Advantages and Disadvantages of Planning Tools for Budgetary Control

This document discusses the advantages and disadvantages of different types of planning tools used for budgetary control. It also evaluates how organizations are adapting management accounting systems to respond to financial problems. The document provides insights into the application of planning tools in preparing and forecasting budgets and how managerial accounting contributes towards sustainable success.

MANAGEMENT
ACCOUNTING

Table of Contents
Introduction......................................................................................................................................3
P4.....................................................................................................................................................3
An explanation of the advantages and disadvantages of different types of planning tools used
for budgetary control....................................................................................................................3
Application of planning tools in preparing and forecasting budget.............................................6
NEvaluate how organizations are adapting management accounting systems to respond to
financial problems........................................................................................................................7
Managerial accounting contributes towards sustainable success.................................................9
Conclusion.......................................................................................................................................9
References......................................................................................................................................11

Introduction
Managerial accounting, also known as management accounting refers to the process of
analyzing business on the factors that are around the business costs and its operation aiming for
the preparation of records of finance. Furthermore, it is also aimed to help business managers in
the decision-making process for the attainment of business goals that are absolute. In other terms,
it can be defined as the practice of making financial sense, data cost and the translation of the
data to pieces of information that are very essential in the process of management and by the
business organizations’ officers.
P4
An explanation of the advantages and disadvantages of different types of planning tools used for
budgetary control.
It's difficult to look into the future and see the majority of the factors that could influence your
organization to acquire or lose cash. Be that as it may, it is conceivable to use past data to
influence speculative figures and afterward to alter your data as genuine conditions unfurl.
Budgetary control is a significant device and a valuable procedure, however it ought to be drawn
closer with alert as a result of its constraints, and forecasts ought to be dependably be treated as
situations as opposed to realities. Budgetary control frameworks include spreading out monetary
conjectures for gaining and spending and after that surveying these numbers with respect to
genuine bookkeeping numbers.
The Benefits and drawbacks of planning tools of Budgetary Control
Setting Objectives.
The control of budget can provide a basis for both the short and long arranging of haul, therefore
helping in the synchronizing of the desires of everyday with large picture ventures.
Clarifying procedure.
Spending that are meant to dispense assets in order to enquire about and making other products

offering diagrams way ahead and also focuses that have clear references in relation to staffing
and spending(Drury, 2009).
Reference focuses.
The process of budgetary control pressurizes someone to do a genuine survey result with the
respect of projections that are hypothetical which in turn gives solid reference focus to
achievement assessment.
Drawbacks of Budgetary Control
Unpredictability.
Budgetary control hugeness can be undermined in a way that there is truly no real way to foresee
particular results(Sangster, 2005).
Accounting costs
An organization should dispense its assets and workforce for the purpose rehearsing its spending
control. In the event whereby one has a book keeping section, this might not be a problem but on
the off chance whereby someone has a employee which is in charge of sharing the duties, then
someone might be needed to occupy the workers and finance hours from exercise (Drury, 2009).
False conviction that all is good
The procedure of budgetary control may make hallucinations that someone acknowledges what
he or she can anticipate from business exercise in the future.
The Purpose of Budgetary Control
The Budgetary control is normally planned for the purpose of helping in the giving of a guide to
executive choices and not reflect on the strong, last numbers. The procedure piece that does the
analysis of real amounts to forecast the figures fills in as a compromise form, thereby integrating
the circumstances that are genuine with the verbalized visions in a composition that is numerical
(Sangster, 2005).
There are various kinds of planning tools for budgetary control which have their own benefits
and pitfalls. These are discussed below :
Zero based Budgeting :
This is one of the planning tool that is used for budgetary control. Zero based budgets are
defined as those budgets which are prepared from the scratch that is from the zero base. This
means that these budgets are not created using any of the historical data which are modified to be
served as new budget. Rather every function within the company is analyzed for its requirements

