitute the planning purpose. It is a basic area in management accounting, and of the
managers who have been interviewed, they indicated that the budgeting process is not an
accounting function but instead it is a managerial function. This report aims at illustrating the
roles of budgeting in various organizations. It will also investigate the influence budgeting has
on the managerial behavior and their performances. Additionally, it has explained the
implications of budgeting organizations and this it has achieved by looking into certain case
studies of certain organizations. It will focus on two specific journals of management accounting,
and this is as discussed in the paper below.
Introduction
Budgeting is typically a tool which is critical in management since it aids in control and
planning purposes. Most of the organizations use budgets to plan for their present and future
expenditures. The budgets are compared with the actual costs of items in a particular fiscal year
and this done to ensure expenditure is controlled in various organizations. This report aims at
illustrating how budgeting is applied in management accounting for various purposes such as
control and planning. It will also focus on cases in the organization where budgeting has been
used as a toll in management accounting.
Purpose of Two Studies
The purpose of the two studies is to understand what budgeting entails and this includes, the
various types of budgets, roles of budgeting in management and the key implications of
budgeting in a particular organization.

MANAGEMENT ACCOUNTING-BUDGETING 4
Research Questions
The study aims at exploring the following questions on budgeting and this include;
 What is budgeting?
 What are the types of budgeting?
 What are the purposes of budgeting in an organization?
 What is the role of budgeting in management?
 What are the implications of budgeting in an organization?
Budgeting
A budget is a plan for the future operating activities, and it could be short-term or
quantitative. It has been considered as a fundamental element in control and planning systems in
the organiations.Budgeting, therefore, is the process which entails the preparation of budgets.
Process of Budgeting
It entails the formation of committees in charge of the preparation if the budgets and this
is especially in the large organizations. The whole process of budgeting entails five steps as
discussed below;
Determination of Flow of Information
In this step, an organization collects information to help in the compilation of the budget.
Such a step is done in two ways that are the bottom up and top down. For instance, the heads of
units may be asked to provide certain key information (Bogsnes, 2016). Also, the top level
management can develop the projections and priorities of an organization and that way data can
be obtained to help in the preparation of budgets.
Decision on What to Measure

MANAGEMENT ACCOUNTING-BUDGETING 5
While preparing budgets, it is prudent to decide on the item in the organization which an
individual is to measure and this usually depends on how such an organization is organized or
may be how it intends to set it up. The elements to be measured may include, the revenues and
costs and the items can be classified according to the distribution and manufacturing units such
as revenue and cost centers.
Collection of Historical Data
According to Bogsnes (2016), the historical information in regards to the past
performance of the organization is collected, and this is done after a decision has been made on
the basics of segmenting the various operations of the organization. The historical information
can be obtained from the financial statements such as cash flow statement, incomes statement
and statement of financial position. Additionally, the organization can collect information on
sales, and this is in regards to the customers, regions and product lines. Also, a company ought to
obtain information on the expenses which have already been covered such as the variable costs,
direct costs, fixed costs, and indirect costs.
Preparation of Projections
The step entails the preparation of projections for the performance of the company in the
future. Such a task is typically complicated, and this is especially when preparing the zero-based
budgeting. However, when preparing incremental budgeting which predictions are based on the
past performance, they are considered easy to make (Baiocchi & Ganuza, 2014).
Determination of the Break-Even Point
The estimation of the break-even point is considered to be the hardest task and step. It is
important to understand certain key items before the preparation of the break-even point. Such
may constitute, the contribution margin. In the process of preparing the break-even point, there

