Traditional Budgeting & Standard Costing

This report discusses traditional budgeting and standard costing, their benefits, limitations, and impact of organizational culture. It also covers their global status and present scenario. Traditional budgeting provides a solid framework, centralization of authority, and simplicity. Standard costing helps in improving cost control, provides useful information, and reduces production costs. Both these systems are simple and provide a host of benefits. Get solved assignments, essays, and dissertations on Desklib.

Running Head: TRADITIONAL BUDGETING & STANDARD COSTING
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TRADITIONAL BUDGETING & STANDARD COSTING
Table of Contents
Introduction:...............................................................................................................................3
Main Body:.................................................................................................................................3
What is Traditional Budgeting?.............................................................................................3
Dissecting Traditional Budgeting:.........................................................................................4
Impact of Organizational Culture:.........................................................................................6
Beyond Budgeting:.................................................................................................................7
Is Traditional budgeting on the wane?...................................................................................7
What is Standard Costing?.....................................................................................................8
A closer look into Standard Costing:.....................................................................................9
Its Global Status:....................................................................................................................9
Present scenario:...................................................................................................................10
Conclusion:..............................................................................................................................11
References:...............................................................................................................................12

TRADITIONAL BUDGETING & STANDARD COSTING
Introduction:
Change is the only constant aspect of our world. Day by day the technological
advancements and the rapid alterations in the various aspects of the business environment are
compelling businesses to change their methods of management and budget systems. The
companies which are not remaining alert to these changes are failing to adapt to these
changing circumstances. Therefore in order to ensure the growth and development of any
business, the management must take into account these changing practices and adopt them to
it. One of the most widely used management tool of businesses all over the globe is
budgeting. It is used as a performance evaluation measure of all employees and is one of the
most widely used management tools, in order to reward managers and employees for their
performances. In the same way, standard costing is another vital tool of management used
primarily for the purpose of identifying and measuring the actual costs of the products
produced and the actual costs which should have occurred for those goods. However, as
mentioned in the first few lines, those rapid changes have been taking place and these
changes have put a serious question on the utility of these two management tools in the
present times, which is the focal point of this report.
Main Body:
What is Traditional Budgeting?
A traditional Budget can be defined as a statement made in quantitative terms, which
includes gaols and targets related to cash flow expenses, revenues, assets, liabilities for a
particular period of time. It is prepared by taking into account the planning made in respect of
sales, costs, inflation etc. It is created keeping in mind the role played by the organizational
hierarchy in the preparation of the plans for the business. It is the central management which

TRADITIONAL BUDGETING & STANDARD COSTING
prepares a budget as per the company’s strategy and focus for the given year, thereafter
allowing the departments to make their own budgets in tandem with the main one. It is a very
important tool for value creation for any company and helps in promoting coordination and
cooperation among the different departments of any business.
Dissecting Traditional Budgeting:
When one carefully looks in the various aspect of traditional budgeting, a number of
important benefits provided by the system come into the limelight. It provides some of the
best advantages, which says a lot about its dominance in the business world for the last few
decades.
 Providing a solid framework: It is based on a particular reference point, which is in
most cases the data and records of previous years, as a result it becomes very easy for
the managers to manage the financial activities of the business. It is this framework
which helps the business in basing their operations on the basis of a solid framework,
which makes it easy to control.
 Centralisation of authority: Here less amount of freedom is been given by the
central management to the lower levels for the purpose of micromanaging their
performances, lest they falter and perform in a poor way. It helps the central
management to focus on the most critical parts of the business, as it tries to provide
the routine tasks to the middle and lower levels of management. Since traditional
budget is based on a specific reference point, it could be accessed and followed by the
middle and lower teams too, without constant central approval and guidance.
 Simplicity: It is one of the simplest forms of budgeting procedures and easily
becomes an integral part of the business where it operates. It is because of its ease of
understanding and implementation, which provides it the edge over the other forms of
budgeting such as Zero based or activity based. Thus, organizational personnel

TRADITIONAL BUDGETING & STANDARD COSTING
become habituated with this ease that making any changes in the form of other
budgeting techniques could lead to backfire the policy.
(Figure 1: Merits of traditional form of budgeting, Source: Lorain, Domonte and
Peláez 2015)
However, as every rose has its thorn, traditional budgeting suffers from some disadvantages
too, which is one of the most primary reasons for its diminishing prevalence in the modern
business world. Some of the biggest drawbacks of the method have been listed below:
 Time consuming and increased chances of error: In this procedure, the managers
have to take the help of spreadsheets in a regular manner, for comparing the results
with that of the previous years and it takes time to make adjustments because of
inflation and other factors (Lorain, Domonte and Peláez, 2015). Moreover, looking at
the spreadsheets, could lead to errors too.
 Inaccuracy: As it takes the previous year’s data as a reference point for building this
year’s budget, the predictions lead to errors and inaccuracy. It becomes important to
revisit the factors and make changes in accordance with those of the present years,
otherwise inaccuracy creeps in.

