University Essay: MN-3537 Management Accounting and Budgeting

This essay examines the obsolescence of traditional budgeting in contemporary organizations. It begins by defining traditional budgeting and its advantages, such as ease of implementation and decentralization, while also highlighting significant disadvantages including being time-consuming, inflexible, and prone to human error. The essay then explores alternatives to traditional budgeting, such as rolling forecasts, which offer continuous updates and adaptability to market changes. Zero-based budgeting is presented as another option, requiring justification of each cost item annually, though it is also criticized for being costly and bureaucratic. The essay concludes by introducing "beyond budgeting" as an approach that emphasizes continuous environmental sensing and rapid adaptation, advocating for flexible resource allocation and performance measurement to align with dynamic business environments. The document is a well-researched analysis of the evolution of budgeting practices, with the intention of aiding students.

Running head: MANAGEMENT ACCOUNTING
Management accounting
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Name of the university
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Author note

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Traditional budgets are considered as ‘a thing of past’ for the contemporary
organisations those are operating in competitive, fast-moving and knowledge-driven
environments
Budget is the estimate for expenses and revenues for specific future time period and is
compiled and analyzed on timely basis. For any organization budget is the internal tool that is
used by the management and not generally required to report for the external parties. Budget is
the microeconomic concept that represents trade-off while one item is exchanged for another. In
context of bottom line or for the end result of trade-off the surplus budget signifies the
anticipated profit and the balanced budget signifies expected revenues are equal to the expenses
and the deficit budget signifies that the expenses are more than revenues (Réka, Ştefan & Daniel,
2014).
Traditional budgeting is the method for preparing of budget where the previous year’s
budget is considered as base. Present year’s budget is prepared through making the changes to
the last year’s budget through adjusting expenses on the basis of consumer demand, economic
condition, market situation and rate of inflation. Various advantages for traditional budget are –
(i) Implementation – it is easy to implement and can be prepared in less time as much changes
are not required in last year’s budget. Eventually it saves lot of efforts and time for the managers
(Popesko et al., 2015) (ii) Decentralization – it assists in promoting the decentralization in
organization. For instance, if any bank’s branch is situated far away from headquarter, it can
prepare the budget on own and make the changes within allowed limits (iii) Stability – this
method is old and is used by most of the organization. This brings stability to the organizational
function as financial activities can be done with the coordination and all the employees are aware
of the requirement (Lorain, García Domonte & Sastre Peláez, 2015).

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However though it has some advantages, various disadvantages those are associated with
traditional budgeting are –
Time consuming and costly – under traditional budgeting the management generally depends on
numbers of spreadsheets. Owing to this, it can take 6 to 8 month time for some of the
organisations. For some of the entities it can be found that the budget has been started in summer
but not finished till the winter (Cardoş, 2014). In some cases this even completes after 1 year
period. Further, most of the budgets are detailed and hence, require input and back and forth
intervention of various people from all over the organisation. It in turn, adds amount to corporate
resources that is consumed by the traditional budgeting. Further, most of the times the internal
politics get involved with this and it becomes more crucial for the employees and managers as
compared to the customers (Cardoş, 2014).
It is fixed as well as inflexible and become irrelevant – generally the traditional budgeting
system starts with the top down approach and eventually becomes detailed bottom up process for
meeting the fixed goals that is set by the management irrespective of the fact that it is realistic or
not. However, if the budget locked down, it will not be possible make any further changes. It
shall be noted that there may be changes in the economy, changes in the market conditions or
changes in the specific changes of the business. Further, there may be new partnership, new
concepts, new innovations or any other internal factor along with financial repercussions (Dudin
et al., 2015). So many other things are also there that may change and yet the traditional budget
only considers the things those were considered at time of preparing the initial budget.
Most of the companies tie their executives as well as employee’s compensation directly with
the performance against budget – if this is the case, employee’s main objective is minimize the

