Role of Budgeting in Management Accounting

This essay discusses the critical evaluation of the role of budgeting in management accounting and its impact on effective decision-making in the changing business environment. It explores the concepts of flexible and static budgeting, their merits and demerits, and the importance of budgeting in financial stability and operational strategy.

MANAGEMENT ACCOUNTING

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Management accounting plays several roles in which they conduct a number of challenges to
make sure financial stability for their company, effectively managing all financial affairs and
thus helping to promote the effective operations and strategy of the business (Azudin and
Mansor, 2018). Managing money is help in determining arrangements for pay and benefits. This
essay based on the critical evaluation of role of budgeting which helps the company’s managers
to make effective decisions in the changing business environment. It also includes the flexible or
statics budget, along with its merits or demerits which required evaluating by the managers
before taking any decision on the basis of it.
MAIN BODY
Budgeting is the mechanism whereby company build a strategy to invest their money. The
investment schedule is named a budget (Biancolini and Cella, 2020). Developing this budget
plan gives the freedom to the managers to decide in advance whether they will have enough
funds to do the activities which manager's need or want to do. It's an essential method of
preparation and projecting which help managers to handle company's finances by matching
their costs against with revenue. If organization don't have enough resources to do whatever they
would like to do, so managers should use this budget tool to organize their expenses and
concentrate on their funds on the most important tasks for the company. Since budgeting helps
managers to build a spending schedule with the finances, it means they'll actually have enough
funds for the operational activities they need and the things that matter to them. With the help of
budgeting, a manager is able to make effective decisions in respect of the organization and which
work with the changing environment or make sure balance overall production as well as
profitability. Budgeting plays essential role in the organizations and allow managers to make
effective decisions in respect of the company to maximise firm’s production or profit margin.
Some of its role mentioned below:
Budgeting plays essential role in the communication because it is a systematic approach to
convey a firm’s plans to its key stakeholders, such as directors, departmental heads, and those
who have a concern or obligation for controlling the firm’s performance. Budgeting includes
managers to plan for both income and expenditures.
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Budgets allow organizations to predict future expenditures. Such plans allow to estimation
the appropriate volume of revenue needed to produce capital for financing the budget. Company
owners also will change potential spending based on previous budget results. Historical budget
analyses help company's managers to consider how and when they invest money on the
company. Budgets could also be used to safeguard external capital to expand operational
activities.
Role of budgeting also helps in planning where managers formulate several strategies for the
development of operational performance (Latan And et.al., 2018). Managers needs to consider
and evaluate some assumptions while preparing budget, set long term as well as short term goals
for effective results. By building such budgets, managers are able to make optimal decisions
within changing business environment.
There are several budgeting tools which are used by the organizations to perform their task
accordingly. It also helps the managers to make strategies when business environment changed,
so manager also change their decisions accordingly. Every budgeting tool has different
advantages and drawbacks which is essential for the managers to evaluate before considering any
of them. Flexible and static budgeting both are discussed below, along with its merits and
demerits which required considering by the managers while making decisions. Discussions are as
follow:
A Flexible budgeting is a method that modifies or flexes with quantity or activity changes.
The adjustable budget is more streamlined and practical than a static budget (Clausen And et.al.,
2018). The flexible budget will adjust with expenses that change with quantity of operation, as
the budget will have a variable payment per unit produced rather than a constant overall sum. In
short period production, the flexible budget is a much more helpful tool for comparing the
effectiveness of a manager. Flexible budgets is important because it changed for sales figures
levels; alter in the production costs and practically any other changes in terms of business
operational conditions throughout the year. This adaptability is helpful for managers and owners
to adapt to the change in the business environment and make strategic decisions accordingly.
This budget has several merits such as range of activities can consider in this budgeting
tools. For particular, static budgets are only planned for specific stage, but flexible budgets are
designed for a variety of operations. Flexible schedule allows equating current production,
expense or results to normal or budgeted production, cost and efficiency. It could be used as an
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effective cost management tool, since flexible budgets respond to difficult situations. Static
budget is based on hypotheses, judgements, projections and estimations. But, based on evidence
