Management Accounting: Purpose of Budgetary Control and Key Performance Indicators

This document discusses the purpose of budgetary control in management accounting and explores different budgetary control systems, their advantages, and disadvantages. It also explains the use of key performance indicators (KPIs) in evaluating internal processes. The document further highlights the Patisserie Valerie scandal and emphasizes the importance of ethical conduct in accounting.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................3
QUESTION 3...................................................................................................................................3
QUESTION 4...................................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Management accounting is the process where managers of the company evaluate the
business cost, help in maintaining financial report and beneficial for managers in decision
making process (Bromwich and Scapens, 2016). For the better understanding of management
accounting, this report select the Toshiba company which is multinational conglomerate which
deals in electronic items and based in Tokyo Japan. This report include the various topics such as
purpose of budgeting control, advantage or disadvantage of different budgetary control system.
Along with this, evaluate that how management account use the KPI in internal processes.
MAIN BODY
QUESTION 1
Purpose of budgetary control:
 Main purpose of budgetary control is to done effective planning.
 Make co-ordination among the different departments.
 Is to improve the communication among the staff members.
 Control over the business activities which helps in providing final outcomes.
Advantage of disadvantage of following budgetary control system:
Cash flow budgeting: It is the estimation of cash receipt and cash expenditure of the
specific time period. This estimation can be done on monthly, quarterly or yearly basis.
Management accountant of Toshiba company apply this budget which has some advantage and
disadvantage:
Advantage Disadvantage
With the help of it, business able to
communicate their financial position with
stakeholders. It helps in identifying potential
deficit of the business.
Cash budget limit the spending power which
create difficulty to execute the operational
activities. It also reduce the capability to build
credit profile.
Zero Based budgeting: It is the accounting technique which help the manager of
Toshiba to estimate the cost of each unit from the “Zero Base”. It helps in providing accurate
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cost which is beneficial for managers in decision making process and it has some advantage or
disadvantage:
Advantage Disadvantage
It help the managers of Toshiba company to
justify all the operational expenses and
evaluate accurate results (Kaplan and
Atkinson, 2015).
It is very time taken or consuming process
which affect the organizational performance as
well as profitability.
Operating budgeting: This budget represent the projected revenue of the company and it
allow the business to know how they spend its money and what area of the business needed the
most cash. It has some advantage of disadvantage:
Advantage Disadvantage
Managers of Toshiba company use this budget
because it will increase the flexibility of their
spending.
Under this budget, company face the federal
tax complications which affect the business at
the time of paying tax.
Rolling Budget: This budget refer to the budget which continuously required to update
as per the change in the operational activities. Toshiba company follow this budget which has
some advantage as well as disadvantage:
Advantage Disadvantage
Responsiveness is the advantage of this budget
where they have to update budget continuously
as per the requirement of organizational
activity.
If manager wanted to improve employees
performance with the help of rolling budget so
it will reduce the opportunity. Change in the
budget will generate work pressure for the
employees.
Capital budgeting: This budget include the capital expenditure which largely based on
inflow or outflow of money which invested in particular project (Lavia López and Hiebl, 2014).
By using capital budget managers of Toshiba company should decide to invest in a project or
not. It has some advantage or disadvantage:
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Advantage Disadvantage
It helps in understanding risk and the relevant
effects which provide further opportunity.
It is not useful for long term investment
because it will lead the wrong applications.
QUESTION 2
In the organization, management accountant use the various planning tools such as cost
accounting, budget control, financial statement analysis and pricing strategy. With the help of
effective planning tool, managers of the Toshiba company able to develop effective budget
which minimise the cost or maximise the profit margin. It further beneficial because it provide
competitive advantage. With the help of cost accounting, accountant able to identify the cost of
each product. Further it help the manager to develop budget accordingly and further strategies as
well. With the help of budget control, company limit their spending and perform in the projected
value which helps in maximising the profit margin and provide competitive advantage. Prising
strategy of the company need to be appropriate which meet the customer's expectation and fulfil
the business objectives (Otley, 2016). Analysis of financial statements is very important which
help the managers to evaluate the financial position of the company. It help the business to gain
competitive advantage and these information used by the managers at the time of developing
strategic decisions. Basically planning tools help the business to gain competitive advantage and
used in future strategies which maximise the production as well as profitability.
