Analysis of Traditional Budgeting Practices and IT Application

This essay explores traditional budgeting practices, evaluating their advantages and disadvantages, particularly in the context of the information technology era. It discusses the fixed and rigid nature of traditional budgets, their reliance on past data, potential for poor resource allocation, and risks of unfaithful management. The essay contrasts these with modern budgeting methods like incremental, activity-based, capital, and zero-based budgeting, highlighting their application in Australia. The analysis emphasizes the need for strategic, informative, and adaptable budgets that minimize waste and consider both micro and macro environmental factors for effective resource allocation and profitability.

By student name
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Date: 14th May, 2019.
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Table of Contents
Traditional Budgeting Practices and Its Application in the IT era................................3
References................................................................................................................. 7
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Traditional Budgeting Practices and Its Application in the
IT era
Traditional Budgeting is the method of preparation of the budget in which the
prior year budget is taken as the base and based on that the company prepares the
budget for the coming year. There are changes made to the prior year budget, like
adjusting the expenses that are based on the rate of inflation, the prevalent market
situation and the demand and supply of the consumers. Only those items need to
be adjusted in the traditional budget that is over and above the traditional
budget(Boghossian, 2017). The traditional budgeting has been in practice since a
long time, but now the companies have come up with many new and different
methods of budgeting that are more advanced. However there are different
advantages associated with traditional method of budgeting likes –
Implementation – It is very easy to prepare and thus management does not need to
provide extra training to its employee to prepare this. It can be prepared very fast
and not many changes are needed from the prior year budget. It helps in saving a
lot of time and effort on part of the managers of the company. Easy implementation
helps in easy accessibility for the employees also and for the future employees also
to understand the budget is easy(Freeman, Wicks, & Parmar, 2004).
Stability – This is a very old method of preparation of budget and thus many
companies around the world have been following this since ages. This helps in
providing the much needed stability to the companies as same method has been
followed over the years. The financial activities are done with a lot of coordination
and all the employees know what needs to be done. When new methods are applied
there are chances that the company might face some hurdles because of that and
can lead to under or over expense on part of the management.
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Decentralization – In case of traditional budgeting methods it helps in promoting
decentralization and that helps the company to better organize its activities
especially in case of banks decentralisation is very useful. Any branches can make
their own budgets and apply the same in their overall accounting and auditing
purposes. Thus it helps in seamless flow of operations between various branches of
the bank and helps in making the branch function effectively without being under
the pressure to function as per the central branch directions. This is one of the
major advantages that is associated with traditional budgeting practices(Borit &
Olsen, 2012).
Consolidation – Traditional Budget helps in consolidation of several projects
together into a single one. It helps in saving the time of the company and also gives
them an insight on how several projects work together. It helps in improving the
performance of those projects that are under performing and club them with good
performing projects and that in turn helps in improving the performance of those
projects also. This helps in improving the overall revenue of the company on many
aspects and a single budgeting method used for all the projects is anytime more
fruitful then using the different method for all the projects.
Very Easy Preparation – This is one of the biggest advantage that is associated with
traditional method of budgeting that it is very easy to prepare and very easy to
apply. Only mere changes are required in the prior year budget and then the
current year budget is ready. So we see that there is not too many complexities
involved with preparation of the budget, and saves a lot of time and effort on part of
the management(Iggers, 2018).
Thus we see that there are a lot of advantages that are associated with
traditional method of budgeting and thus we need to analyze why in this
information age companies are switching to other budgeting methods, over the
traditional budget(Johan, 2018). This brings us to the disadvantages that are
associated with traditional budgeting method and that has led to companies
switching to other methods-
Fixed and Very Rigid – The overall preparation of the budgets based on traditional
method is very rigid and complex. Once prepared the traditional methods cannot be
changed and they fail to take into consideration various other factors that affects
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the budget like market scenarios, changes in the overall policy, changes in the
overall market condition etc. These are very important factor based on which the
companies need to change their strategy however in traditional method of
budgeting the scope of inclusion is very low.
Reliance on the past budget – There is a lot of reliance on the past budget and this
can prove to be very fatal at many times. In case there was any mistake in the past
budgets than that shall get carried to the current year budget also and then years
to come. So in this case we will see that there will be preparation of incorrect
budgets and this will spoil the growth of the company in times to come(Kaufmann,
2017).
Poor allocation of resources – The managers may not put that many efforts that will
help them in properly planning allocation of the resources and they might lack
motivation to make changes to the budget to suit the current scenarios(Norberg,
2018). Poor allocation of resources happens because the management will not put
resources to the projects that are more important and necessary for the overall
survival of the company, instead they will focus on those projects that are there
from the past and allocate the resources in the similar manner. This is one of the
major disadvantages that are associated with allocation of resources and companies
need to handle the same through different method of costing.
Unfaithful Managers – There are high chances that the managers can use this
loophole associated with budgeting techniques and ask the top management to
provide them more resources than required and the use it for their personal
purpose. Thus we see that there is a lot of disadvantage associated with traditional
method of budgeting and it can affect the company growth on much level as there
is no proper scrutiny on how these resources are being used by the
management(Kusnadi & Wei, 2017).