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expectation from the performance. Easiest way to do control this is negotiating the over
achievable benchmark of the budget so that the budget can be easily achieved. If the cost centre
for spending is managed, the management will prefer to maximize the expenses as much as
possible as it will give most resources for the purpose of spending irrespective of whether it is
necessary or not. On the contrary, if the manager is responsible for revenue generating centre, it
will set lower target so that exceeding the target will make his performance better (Bogsnes,
2016). Hence, the budget process will basically involve the internal negotiation and lacks the
realistic view regarding where the entity is going up and ends up with largely arbitrary and
fictitious budget.
Higher chances of human error – as it is all about looking into various spreadsheets, it is very
common thing that human error will take place. Owing to this, mistakes become too costly for
the business.
Does not promote the expected behaviour – if the entity wants to encourage the loyal and
innovative behaviours, they shall put in more budgets into the departments where the employees
may become innovative on regular basis and may prefer the organizational goals 1st. However, in
traditional budgeting, expected behaviours are not encouraged as it is dependent on spending of
previous year (Miller, 2018).
No alignment among strategy and spending - strategy for each year is different as in each year
organisation sets higher goal. Hence, with the similar spending strategy it will be impossible for
the organisation to form strategies for the year to year developments and profits.
Inaccurate estimates – as previous year’s budget is taken as the base, predictions for the next
year’s budget cannot be prepared accurately. Hence, it is always wise to review the factors

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considering the strategic plans for the future and spending of the year. Without right approach
and improper thinking, accuracy is near impossible (Bragg, 2014)
Hence, ideally the traditional budget actually does not work. However, for small
organisation those do not have large amount of overheads traditional budget can be used.
However, zero based budgeting is always better option against traditional budgeting as it
provides the opportunity for considering the next year with the blank slate. Further, other
remedies against traditional budget are –
Rolling forecast – where the company faces flaws with the traditional budget it can switch to
rolling forecast that involves adoption of logical forecast or fixed budget and will largely address
issues raised with the traditional budgeting. Rolling forecast is the 1st step towards the
management of adaptive performance. It can be defined as the projection for the future that is
partly based on the past performance that is updated routinely for incorporating the input and the
information that reflects the changes in the market, business conditions or industry. It is not
meant for the fixed budget rather it provides best prediction for the current situation regarding
the organisations operational as well as financial performances over the particular time period
(Hagel, 2014). The time horizon can be quarterly, monthly, annul or any number of months that
is in future. It rolls with the forward moves of time so that the time horizon may forecast unlike
the traditional budget that always ends up with the fixed time point. Generally the management
do not prefer to estimate for too far as it tends to become somewhat hazy, unpredictable and
unrealistic. However, the time horizon is not kept too short as full impact of the decision cannot
be seen with that. Typically the rolling forecasts are updated on continuous basis. It means they
are more accurate and it requires less time for updating as compared to fixed forecast or
traditional budget planning model (Laval, 2016). Unlike the traditional budget, where it requires

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starting all over and requires redefining the entire process as well as assembles the resources on
annual basis, rolling forecast involves minor changes as the process is updated on continuous
basis on short term. It helps in saving time. Further, the rolling forecast solves the issues related
to tying of the employees and executive’s compensation to link directly with the performance
against budget; rather it focuses on exceeding the competition against top industry players
(Nguyen, Weigel & Hiebl, 2018). It results into higher bonuses for the executives while the
entity outpaces the competition or it tries to publicise the peer performance of sales organization
and analyse their performance regarding how they work to remain on top.
Better budgeting – although the words are generally associated with better budgeting is difficult
sometimes to work out what actually it means, however, it seems to engage doing the same
things little bit more frequently and more efficiently with the expectation that the people will
behave in better way. It is viewed by some people as doing wrong things righter (Baiocchi &
Ganuza, 2014). Apart from that, another option that addresses the source directly is one of the
major issues with the traditional budgeting that is the tendency for taking the last year’s actual
result as the starting point for the purpose of budget or negotiation. This will have irreversible
impact on the costs that is it will only go up and will reinforce the sense for entitlements that is
felt by the budget holders (Baiocchi & Ganuza, 2014).
Zero based budgeting – for countering the zero based budgeting, it requires the participation for
justifying each cost item from the 1st principle in each year. This methodology 1st came into force
in mid 1970 while the carter administration tried applying the same to the federal budgets
however fell out of the fashion quickly. Recently it made the comeback as it aggressively used
by the people (Ekanem, 2014). However the main issue involved with it is in solving one issue of
traditional budgeting it creates other problems more prominent. Further, it is considerably costly

