Management Accounting Report: Budgeting and Performance Analysis

This report provides a comprehensive overview of management accounting, specifically focusing on budgeting and performance evaluation. It examines the crucial role of budgets in planning, controlling, and evaluating financial aspects of an enterprise. The report details how budgets serve as a performance evaluation tool, comparing planned versus actual results to identify variances and implement corrective measures. Furthermore, it explores the objectives of budgeting, including efficient resource allocation, improved decision-making, and departmental coordination. The report also investigates how budgeting can motivate employees by setting performance benchmarks and involving them in the budget formation process. Finally, it addresses the challenges associated with budgeting, such as external environmental changes, information accuracy, and the time-consuming nature of the process, and how these challenges impact overall performance and success. The report concludes by emphasizing the importance of budgeting as a tool for controlling, delegating, and motivating employees, as well as its role in overall performance review.

Management accounting for non-accountants

One of the most significant branches of the management of an enterprise is that of the
management accounting which provides vital information to the managers regarding the
planning and performance of day to day activities of the entity. One of the significant
techniques of the management accounting is that of budgeting and performance evaluation
which is a continuous cycle in terms of planning and the adjustments (Drury, 2013). The
following report is aimed at examining the role of the budget in context of the performance
evaluation. In addition, the role of the budget as an employee motivation tool would be
studied together with the critical issues that have emerged in this field.
The budgeting techniques plays an empirical role in the planning the financial aspects
and the management of the enterprise irrespective of the size and the nature of the
organisation. The budgeting and the performance evaluation is used to manage efficiently the
scarce resources of the entity. Following is described the role of the budget as a performance
evaluation tool and the overall objectives of the same. At the start of a financial year or a
financial period, the budgets are prepared by the management of the enterprise taking into
consideration the past performances and the future objectives of the enterprise (Hilton &
Platt, 2013). The present performances are then compared to the actual budgets to review the
variances in the performances if any. These variances are further analysed to gauge the
reasons of the inefficiency and the corrective measures are then devised to correct the causes
of such variances. Hence, the process of budgeting is regarded as an integral part of the
controlling the performance of entity. Thus, the control is exercised by the central unit of the
enterprise on the various units, departments or the branches. In addition to the above, the key
objective of the budgeting and the performance evaluation is the enhancement of the
delegation of the resources and the responsibilities, which further facilitates the pace and the
quality of the decision making within the organisations. The various managers of the
components or branches of the global organisations when well informed, are able to make
efficient decisions (Isaac, Lawal & Okoli, 2015). In addition to the above stated, the next key
objective of the budgeting and the performance evaluation is that the managers are able to
efficiently plan the activities and the levels of the expenditures in the same. This is when the
cost and returns of each of the activities of the organisation is analysed and the financial
resources are invested maximum in the activities in the order of the highest ratios of return to
the costs. Lastly, the budgeting aids in the overall coordination between the departments,
when the resources like assets, labour hours, personnel, material and others are segregated in
terms of efficiency and the requirements.

The following segment is descriptive of the role of the process of budgeting as a
motivational tool within the enterprise. Motivational tools refer to the certain factors that
inspire the individuals in an organisation to act in a manner that is goal directed. These
factors address the questions of causes of certain behaviour, stimulation, maintenance, and
the ceasing of the said behaviour. There are various techniques that are employed to review
the performances of the employees and the extension of rewards and recognition that works
as a motivation tool. One of these techniques is budgeting. The budget aids in the setting up
of the benchmarks of the performances of the employees of the various departments (Becker,
Mahlendorf, Schäffer & Thaten, 2016). In addition, the process involves the communication
of the goals of the enterprise to the managers of the entity and involving them to achieve the
desired outcomes. The said participatory approach in the budget formation and the analysis of
the performances aids in the increment of the motivation of the employees (Shim, Siegel &
Shim, 2011). It is significant to note that the subordinate managers of the enterprise have an
access to more information with respect to the day to day organising and the challenges of the
organisational aspects. The involvement of the subordinate employees in the budget
formation aid in the facilitation of the inclusion of the information in the budgets that have
the potential to significantly affect the budget and also enhance the accuracy of the same. The
above approach is also referred to as the bottom-up approach. The inclusion of the employees
in the budget formation and the review of the performances can also aid in the increment of
the commitment of the personnel towards their individual professional goals, as well as the
organisational goals. In addition, there is an improved communication within the departments
and the head units and the increased acceptance and adherence to the budgets (Wildavsky,
2017).
In contrast to this, there are times when the employees find it difficult to achieve the
budgetary objectives, there is problems on the part of the personnel regarding the
understanding of the budgets benchmarks, or the budgeted targets are perceived to be too
easy to be achieved because of the inefficiency and the performance understatement in the
budget preparations. Further, the budgets may be concentrated only on the financial aspects
of the performance and may be non-considerate of the non-financial factors such as the
requirements of the consumer, legal guidelines, the changes in the external business
environment and others (Hansen, 2011). It is essential to review various aspects of the
budgets to aid the organisational objectives as well as the employee objectives.

