Management Accounting Report: Budgeting, Flexible Budgets, and Control

This report provides a detailed analysis of management accounting, focusing on the preparation, control, and implementation of budgets within X Star Management Services Ltd., an automobile dealing and selling company. The report defines budgets, explaining their role in projecting financial results and quantifying resource requirements for achieving organizational goals. It outlines the process of budget preparation, including obtaining estimates, coordinating estimates, communicating budgets, implementing budget plans, and reporting progress. The report also emphasizes the importance of budget control, highlighting techniques for monitoring performance, identifying deviations, and taking corrective actions. A significant portion of the report is dedicated to flexible budgets, defining them as budgets adjusted based on activity volume. The report details the steps for preparing flexible budgets, emphasizing their advantages over static budgets, such as their utility in variable cost environments, performance measurement, budgeting efficiency, deviation analysis, and cost control. The report concludes by summarizing the key aspects of budgeting, the importance of proper procedures, and the benefits of using flexible budgets for effective financial management.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
1. Defining and explaining Budgets............................................................................................1
2. Process of Preparation of Budgets..........................................................................................2
3. Controlling the budgets...........................................................................................................2
4. Defining and preparing a flexible budget................................................................................3
5. Importance of flexible budgets................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Budget can be determined as an estimation regarding the revenues that are generated and
expenditures incurred by an organisation over a specific time period. It projects the detailed
financial results that are expected by a company for a given time frame (Cinquini and Tenucci,
2010). Budgets may be prepared for short term or long term i.e. it can be either monthly,
quarterly or yearly. The present assignment focuses on preparation and controlling of budgets
within X Star Management Services Ltd. which is engaged in the business of dealing and selling
of auto-mobiles. Moreover, the report provides an understanding of flexible budgets prepared by
the company and its distinctive features over other types of budget.
1. Defining and explaining Budgets
Budget can be determined as an estimation regarding the revenues that are generated and
expenditures incurred by an organisation over a specific time period. It projects the detailed
financial results that are expected by a company for a given time frame. It provides an expression
of requirements of quantified resources such as amount of capital, raw materials, labour etc. in X
Star Management Services Ltd. that are needed for achieving time phased goals and objectives.
The main objective of a business is to earn profits which is a yardstick for measuring the success
of the organisation (Fullerton, Kennedy and Widener, 2013). The profitability of the company
depends upon proper planning, coordination and controlling of activities by management. Thus,
the management is required to plan and control future requirements of financial and physical
resources for maintaining profitability and productivity of an organisation which is known as
budgeting.
Budgeting is a planning and controlling tool which encompasses a number of activities
needed for preparing a budget. It consists of various steps including – identifying short term
objectives, specifying programs and these will be expressed in budget. Different aspects of the
cited firm like sales, finance, production and distribution are involved in budgeting.
A budget is a quantitative, coordinated and comprehensive plan that defines the resource
requirements and operations of an organisation over a specified period of time. It is an
expression of managerial plans in the form of forecasted financial statements. It is a numerical
and written plan of action for the future designed by X Star Management Services Ltd. to carry
out different functions of the firm.
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2. Process of Preparation of Budgets
X Star Management Services Ltd. prepares budget for estimating the revenues and
expenses over a time period. The budget includes all the information regarding requirements of
manpower, raw material, capital etc. in different phases of operations like production, sales,
finance etc (Qian, Burritt and Monroe, 2011). These informations are compiled and re-evaluated
on a periodic basis. For this, management of X Star Management Services Ltd. follows the
procedure for preparing its budgets which is described below :
 Obtaining estimates : The managers or departmental heads of the company are required
to obtain estimates regarding sales, expected costs, level of production and availability of
resources of each division or department. The impact of estimation of these activities on
the company are required to be provided by the managers to the budget committee.
 Coordination of estimates : The budget committee of X Star Management Services Ltd.
would evaluate the plans submitted by different departmental heads and determine the
viability of such plans in the overall interest of the organisation (Luft and Shields, 2010).
The amount of resources available and their appropriate allocation among various
departments is assessed.
 Communication of budgets : The budgets are communicated to departmental heads and
responsible managers after the individual budgets are approved as per the goals of the
organisation. Effective communication is required in budgeting to inform and convince
managers about any changes or modifications in the budget.
 Implementation of budget plans : The final budget is adopted as the plan of operation
and presented to the managers for the future budget period. It is ensured that all the
required materials, labour and other resources to carry out the budget effectively are
provided.
 Reporting Interim Progress towards Budgeted Objectives : Performance reports are
prepared and presented to the departmental heads and top management to analyse the
performance level as against budgeted figures (Van Helden, Aardema and Groot, 2010).
This helps in determining deviations and taking corrective actions according to which
budget can be revised.