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as well as bureaucratic and takes longer times and hence is considered as less flexible. It is also
supercharges annual cost of negotiation process as the stakes are considerable high. Hence, it is
not difficult to understand why the system went out of fashion initially. Further, it is easy to
understand why this is attractive if quick financial return is preferred and the management is not
worried regarding the long term (Ekanem, 2014).
Beyond budgeting – though the name given to this approach is description, however some
people feel that it makes the situation more complex that is actually misplaced. Control is the key
to this approach – it is simple and is exercised in different approaches through uses of different
approaches. Though the ends are same, the means differ. These can be summed up as –
Target – if the purpose is achieving target it can be negotiated and can be fixed from the fixed
traditional budgeting and can adapt the beyond budgeting in continuous and relative way
(Olesen, 2015).
Plan – if the purpose is planning it can be predicted and can be fixed from the fixed traditional
budgeting and can adapt the beyond budgeting through continuous anticipation
Allocate resources – if the purpose is allocating the resources it can be negotiated and can be
fixed from the fixed traditional budgeting and can adapt the beyond budgeting on the basis of
demand based on the contexts (O’Grady, Akroyd & Scott, 2017).
Measure performance – if the purpose is to measure the performance it can be negotiated and can
be fixed from the fixed traditional budgeting and can adapt the beyond budgeting in continuous
and relative way

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Co-ordinate – if the purpose is co-ordinating the numbers can be hit from the fixed traditional
budgeting and can adapt the beyond budgeting through synchronising it dynamically (Olesen,
2015).
From above it is clear that the beyond budgeting is based on objectives of assisting
organisations to sense the environment on continuous basis and adapt the changes quickly.
However, it is suggested that for implementing beyond budgeting further research is required in
context of organizational changes regarding beyond budgeting and the challenges resulting from
implementation of same. For example, while implementing the beyond budgeting approach the
organization must change the targets, rewards and motivation, forecasting and planning, control
and measures, role of the controllers, coordination and controllers (Ekanem, 2014). Further,
beyond budgeting practiced by Volvo, one of the most profitable car manufacturing companies
found improvement in their performance.
Analysing the above it can be concluded that the though the traditional budgeting still
plays the significant role while planning for the corporate finance, it is associated with various
issues like it is resource and time consuming, have weak links with the corporate strategy and it
is not enough flexible dealing with the changes. Hence, for neutralizing arguments for and
against the traditional budgeting entities shall take necessary steps to improve the same. Various
alternatives those can be used against the traditional budgeting are rolling forecasts, zero based
budgeting, better budgeting and beyond budgeting. Main reason of changing the budgeting
process is not only to save the time and resources but the opportunities to do more with the saved
time and resources.

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References
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& Society, 42(1), 29-50.
Bogsnes, B. (2016). Implementing beyond budgeting: Unlocking the performance potential. John
Wiley & Sons.
Bragg, S. M. (2014). Budgeting: The Comprehensive Guide. AccountingTools.
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Science, 2(04), 483-489.
Dudin, M., Kucuri, G., Fedorova, I., Dzusova, S., & Namitulina, A. (2015). The innovative
business model canvas in the system of effective budgeting. Asian Social Science, 11(7),
290-296.
Ekanem, E. E. (2014). Zero-based budgeting as a management tool for effective university
budget implementation in university of Calabar, Nigeria. European Journal of Business
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Lorain, M. A., García Domonte, A., & Sastre Peláez, F. (2015). Traditional budgeting during
financial crisis.

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Miller, G. (2018). Performance based budgeting. Routledge.
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