Management Accounting - Assignment PDF

To: Tom Dell
From: Management Accounting Team, Arrowhead Transport
Date: 8th November, 2018
Subject: Traditional Budgeting System and other available alternatives
Dear Dell,
Arrowhead has been a profit making company for long and has been using traditional budgeting
system for long as part of its management control activity but it has become a trend that almost
every year the departmental managers negotiate with you over budget allocations as a significant
proportion of our compensation is tied to the budget data. We have generally been using this
budget for planning and allocation purposes, control controlling and other performance evaluation
as well. On the other hand, Mainfreight which is one of the famous logistic company operating in
New Zealand has executed its operations without annual budget for years and has been successful.
The memo highlights few of the critical factors to be considered while moving away from traditional
budgeting and emulating Mainfreight’s management control system[ CITATION Che96 \l 1033 ].
There are some best reasons to maintain the traditional budgeting system:
1. It provides the overall framework and strategy to manage all the activities of the company
and also helps in controlling the unnecessary costs.
2. It is an effective way of fixing the responsibility on the managers and evaluate their
performances based on the same[ CITATION Ale16 \l 1033 ].
3. Traditional budgeting not only helps in initiating cost control measures but also helps in
doing variance analysis and finding out the loopholes and shortcomings in the present
system.
4. It has been a part of the organization culture and to abolish it all at once may prove
detrimental to the interests of the company and might be risky altogether.
5. It gives managers and respective cost centre owner’s freedom to operate and fix the
expenses head wise and give approvals based on necessity.
However, besides the above advantages, it also suffers from some disadvantages as well and
therefore, some of the reasons to move to Mainfreight’s management control system (MCS) from
Arrowhead’s traditional budgeting system have been enlisted below:
1. MCS is more cost effective and less time consuming, at times it may result into economies of
scale[ CITATION Cho18 \l 1033 ].
2. Since the responsibility of cost controlling and budget are not directly fixed on the
managers, they feel motivated and independent to take innovative decisions and thus
contributing to the growth of the company.
3. In a way, it avoids bureaucracy at the top management level and promotes decentralization
of power.
4. Managers get more time to set strategic goals rather than just achieving the numbers and
thus leads to value creation. It is thus a kind of participative budgeting system.
Furthermore, in case the existing traditional budgeting system is scrapped, certain alternative
controls would need to be implemented so that the costs can be controlled and the performance
can be measured. Some of them are implementation of the rolling forecasts on a monthly or
quarterly basis which is being used by a wide number of companies nowadays[ CITATION Gol16 \l