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3. Controlling the budgets
The management of X Star Management Services Ltd. constantly monitor and control the
budgets in order to ensure result oriented objectives. Controlling involves monitoring to ascertain
whether the plans are implemented effectively or not, this is done with the help of performance
reviews. The managers need various information for monitoring and measuring the performance
which is provided by controlling techniques (Vaivio and Sirén, 2010). These informations are
required to be tailored with specific division or department so that the performance level of each
department can be evaluated. It is important to control the budgets so as to ascertain the
variances and check if there is any shortage or surplus of resources that may hinder attainment of
targets. Controlling the budgets of an organisation is very essential because it helps the
management in monitoring and measuring the performance of various departments, identifying
deviations from the budgeted figures and taking corrective actions. The budget can be revised in
order to ensure that the organisational objectives are accomplished effectively and efficiently.
4. Defining and preparing a flexible budget
As the name signifies, a flexible budget is the type of budget which can be adjusted or
modified according to the changes in volume of activity. It takes into account, different levels of
expenditures for variable costs which depends upon changes in actual revenue. In a flexible
budget when actual revenues or other activity measures are incorporated, then, a budget is
generated which is specific to inputs (Flexible Budget, 2017). The following steps are followed
by X Star Management Services Ltd. in preparation of a flexible budget :
 Identification of fixed costs and their segregation in a budget model.
 Determining the extent of changes in the variable costs as a result of activity measures.
 A budget model is created where fixed costs are hard coded and variable costs are
expressed as a % of relevant activity measure or its cost per unit.
 Actual activity measures are entered in the model at the end of accounting period. As a
result, variable costs are updated in the flexible budget.
 The completed flexible budget is entered into the accounting system in order to compare
with the actual expenses.
Preparation of Flexible Budget of X Star Management Services Ltd.
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5. Importance of flexible budgets
The management of X Star Management Services Ltd. uses a flexible budget as it is more
useful and sophisticated than the static one which amount remains same regardless of volume of
activity (Van Helden and Northcott, 2010). The major advantages of using a flexible budget over
others are explained as follows :
 Usage in variable cost environment : It is quite useful when the costs are aligned with
the business activity. The overheads are treated as fixed cost and the merchandise costs
are directly allocated to the revenues.
 Performance measurement : Flexible budget is a vital tool for evaluating performance
of managers as it restructures itself according to the activity levels which is not done in
other types of budget.
 Budgeting efficiency : It is useful to update the budget where the revenues or other
activity figures are not finalised. Managers approval is required for fixed expenses and
apportionment of variable expenditures on the basis of revenue or activity measures.
Thus, it enhances the efficiency of budget formulation process.
 Analysing the deviations : A fixed budget helps the management of X Star Management
Services Ltd. in analysing the deviations of actual output from the expected output.
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 Comparison of costs : An effective and appropriate basis for comparison between actual
costs and budgeted costs is provided by a flexible budget (Van der Stede, 2011). It
enables the management to compare budgeted costs at actual volume with the actual costs
at actual volume.
 Cost control objectives are fulfilled : A flexible budget assists the managers of X Star
Management Services Ltd. in fulfilling the objectives of cost control as the deviation in
actual performance with the planned ones. Thus, corrective actions can be taken to
control the costs.
CONCLUSION
It can be summed up from this assignment that budgeting is a planning and controlling
tool which encompasses a number of activities needed for preparing a budget. It consists of
various steps including – identifying short term objectives, specifying programs and these will be
expressed in budget. Different aspects of the cited firm like sales, finance, production and
distribution are involved in budgeting. Budget can be determined as an estimation of revenues
that are generated and expenditures incurred by an organisation over a specific time period.
Further, it can be concluded that proper procedure is to be followed for preparation of budget and
it should be constantly monitored to ensure the organisational objectives are accomplished.
Lastly, it can be analysed that a flexible budget is the type of budget which can be adjusted or
modified according to the changes in volume of activity.
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REFERENCES
Books and Journals
Cinquini, L. and Tenucci, A., 2010. Strategic management accounting and business strategy: a
loose coupling?. Journal of Accounting & organizational change. 6(2). pp.228-259.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2013. Management accounting and control
practices in a lean manufacturing environment. Accounting, Organizations and Society.
38(1), pp.50-71.
Luft, J. and Shields, M. D., 2010. Psychology models of management accounting. Foundations
and Trends® in Accounting. 4(3–4). pp.199-345.
Qian, W., Burritt, R. and Monroe, G., 2011. Environmental management accounting in local
government: A case of waste management. Accounting, Auditing & Accountability
Journal. 24(1). pp.93-128.
Vaivio, J. and Sirén, A., 2010. Insights into method triangulation and “paradigms” in interpretive
management accounting research. Management Accounting Research. 21(2). pp.130-141.
Van der Stede, W. A., 2011. Management accounting research in the wake of the crisis: some
reflections. European Accounting Review. 20(4). pp.605-623.
Van Helden, G. J. and Northcott, D., 2010. Examining the practical relevance of public sector
management accounting research. Financial Accountability & Management. 26(2). pp.213-
240.
Van Helden, G. J., Aardema, H., and Groot, T. L., 2010. Knowledge creation for practice in
public sector management accounting by consultants and academics: Preliminary findings
and directions for future research. Management Accounting Research. 21(2). pp.83-94.
Online
Flexible Budget. 2017. [Online]. Available through: <http://www.accountingtools.com/flexible-
budget>. [Accessed on 26th March 2017].
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