MANAGEMENT ACCOUNTING-BUDGETING 6
are certain needs in an organization which must be taken into account such as the break-even by
sales and break even by units.
Purpose of Budgeting
Budgeting has several roles which it plays in every organization. For example, budgeting
can be used to help in the allocation of resources of the organization, and it thus prevents
wastages. Another key purpose of the budget is that it is a motivating factor for the employees
since the workers of an organization always towards the achievement based on that which is
indicated in the plans (Baiocchi & Ganuza, 2014). It also helps in controlling of operation and
profits such that the expenditure on various activities will entirely depend on the estimated
budgets and there will be no expenditure beyond that which is put.
The other purpose of the budgeting is that it is a tool which is used during the evaluation
and hence assessment of the performance of the organization. The actual expenditure is often
compared with the budgeted expenditure, and this will help in ascertaining the level of
performance for a particular fiscal year. Budgeting is also used to facilitate coordination and
internal communication in organizations (Bogsnes, 2016). It is the budget through which the
management of an organization communicates the critical objectives of the company to the
employees and hence ensure that they all work towards such goals. Further, budgets in the
organizations can be used to displays the plans of the organization and this in financial terms.
The plans of action could be to make more profit or even increase the sales volume.
Types of Budgeting
There are various types of budgeting, and this is as discussed below;

MANAGEMENT ACCOUNTING-BUDGETING 7
Zero Budgeting
In zero budgeting, all the fundamental activities of an organization are usually set at zero.
It also assumes that the budget prepared by a company an item in one year should not be based
on the budgeting in the future (Gonçalves, 2014). A key limitation of this type of budgeting is
that expensive and time-consuming. However, it is more accurate compared to the other types of
budgeting.
Incremental Budgeting
It is considered one of the simplest budgets and hence it easy to prepare. It usually
involves the collection of information on the expenditure by a company in the other previous
fiscal year. The increases and decreases are then estimated (Bogsnes, 2016). Incremental
budgeting is however not accurate, and this is because a company which uses such a method of
budgeting will repeat the same mistakes over the years and this may result in losses made by the
company.
Hybrid Budgeting
The hybrid budgeting method is done based on the past performance of a company. Most
of the organizations across the world entirely depend on this type of budgeting. The technique
also takes into account other elements such as macroeconomic forces and industry trends.
Program Budgeting
A variety of programs are typically identified in the organization. Also, the key goals of the
different programs which have been identified are set, and then a budget is prepared for each of
the programs (Gonçalves, 2014). The program budgeting often puts a lot of emphasis on the
outputs rather than the inputs of an organization. Additionally, such a budget is most used in
organizations which are non-profit making and also other fundamental departments.

MANAGEMENT ACCOUNTING-BUDGETING 8
Role of Budgeting in Management Accounting
Budgets are often considered to be significant tools for communication in an
organization, and this entails providing details on financial and operational goals. Often, the
budgets convey information to the middle and upper management, and this is typically the top
management's expectations. The various priorities of the management are also communicated to
the lower levels of management through the use of budgets (Kelly & Rivenbark, 2014).
Additionally, budgeting plays a key role in the control and planning of a company's activities,
and this forms the key roles of management in an organization. Budgeting also plays a role in
performance evaluation, and this is fundamental in management accounting. The manager must
be in a position to assess the performance of an organization, and this helps in identifying certain
key areas which should be improved.
Behavioral Implications of Budgeting in an Organization
Everyone in an organization is often affected by the budget, and they will always tend to
work hard to keep with the targets set. The reactions of the workers including the top level
management often have different impacts on an organization. When the reactions are positive,
such an organization will experience high performance, and this is unlike when the reactions are
negative (Rubin, 2016). Another implication could be an excessive pressure mounted on the
employees, and this could be as a result of budgeting. Such an implication is usually a result of
tight goals set in the budgets. The budgetary slack is another implication of the budgeting
process, and this is when the management overestimates costs and underestimate the revenues
and then later asking for more money to finance the budget.