and its associated costs (Zero Based Budgeting, 2019).
Benefits :
 These budgets provides more accurate results as these are not based on any past data. It takes
into consideration the budget inflation factor and each of the business activity is thorough
analyzed for the purpose of determining its requirements and costs.
 It leads to decline in the redundant activities by identifying the opportunities and different
ways of operating business which are cost effective. This ultimately results into elimination
of unnecessary and unproductive activities within the organization that increases the
operating cost of firm.
Pitfalls:
 It is a very time consuming task for the management of the company. Since each and every
activity of business is thoroughly analyse, it ends up consuming organizations material
resources way too much.
 Performing zero based budgeting requires highly skilled and qualified workforce.
Incremental budgets :
These are such kind of budgets which are created by using the budget of previous year or
past year’s actual performance along with the additions of incremental amounts to each of
activity by considering the changes in accounting period.
Benefits:
 This way of budgeting is easier to perform and implement as it does not involve any
complex calculations.
 This budgeting makes sure the continuity of funding for organizational departments without
much comprehensive analysis of funding necessities.
Pitfalls:
 There is an omission of innovation. Also it does not facilitate the managers with cost
reduction privilege.
 It makes the business to run into conservative mode and makes the managers less creative
and risk taking in their approach to dealing with the business dynamics.
Fixed budget:
Fixed budget is defined as such budgets which does not change with the change in sales
volume. It remains constant irrespective of any variation in the level of sales or production

activity. This is the reason that is it is also known by the name of static budget. It is
advantageous only for those business units wherein the expenses are mostly unchanging so that
expenses does not deviate as income or revenue variate.
Benefits :
 Performing fixed or static budgeting is the simplest out of all the other kinds of budgeting.
 Fixed budget offers managers some useful insights regarding costs of business organization
especially when a variance analysis is performed. This facilitates the management in
ascertaining the areas which might be under/over-estimated that could significantly affects
quality of business decisions (Peters and et.al., 2016).
Drawbacks : These budgets does not offer any flexibility. It does not take into account the budget
inflation which is not a right and accurate way of tracking the expenses of the firm. Such budgets are prepared by using historical records which might provide inappropriate
forecasting of company’s expenses and income.
Application of planning tools in preparing and forecasting budget
Planning tools are applied by the managers in forecasting of the company’s budgets. For
instance, cash flow statements are taken into consideration while preparing budgets as it allows
the managers in gaining useful insights about the patterns of cash inflows and outflows within
the business. These budgets aids the management in its processes of planing and controlling
through which company becomes able to control its operational costs and achieve its objective of
becoming cost effective firm.
Cash Budget
Particulars July August September October
Cash balance at the beginning 10000 9401 5461 9106
cash inflows 54300 57120 66080 64960
Total cash balance 64300 66521 74541 74066
less : costs
Direct raw materials 4549 4560 4860 5113
Direct labour 19750 18000 22250 20500
Direct manufacturing Overheads 10650 9950 11650 10950

selling and distribution costs 15950 12750 14750 13150
Machinery purchased 24300
income tax expenses 4000
Total costs 54899 69560 53510 49713
Cash surplus 9401 -3039 18031 24353
Financials
Cash Borrowings 8500
Repayment of loan -8500
Interest expenses -425
Total financing 8500 -8925
Cash balance at ending 9401 5461 9106 24353
P5
Evaluate how organizations are adapting management accounting systems to respond to financial
problems.
As of today, many of the business enterprises are experiencing the enquiry on some of the
methods that are most proficient in the adjustment of their plans of methodology, methodologies
and actions to react to social and natural strain while putting up for their investors and budgetary
achievements incentives. It normally involves the making of the business situations for the
purpose of manageability and inspecting and detail provision that regards to the impact of natural
and social viewpoint on the execution of associations (Drury, 2009).
Recognizing money related issues
Utilization of budgetary targets is a marker in the key execution of monetary and non monetary
related and benchmark to differentiate issues and distinction so as to tackle them without
postponing.
Budgetary administration
Organizations should designate money related administration and look on to it may be linked to
pre-empt or characterize monetary issues. Budgetary administrations in the checking of the
methodologies can be utilized by business enterprises.