TRADITIONAL BUDGETING & STANDARD COSTING
Impact of Organizational Culture:
Organization culture is one of the most pivotal aspects of any business and it has far
reaching consequences and influence on the management and its functioning including the
use of traditional budgeting. It refers to the sum total of the values and behaviours which are
practised in an organization. The culture of the country, its industry, its people, their ways of
working and behaving the organization has far reaching influence in the day to day practices
of the business. As a result of which it is safe to say that organizational culture has a vast say.
Be it any type of budgeting practice, the culture practised in the organization. There are
mainly four different aspects of the organization culture which has an influence over the
management practices. If the organization has a considerable power distance in the form of
high levels of hierarchy, then they tend to favour the traditional form of budgeting and here
other forms such as beyond budgeting or other forms of it will not work (Nguyen, Weigel and
Hiebl, 2018). If the organization and its people have the tendency of overcoming adversities
and uncertainties with boldness and ease, then in such cases, beyond budgeting is much more
suited than the traditional form. If the practices of the industry are rapidly changing and
everyone needs to be updated, then in such kind of an environment, modern budgeting
techniques are much more used and favoured. Moreover it has been seen that in Europe,
traditional form of budgeting has garnered great amount of praise and fame and as a result of
which it has imbibed the practice. It has been because of the various kinds of identical
organizational cultures which is present in most of the companies of that region due to the
presence of stable business conditions. Thus, organizational culture exercises a significant
amount of influence on the management practices whether it is choosing or favouring any
form of budgeting or any other managerial aspect.

TRADITIONAL BUDGETING & STANDARD COSTING
Beyond Budgeting:
Beyond Budgeting Approach is a series of leading principles which helps in the
decentralisation of companies, their decision making aspects and managing their
performances with much more freedom, contrary to that of traditional budgeting. It works
with three main goals firstly, it tries to implement a flexible and adaptive management
mentality across the organization, a very high level of decentralisation when compared to
traditional budgeting and lastly, measurements of performances based on the relative
performance contracts with hindsight, which goes on to prevent any kind of dysfunctional
management behaviours. It helps in taking giant leaps in the form of higher profits, better
strategic alliances, loyalty of consumers, lowering of costs, ethical reporting, no revision of
targets and performance indicators on the part of the employees and executives (Heupel and
Schmitz, 2015). It has been making the strides and is being used by various organizations
worldwide, because of the host of benefits provided by it over traditional budgeting.
Is Traditional budgeting on the wane?
Traditional form of budgeting is one of the most practiced budgeting techniques
which have ever been used in any business organizational setup. It is still popular as a
medium of planning, managing performances of businesses and as a control tool. Many
business directors are still of the opinion that traditional form of budgeting because of its
simplicity and strong framework could be used for managing, controlling, communicating
and coordinating the various aspects of the business without ceding too much control to the
sub departments and sections of the business. In real terms it could be said that still today
there are various businesses, whose organizational setup and business would be best suited
for traditional form of budgeting. The primary area of concern which remains for these
organizations is the fact that they want to get rid of the different limitations of the traditional
form of budgeting. For this they have been trying to perform various budgeting techniques in

TRADITIONAL BUDGETING & STANDARD COSTING
a simultaneous manner. Today, businesses have started focusing on the activity of value
creation, because of the rapidly changing business environment and they could do so by
working on their budgeting practices. One way would be using traditional budgeting along
with various other budgeting approaches. It is this multi approach which will provide the
traditional form of budget a lengthy time span.
What is Standard Costing?
Standard costing is a costing method used across business organizations, where the
expected cost of a certain item is substituted by an actual cost in the books of accounts. It
involves creating estimated or forecasted costs for some items of activities of the business
organization. It is primarily utilized in business circles because of the fact that in some cases,
in case of some items, it becomes to difficult and time consuming to gather their actual costs,
in those cases, their standard costs are utilized as their closest substitutes (Popesko et al.,
2017). Here the differences between the estimated and the actual costs are found out by the
accountants and sometimes, these differences are lowered down by accountants to bring them
to as close as possible to the actual costs.
(Figure : Processes of Standard Costing, Source: Hieu and Dung, 2018 )

