Budgeting Styles in Management Accounting

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
In management accounting, budgeting refers to the process of estimating, deciding,
streamlining and evaluating income and expenses on a periodic basis (Koliesnichenko, 2019). It
is done by companies to keep a track of their revenue and expenditure. This essay will determine
various budgeting styles and assess their merits and demerits. The relation between budgeting
and short-term decision making by mangers of companies will be highlighted using examples.
The impact of changing external and internal environment on budgeting styles will be evaluated.
The implication of participatory budgeting on a company’s business performance will be
evaluated by analysing its benefits and disadvantages.
MAIN BODY
Budgeting Styles
A budget describes management’s plans for operation, streamlines management’s plan in
quantitatively, makes all levels in management to estimate and anticipate results, take corrective
measures (Matějka, Merchant and O'Grady, 2020). Budgeting helps managers in coordinating
activities, makes employees more conscious about resources, and helps managers in developing a
vision for effective business performance. There are various types of budgeting styles.
On the basis of flexibility, budgets can be divided as flexible and static or fixed budgets.
Flexible Budgets: This type of budget recognises the difference between fixed and variable costs
in context on fluctuation of variable factors like turnover and production. It is developed in a
way that can be changed according to the actual level of activity attained and undertakes a rage
of possible outputs or relevant range (Oyadomari and et.al., 2018). For example, assuming a
company’s cost of supplies varies by £15 for each machine hour used and monthly fixed cost
amount to £35,000 and machine hours range from 3000 to 6000 hours per month. The flexible
budget in this case would be £35,000 + £15 per machine hour. For the month of January, if
machine hours are 4000, the budget would be (£35,000 + £15 * 4000 MH), that is £ 90,000.
Advantages: Procedure of drawing up this budget is straightforward, and there is accuracy in
assessing managerial performance if cost acts in estimated manner. The budget enables the
company to predicts its business performance and income levels at a particular level of activity
and sales.
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