MANAGEMENT ACCOUNTING-BUDGETING 9
Similarities and Differences of the Journals
The journals chosen were Accounting, Auditing and Accountability Journal and the
Journal of Applied Management Accounting Research.
Accounting, Auditing and Accountability Journal
According to the above journal, the budgeting practices are usually done in response to
various changes in the environment which may lead to a financial crisis in a particular
organization. The above circumstance was witnessed in the hospitality organizations in Greece,
and this was in 2007-2010 (Ferry, Eckersley & Zakaria, 2015). At the time, there was a
continuous financial crisis in Europe. Often budgeting in consideration to the management
accounting is done to help an organization to configure itself (Demirag, 2017). Such a
configuration is based on the arrangements for control, and this is done to allow an organization
to adapt and hence survive in a dynamic environment.
Bracci, Humphrey, Moll & Steccolini, (2015), argues that under the situations of
financial crisis in the companies, budgeting is often considered as the only way in which the
control practices laid out by such an organization will adapt with such prevailing condition. The
shift towards budgeting is often viewed as difficult and this because they cannot easily reflect the
dynamic changes in the environment. In such situations, the budgetary control is abandoned.
However, the practices and procedures in management accounting have to be complied with
even with such prevailing situations.
Budgeting, therefore, plays a key role in helping an organization to adapt to certain
dynamic conditions in the environment. Most of the managers, therefore, tend to adopt budgeting
when conditions in the environment typically change, and it can result in adverse implications on
the particular organization (Wildavsky, 2017). In management accounting, budgeting is
considered to be a strategic function of the management of an organization. It is a control

MANAGEMENT ACCOUNTING-BUDGETING 10
practice and structures, and they help in maintaining the stability of the various structures in an
organization.
The Organization
The hotel was built in the 1990s, and it was a single hotel by then. Later another hotel as
built. Over the years, it has grown leading to the construction of more hotels. The organization
was involved in the management and administration of all the hotels (Becker, Jagalla &
Skærbæk, 2014). The key objectives of the organization typically revolve around the innovation
and constant improvement in new markets. It also focuses on the enhancement of quality and
investment in those infrastructures which are considered to be luxurious.
Often the organization prepares its budgets on a yearly basis, and this is done in October.
The president of the organization in a variety of its formal meetings stipulates the projections and
directions for the next year (Brown, Dillard & Hopper, 2015). At the time when the president is
making such sentiments, the marketing department will have made already their projections and
this in regards to the prices and occupancies per market. Once that has been done, all the views
are unified, and revenue is estimated based on the views provided by the marketing department
(Hyndman, Liguori, Meyer, Polzer, Rota & Seiwald, 2014). The budget forms will then be sent
to all the departments in the hotel by the fiancé department, and this is done in November. The
forms contain the standard costs for all the hotels. The budgets for the hotels will then be
submitted to the senior management who consult and finally agree on the estimated costs and
details provided in the budget.
According to Ahrens & Ferry (2015), the hotels use budgeting for cost control and
planning purposes. Such a control mechanism using the budgets helps to ensure that more
variances in the cots items do not occur. The management, therefore, uses a budget as a tool for
control and planning, and such constitute some of their fundamental functions in an organization.

MANAGEMENT ACCOUNTING-BUDGETING 11
The organization has often used budgeting in the events of a financial crisis (Ferry & Eckersley,
2015). For instance, in 2007, one of the hotels faced certain challenges, and this was due to the
low occupancy rates. However since the senior management had made projections for the hotel,
the crisis persisted. The management was therefore forced to re-adjust towards the self-
sustainability instead of growth. Later in 2008, the organization prepared their budget, and this
was done from a zero base.
Based on the projections which had been made by the management that the next year
would be a difficult one, it was different from such a projection in the following year. The
dynamics in the environment adversely impacted the budgeting of the organization, and the
management admitted that the prices in the market had become sensitive resulting in depression
(Oulasvirta, 2014).
Journal of Applied Management Accounting Research
In past few years, the matter of how the preparation of budgets tends to affect the
organization behavior has been a significant concern for management accounting. The process of
budgeting has often been associated with enhanced performance of a particular organization.
This journal focuses on the impact of budgeting in managerial performance in the Macau service
sector (Hiebl, 2014). According to the journal, managerial performance cannot be as a result of
the budgetary participation by the managers. However, at times, the performance of the
managers varies due to the budgetary participation.
According to Otley (2015), the process of budgeting tend to vary in different
organizations, and this is based on the size of such organizations. The larger organizations who
allow their management to pay a key role in the preparation of budgets typically perform well
compared to the others. Additionally, their workers are often motivated to work towards the
objectives as set in the budgets (Anessi-Pessina, Barbera, Sicilia & Steccolini, 2016). The