So given all these disadvantages that are associated with traditional method
of budgeting the importance of the same in this era of information technology and
technological advancements has reduced and companies are taking up complex
projects where it is not possible to procure and allocate resources based on the past
budgets as there is a lot of changes that happens year after year and companies
need to include those changes when they are preparing those budget for the
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current year. This is the era of information technology and the management of
companies have been capable enough to develop different controls that have
helped them in using the available resources in the best ways possible and make
profit accordingly from that. The aim of the companies now is that they develop
such budgets that are strategic informative, easily applicable and leads to minimum
amount of wastage when it comes to development of budgets as a whole. It can
also be seen that they do not lay their reliance on the past budgets given that the
scenarios are changing every day and apart from the micro environment factors
they need to consider the macro factors also when they are preparing the budgets
that will be useful for the companies(Ruth, 2018). There are a lot of advantages that
are associated with other types of budgeting over the traditional method of
budgeting. It includes better resource allocation, taking into several factors that
affect the growth of the company, using zero budgeting approach where the profit
is maximised, taking in the controls designed by the management and making sure
that the managers are working proactively such that it will help them in maximising
the return possible. In case the managers fail to do their work properly then that is
also shown through these budgets and is reflected in the results that are generated.
Thus we see that there are various reasons because of which companies around the
world are switching to different method of budgeting over traditional method of
budgeting and we shall discuss the various types of budgeting practices adopted in
Australia and how is it helpful in the given section below(Truong, Partington, & Peat,
2008).
Budgeting Practices in Australia
With development in technology there are several new methods of costing
and budgeting that has been developed to assist in the development of projects and
for resource allocation in those products that would help in minimizing the cost and
generating higher revenue. Few of these advanced budgeting methods have been
given below:
1. Incremental Budgeting – In this budgeting the company takes in
consideration the last year figure and add or delete a certain percentage to obtain
the current year budget. This is based on the traditional method of budgeting and
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hence it is not considered to be very functional and not very appropriate to use as
the cost drivers are changing year after year.
2. Activity-based Budgeting – This is a method in which the companies
applies the top-down budgeting approach that helps in understanding the amount
of inputs that would be needed to achieve the specific target outputs for the
company. In this the management does not consider the past year budget but
depends on the current year activities to take decisions about the current budget.
Then the activities that are incurred and analyzed and based on that decisions are
taken whether or not and how to allocate the resources, the activities that are more
crucial to the project are given more priority over other(Vieira, O’Dwyer, &
Schneider, 2017). Thus we see this is one of the most important features of activity
based costing and people need to follow the same. The major advantages included
are removal of bottlenecks and considering the business as one single unit, helps in
improving the relationship between various departments of the company and helps
in developing a competitive edge. Thus we see that many companies around the
world are switching to this advanced method of costing, especially in Australia
where there are many manufacturing companies that uses activity based costing.
3. Capital Budgeting Methods – Capital Budgeting is a method in which
the overall planning is done to take decisions whether long term decisions of the
company like investing of funds in new machinery, new plants and new products etc
are economical or not and that is done by applying the allocation of resources to
major capital, expenditures and the relevant investment that is needed. The main
aim of this method is to increase the overall returns for the shareholders who are
putting their money in the company. There are various capital budgeting techniques
that can be used by the companies like the internal rate of return method, net
payback period method, net present value method, real option values etc(Webster,
2017). This is a widely used method of budgeting for long term investment
decisions and companies all around the world especially in Australia depends on
this method to take important decisions whether to invest in this company or not.
The capital budgeting is a very complex method but the results generated are very
effective and thus companies aim to follow the same as the probability of correct
result is far more in case of capital budgeting than in any other method of
budgeting(Wendt, 2018). The disadvantages associated with capital budgeting is
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that the process is complex, moreover different projects needs different techniques
to be applied, which if the company fails will lead to lot of loss on part of the
company.
4. Zero Based budgeting – Zero based budgeting is a very new age method in
which it is assumed that all the department budgets are zero and that all of it must
be built from scratch. It is necessary that the managers justify each and every
single expense of the company. It is a very tight method of budgeting and does not
take into consideration any such expenses that are not considered very important
for the company to complete the project. So this means all unnecessary cost
elements are avoided and the overall process is very effective when it comes to
generating the maximum return. It is best suited when taking decisions with respect
to discretionary cost rather than the essential cost elements for the
companies(Wellmer, 2018). But it is very complex and time consuming so
companies do not prefer selecting this as an appropriate method to take decision
whether they want to invest in the company or not. The major disadvantages
include understanding possibility of resource insensitiveness, threats of
manipulation of savvy managers and the overall biasness towards short term
planning and management. All this discourages the companies to switch to these
new methods of budgeting like zero based budgeting.
Thus these are different types of budgeting methods that are majorly used in
Australia and thus this has led to removal of the budgeting techniques like
traditional budgeting method. There are various budgeting techniques that have
evolved due to the changes in the technology, new complex method of production,
and thus this has led to new techniques. But there are disadvantages that are
associated with such kind of budgeting which includes understanding the
complexities that comes with such budgeting methods, applying methods like zero
based budgeting is difficult as they are very project specific and employees need to
be trained on how they can use these costing methods for long term benefits. But
even then it is better than traditional methods of budgeting and so companies are
adopting the new methods. Overall the benefits applied are huge and many new
developments are happening everyday in this field related to budgeting and costing
so that the overall benefit to the management is huge and stakeholders also benefit
from the same.
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References
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