QUESTION 3
Key Performance Indicator (KPI): It is the measurement tool which help the business
to know that how they able to achieve their organizational goals & objectives. There are two
types of key performance indicator (KPI) such as financial or non financial. With the help of it,
management accountants of Toshiba company able to identify the operational issues which can
be related to the finances. Main purpose of this indicator is to monitor the progress and company
able to achieve their goals. There are two types of key performance indicator which mentioned
below:
Financial KPI: It is based on the components of income statement or balance sheet,
change in the sakes and expenses. All the factors will help the business to evaluate their
performance.
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Non financial KPI: It include the other activities which is important for the business to
achieve their strategic goals & objectives (Tucker and Lowe, 2014). It include the customer
relationships, quality, operations, supply chain etc.
With the help of financial or non financial measurements, accountant of Toshiba
company able to identify the operational issues which resolve in effective manner in order to
improve the internal process.
Management accountants of Toshiba company used KPI tool to evaluate the internal
process. When business identify the problem by using KPI tool then it help the accountant to
resolve the issues through providing effective solutions. After resolving the issues, it become
easier for the organization to make their internal process more smother and they achieve their
business objectives more effectively. There are some advantage and disadvantage of this
measurement tool:
Advantage Disadvantage
Sole purpose of key performance indicator
(KPI) tool is to measure the progress of the
company. It provide the results in terms of
numbers which help the managers to make
strategic decisions in order to achieve business
goals & objectives.
Due to focus on getting results in short period
will reduce the quality of work. It is time taken
process or if business do it in fast motion then
it will affect the quality of work further which
automatically impact the production as well as
profitability.
QUESTION 4
Patisserie Valerie scandal:
Patisserie Valerie is the chain of cafe which operated in UK. On June 18, joint operation
with police arrested the five people. Police discover the huge black hole in the books of accounts
of the company which valued £ 94 million. Currently working shops are 96 which done their
operations in well manner. But initially Cafe have 206 outlet and 3000 staff members when it
collapsed. In Patisserie Valerie, auditors found in doing fraud in the accounts. In the
organization, management accountant does not play their role effectively and done accounting
irregularities (Quattrone, 2016). Basically company have to placed external auditors which
perform their task effectively because they does not have any personal interest in the Cafe.
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Management accountant of Patisserie Valerie have to follow ethical conducts and all the
accounting principles. The one who is arrested is Causeway Capital which is not related to the
current employees of Patisserie Valerie who done fraud around £ 5 million in administration.
Lack of visibility and control prevent this scandal and 33% of UK CFOs accept that errors in
accounts will create this situations. So accountant of the company have to ensure before doing
any entry they have to make sure twice. They have to focus on financial or management
accoutring through following all the principles related to the accounts.
CONCLUSION
From the above discussion it has been concluded budgetary system help the managers to
evaluate the performance of the operational activities. With the help of planning tools such as
cost accounting, budget control, pricing strategy etc. business improve their operational
efficiency as well as effectiveness. Key performance indicator is one of the important tool which
help the organization to identify the operational issues which affect the productivity as well as
profit margin. In the organization, management accountant have to play critical role where they
have to ensure that all the accounting principle should be followed in well manner.
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REFERENCES
Books & Journals
Bromwich, M. and Scapens, R. W., 2016. Management accounting research: 25 years
on. Management Accounting Research. 31. pp.1-9.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Lavia López, O. and Hiebl, M. R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of
Management Accounting Research. 27(1). pp.81-119.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research. 31. pp.118-122.
Tucker, B. P. and Lowe, A. D., 2014. Practitioners are from Mars; academics are from Venus?:
An investigation of the research-practice gap in management accounting. Accounting,
Auditing & Accountability Journal. 27(3). pp.394-425.
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