MANAGEMENT ACCOUNTING-BUDGETING 12
uncertainties in the environment tend to restrain the managers from participating in the
preparation of budgets. In the event that the managers realise that they will not attain some of the
budget goals, they become reluctant, however when they perceive success they hesitantly prepare
the budgets (Nitzl, 2016). Based on the budgetary participation, companies can be categorized
into two that is defender companies and prospector companies. The defender organizations put a
lot of focus on the achievement of the targets of the budget, and this forms the basis of the bonus
remuneration. The prospectors' companies, on the other hand, tend to focus on financial
reporting which is frequent and use of a uniform control system. In such companies, the
managers tend to have positive performance unlike those of the defender companies (Lukka &
Vinnari, 2014).
Just like in the previous journal, budgeting helps an organization to overcome certain
financial crisis which may arise. Use of certain intervening factors could establish the absence of
a relationship between participation in the preparation of budgets and managerial performance.
Such factors may help stimulate certain variables such as attitude, motivation and job-related
tensions (Chong & Mahama, 2014). Apart from the intervening factors, there are also other
factors which can be used to depict the relationship which exists between participation in the
budget process and managerial performance. Based on the moderating factors, when higher
levels of budgetary participation are used together with the less difficult task, there are high
chances that the performance of the management will typically be high. One of the key
moderating factors was the information asymmetry (Park & Jang, 2014).
Such a moderator means that the junior employees in an organization may have more
valuable information than the top level management (Lavia López & Hiebl, 2014). Additionally,
they can have a greater comprehension of the standards on which to attain the set projections by

MANAGEMENT ACCOUNTING-BUDGETING 13
the organization. The factors of information asymmetry typically contribute to the relationship
which exists between the participation in the preparation of budgets and managerial performance
and this is especially in slack relationships. When the management highly participates in the
preparation of budgets, the subordinates who possess a lot of information tend not to participate,
and this results in a slack relationship (Hoque, 2014).
Learning Outcomes of the Journals
From the study of the journals, it is clear that budgeting enhances performance of an
organization and this is especially when there are financial crisis. Such an outcome is significant
to the management accountants since it will enable them to focus on the budget which provides
the key goals of an organization. Another learning outcome is that the dynamics in the
environment tend to affect budgeting and hence the management accountants should be vigilant
while preparing the budgets (Hoque, 2014). The learning outcome is useful to the management
accountants in the sense that they should take into account the environmental conditions during
the preparation of budgets.
Further budgeting is used for cost control and planning purposes in the organizations and
it is therefore a fundamental aspect in the organization which the management accountant should
take into account. The key roles of a manager involves planning and control and thus budgets
can be used as tool for planning and control by the management accountants (Ferry & Eckersley,
2015). Lastly, budgeting tend to vary with the size of the organization such that large
organizations prepare a more complex budget compared to those in smaller organizations. The
above learning outcome is important to the management accountants of Australia since it will
enable them to prepare budgets based on the size of the organization they are employed.

MANAGEMENT ACCOUNTING-BUDGETING 14
Conclusion
In summary, it is clear that the budgeting process is significant for the success of any
particular organization. It plays certain key roles such as planning and controlling of various
activities in a firm. Such roles typically help the management to work towards the attainment of
that which is set in the budgets. However, there are certain reasons which may prevent the
management from participating in the preparation of budgets. For instance, the dynamics in the
environment which tend to reduce the possibilities of attaining some of the set goals in an
organization.
The uncertainty to accomplish the targets in the budgets results in lack of participation of
the management in the preparation of budgets. The lack of participation will typically lead to
poor performance of the organization. Usually, the Managerial performance and budgetary
participation relationship fail to exist, and this is based on the research which had been
conducted. However, the relationship can be built using certain factors referred to as the
moderating factors. One of the fundamental moderating factors is the information asymmetry
where the subordinates who tend to possess a lot of information concerning an organization are
involved in the preparation of the budget. Such an involvement usually speeds up the preparation
if budgets and hence high performance is attained.

MANAGEMENT ACCOUNTING-BUDGETING 15
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