and core values, flexible budgeting is prepared. This is much more flexible than the budget
which is static. Depending on market environment and situation this can be customized or
changed. Flexible budget allows assess the efficiency of the administration and activities.
Flexible budget also has several demerits which managers should know about it, such as it
need further preparation to manage costs and to compensate for the time differential. A selection
that varies over the time will lead some users to excessively misinterpret the budgeting system
and therefore minimize the likelihood that they'll be productive in executing it. Flexible budgets
confuse matters by including more regulations that someone trying to maintain within the limits
can easily bend or break. The whole idea of a flexible schedule is to make it easy to stick to, but
these schemes are unable to encourage the same consistency or long-term patterns as more
conventional solutions by not implementing the same strict plan each month.
A static budget is a form of budgeting tool that combines expected input and output
variables that are formulated before the start of the time of the incident. A static budget that is a
projection of income and spending for a given timeframe appears constant even with rises or
declines in volumes of revenues and output. Nevertheless, the figures from static budgets can
become very different from the actual results as opposed to the actual reports which are obtained
after the event (Marotta And et.al., 2018). It is used over time by accountants, accounting
experts, and corporate management departments trying to measure an organization's financial
results. A static budget tool is particularly useful where a company has relatively stable sales and
costs which are not likely to change significantly over the budgeting cycle. This budget also has
several merits and demerits which required evaluating for the managers to make optimal
decisions in the changing working environment and these are discussed below:
One of the major merits of static budget is that it would be simple to execute and follow,
since static budgets do not have to be continually updated all throughout financial period which
they are meant to cover. In addition, a static budget can provide a strong insight into the costs
and profits of the firm when carrying out financial statements. This helps an organization to
consider if its costs and profits might be overestimated or exaggerated, so it can make corrections
or adjust its plan for the future. Also, since there is no built-in room for flexibility for static
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budgets, individuals can allow clients to control their expenses, and make sensible spending
decisions.
The biggest drawback to the static budget has been its lack of versatility. When an
organization sets a budget based on a predefined amount of revenue demand and the volume
increases, additional funds cannot be dedicated to keep up (Myny, 2018). When an organization
discovers underperforming service areas along such lines it cannot devote extra capital to assist.
It will adversely affect the sales flow of a company. In fact, although static budgets are based on
past results, it could be more challenging for new companies to develop and enforce them.
It has been critically evaluated that budgeting plays essential role in the organization or
allows the managers to make strategic decisions in respect of the company or make sure that
organization perform their task according to the activities which mentioned in budget. Flexible
and static budget followed by the organizations in order to build plans which include the
estimation of sales volume, profit and expenditures. There are more budgeting tools available
which help the managers to done planning in order to achieve business goals & objectives.
CONCLUSION
On the basis of above discussion it has been observed that management accounting and its
concepts are very essential for the organizations to perform their task. Budgeting is one of them
tool which are used by the managers to perform their task or make sure that all the operational
activities should completed in the budgeted value. In addition, flexible or static budget can
changed throughout the period as per the requirement of production but both has some
disadvantages as well which managers need to consider before making optimal strategic
decisions in the changes business environment.
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REFERENCES
Books & Journals
Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of
organizational DNA, business potential and operational technology. Asia Pacific
Management Review. 23(3). pp.222-226.
Biancolini, M. E. and Cella, U. eds., 2020. Flexible Engineering Toward Green Aircraft: CAE
Tools for Sustainable Mobility (Vol. 92). Springer Nature.
Clausen, D. And et.al., 2018. Experimental demonstration of flexible hybrid modulation formats
for future adaptive optical transmission systems. Journal of Lightwave
Technology. 36(12). pp.2551-2558.
Latan, H. And et.al., 2018. Effects of environmental strategy, environmental uncertainty and top
management's commitment on corporate environmental performance: The role of
environmental management accounting. Journal of Cleaner Production. 180. pp.297-306.
Marotta, A. And et.al., 2018, May. Efficient management of flexible functional split through
software defined 5G converged access. In 2018 IEEE International Conference on
Communications (ICC) (pp. 1-6). IEEE.
Myny, K., 2018. The development of flexible integrated circuits based on thin-film
transistors. Nature electronics. 1(1). pp.30-39.
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