TRADITIONAL BUDGETING & STANDARD COSTING
A closer look into Standard Costing:
On having a closer look into the structure of standard costing, some important aspects
about its benefits and limitations have been found out. Standard Costing provides a
competitive edge to the business over its rivals. It helps in improving the cost control of the
business, provides a range of more useful and productive information which aids in
managerial planning and in the process of decision making, it further helps in easier ways of
measuring inventories, costs are reduced in case of record keeping and it also provides a
scope of reduction in production costs (Huang, Ryu and Dervin, 2017). Standard are set for
each kind of costs and as a result of which their variances are measured which helps in
controlling these costs, it can be utilized for making correct and close estimates to actual
costs and as a result more or less accurate budgets are prepared. Using standard costing
makes the employees much more conscious and hardworking, this helps in reductions in
production costs (Malmmose, 2015). While on the other hand, it provides a lot of
disadvantages too, it does not provide much benefit in case of a fast paced business
environment, where products get outdated pretty much fast moreover, these costs are
calculated for specific units and cannot be converted for the entire department, the feedback
is also very slow, which leads to be very useless at the end.
Its Global Status:
Several academic researchers have concluded that standard costing is fast
disappearing because of the increased amounts of its demerits. However it has been seen that
it is widely being used in various parts of the world. in developed countries studies have
suggested that around 73% in being used in the UK , while around 86% is used in Japan. As
per the research of Lyall and Graham more than 90% of the 231 companies surveyed in the
UK had applied standard costing for the purpose of ensuring control of costs (Segun and
Olamide, 2015). It was also concluded that more than 63% of the managers had only positive

TRADITIONAL BUDGETING & STANDARD COSTING
reviews about its usage especially in the decision making field. In other studies it was found
that around 73% of the 85 surveyed New Zealand companies used standard costing. These
studies have concluded that instead of employing and using newer and modern systems, the
companies make use of standard costing and have not abandoned it altogether (Popesko et al.,
2016). Thus there is considerable presence of the method in the developed countries and is
not on the verge of being removed from the system.
Present scenario:
In the present scenario it could be concluded that standard costing is thriving and is
very much alive and well. It is because of its easy and simple interface and usage, which has
been its main companion in the field of accounting and management. The process of
establishing the relevant standards, determining the actual costs and their comparison is a
very clear, concise and simple process, which is favoured by the management of various
companies worldwide. The determination of the causes of differences between the two and
the working on these differences is the primary area of this procedure, which leads to clear
and timely results. Along with the developed countries of the west, it is also increasingly
being used by the Middle Eastern countries; United Arab Emirates is a very good example of
it. If looked more specifically it has been seen that more than 76% of the companies
belonging to the industrial base of Dubai make use of standard costing. The industrial sectors
products prefer to use standard costing because of its simplicity and specific approach in the
field of accounting (Bargerstock and Shi, 2016). However there is a threat that the upcoming
product cycles which are much shorter in nature, advanced technologies in the field of
manufacturing and decreasing emphasis on the usage of labour because of increasing
mechanisation and technological advancements would lead to the death of the practice of
standard costing.

TRADITIONAL BUDGETING & STANDARD COSTING
Conclusion:
Standard costing as well as traditional budgeting are two very important management
tools which have been providing results to the business for a very long period of time. Both
of these systems are very simple and provide a host of benefits. Providing a solid framework
of work, easy going ways and greater amount of central control of the activities are some of
the most important advantages which is provided by traditional form of budgeting. Although
various newer forms of budgeting such as beyond budgeting and zero based budgeting have
been increasing their sphere of influence in the businesses, but have not been able to
completely remove traditional budgeting. In the same way, standard costing has been at the
helm of affairs of the business for a long time and it is because of the large number of
benefits which it provides the business. Be it reduction of production costs, helping in
planning and decision making or aiding in keeping records and in bookkeeping, standard
costing provides it all. Thus, they have not been removed completely and as a result of which,

TRADITIONAL BUDGETING & STANDARD COSTING
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