Administrative bookkeeping ranges of abilities
For any organization, it is required for it to know successful and proficient administrative
bookkeeping highlights. Furthermore, they can observe how abilities can be affiliated in the
management or forestallation of issues. Like, asset misappropriation that is intended for business
development.
Business organizations sort to management accounting systems in order to deal with their
financial crisis. Different organizations adopt different methods of management accounting for
becoming efficient ad effective in their operations.
Key Performance Indicators (KPIs) :
It is a one technique of managerial accounting by the way of which business enterprises
evaluate, measures and analyses their effectiveness in obtaining their desired target.Chair
manufacturing company apply this technique of managerial accounting system for evaluating the
performance of overall business organization and also for analyzing and measuring the
performance of each of the organizational department. Company uses various KPIs such as
employee performance, revenue growth rate, gross profit, inventory turnover etc.
By applying such key indicators, the business enterprise enables to measure, analyse and
evaluate each of its significant areas. This aids in ascertaining business issues for which more
effective strategies could be made which eventually assists the chair manufacturing company in
dealing with the economic crisis.
Bench-marking :
Bench-marking can be described as the technique of comparing the organization’s internal
policies, strategies, operations/processes, performance of product in the market or employees’
performance with those business enterprises who have set benchmarks in the industry. Bench-
marking is of two types such as internal & competitive. Internal bench-marking is related with
comparison of business performance with company’s own standards set as benchmarks. While
competitive bench-marking is related with comparison of organization’s performance with the
competitors (Lopez-Valeiras, Gomez-Cond. and Naranjo-Gil, 2015.). The Contract Chair
company which is one of the competitor of Chair manufacturing company employs this tool of
managerial accounting system by the way of which it evaluates and analyse its own performance
and discovers any variations in the standards set by the company and its actual performance.
For the major variations, it then employs corrective actions for controlling business activities.

This aids the Contract Chair company in decreasing its operational costs which ultimately
contributes in effectively responding to financial issues of company.
Financial Governance :
Financial Governance can be defined as a style or manner in which business’s financial
transactions are recorded. The benefit of employ financial governance within the business is that
it helps the firm in managing, monitoring and controlling the business activities. Moreover, it
also makes sure that formulation of financial statements and reports has been done by taking into
account all the essential requirements of legislation and keeps a track that all the needed
compliance have been done by the business unit (WAN, ZENG and LI, 2015).
Managerial accounting contributes towards sustainable success
Employment of Managerial accounting system within the chair manufacturing company
has helped the business in a crucial way by helping company’s management in appropriately
managing the resources of the company which includes tangible and intangible resources. By
the application of tools and techniques of managerial accounting, organization becomes
efficiency in its operations through which the quality of decision-making enhances. Effective
decisions for the company are formulated because of managerial accounting reports which helps
the business in achieving its organizational goals and objectives. Further, the different systems of
management account such as inventory management system aids the management in effectively
managing its stock which facilitate smooth production. Due to the effective management of
inventory, company’s requirement of working capital reduces through which cost of operations
reduces (Peters and et.al., 2016). Therefore, it can be said that managerial accounting play a
crucial role in making company to head towards the sustainable success.
Conclusion
From the above report, it can be summarized that framework provided by the managerial
accounting is one of the necessity of the business organization as it helps it in heading towards
the road of sustainable success. It was observed in the report that different planning tools such as
zero based budgeting, fixed budgets, incremental budgets contributes significantly in dealing
withe the financial problems of an organization. The report included the advantgaes and
disadvantages of different planning tools such as fixed budget is useful for companies whose
expenses does not variate significantly while he disadvantage was that this type of budgeting

does not allow any flexibility for inflation.

References
Dyson, J.R. (2010). Accounting for Non-Accounting Students. 8th edition. Harlow: Pearson
Education Ltd
Drury, C. (2009). Management Accounting for Business. London: Cengage Learning
Sangster, A. (2005). Business Accounting 2. 10th edition. Harlow: Pearson Education Ltd.
Horngren, C.T., Sundem, G.L., Burgstahler, D., Schatzberg, J. (2014) Introduction to
Management Accounting. 16 the Edition. Harlow: Pearson
Lopez-Valeiras, E., Gomez-Conde, J. and Naranjo-Gil, D., 2015. Sustainable innovation,
management accounting and control systems, and international performance. Sustainability, 7(3),
pp.3479-3492.
WAN, W., ZENG, Y. and LI, Q., 2015. Financing Constraints, Financial Development and
Cross-subsidies in Business Group. Systems Engineering, (1), p.1.
Peters, M.D and et.al., 2016. Business intelligence systems use in performance measurement
capabilities: Implications for enhanced competitive advantage. International Journal of
Accounting Information Systems, 21, pp.1-17.
Stea, V. and Andresen, J., 2017. The Fixed Budget: Outdated or Underrated?: How Swedish
Privately Owned Companies Perceive The Fixed Budget And How It Is Used.
Online
Zero Based Budgeting.2019. [online]. Available through
<https://efinancemanagement.com/budgeting/zero-based>