In addition to the various advantages of the budget preparation, there are certain
challenges associated too in the preparation of the budgets. One of the prime challenges in the
budgeting process is that of the changes in the external business environments of the entities
that affect the actual performances and cannot be foreseen in the preparation of the budgets.
For instance, in Australian context, there are severe entities whose businesses have suffered
losses owing to the fire. For instance, insurers have received the insurance claims of 13750 in
numbers in the areas of Victoria and New South Wales, which highlights the huge losses
which may not have foreseen by the companies (Lerner, 2020). Another key issue in the
budgeting exercise is the inaccuracy of the information, or the insufficient information with
the managers. The efficiency of the budget is heavily relied on the efficiency of the
information. Thus, if the information is not suitable the budget and the performance
evaluation would not be desired. The next key challenge of the budgeting efficiency is that
the budgeting is a time consuming exercise and the organisations need expertise to formulate
the same, understand the various components and review the variances. Thus, in terms of the
global organisations, it would be complex to aggregate the information of various
departments and branches and the levels of disposition of the financial resources. In addition
to the above, the organisations with high scale of operations need various accounting
software for the preparation of the budgets and the analysis of the same, which needs
investments for the same. Some of the software that are in the practice for the same are that
of QuickBooks, Zoho Books, FreshBooks, Xero, and others. The management must analyse
its needs and objectives for the selection of the software. Thus, the preparation of the budgets
and the analysis of the variances is heavily relied on the quality of the inputs and may not be
useful if the inputs are not up to the mark.
The discussions conducted in the previous parts aid to reach the conclusion that the
process of budgeting is one of the most significant tools of controlling, delegating, motivating
and the overall review of the performances of the entity as a whole and the various
departments and components therein. The work sheds light on the various aspects of the
objectives of the budgeting and the performance evaluation. Additionally the role of the
budgets as an employee motivational tool is reviewed in detail. The budgets can act as a
direct motivational tool by making up the base of the benchmarks and rewards for the
employee recognition, as well as the indirect motivational tool in the form of the inclusion of
the employees in the budget preparation and the analysis of the variances. Further, the
challenges in the budgeting exercise are studied in detail. Some of the major challenges

studied are the accuracy of information, need of financial and technical resource, the change
in the external business environment and others.

References
Becker, S. D., Mahlendorf, M. D., Schäffer, U., & Thaten, M. (2016). Budgeting in times of
economic crisis. Contemporary Accounting Research, 33(4), 1489-1517.
Drury, C. M. (2013). Management and cost accounting. UK: Springer.
Hansen, S. C. (2011). A theoretical analysis of the impact of adopting rolling budgets,
activity-based budgeting and beyond budgeting. European Accounting Review,
20(2), 289-319.
Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic
business environment. UK: McGraw-Hill Education
Isaac, L., Lawal, M., and Okoli, T. (2015). A systematic review of budgeting and budgetary
control in government owned organizations. Research Journal of Finance and
Accounting, 6(6), 1-11.
Lerner, M. (2020). Fire losses spark exposures among insurers, reinsurers. Retrieved from:
https://www.businessinsurance.com/article/20200114/NEWS06/912332558/Fire-
losses-spark-exposures-among-insurers,-reinsurers
Shim, J. K., Siegel, J. G., & Shim, A. I. (2011). Budgeting basics and beyond (Vol. 574). UK:
John Wiley & Sons.
Wildavsky, A. (2017). Budgeting and governing. UK: Routledge.