Evaluating Traditional Budgeting and Standard Costing in Business

This essay assesses the relevance of traditional budgeting and standard costing in modern business environments. It discusses how traditional budgeting systems are used for planning and forecasting revenue, highlighting their advantages in planning, control, and financial access. The essay also addresses the limitations of traditional budgeting, such as its time-consuming nature, reliance on accurate forecasting, and potential for human error. It references Jensen's critique of corporate budgeting practices and explores the inadequacies of traditional compensation systems. Furthermore, the analysis covers standard costing methods, their role in setting goals, comparing actual costs to estimated values, and detecting production process efficiency. The essay also acknowledges criticisms of standard costing, particularly concerning estimation inaccuracies, while emphasizing its advantages in price formulation and cost control. The document concludes by integrating the concepts of traditional budgeting and standard costing in the context of contemporary business challenges.

Running head: COST AND MANAGEMENT ACCOUNTING
Cost and Management Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1COST AND MANAGEMENT ACCOUNTING
Introduction:
The main purpose of the assessment is to analyse the relevance of Traditional budgeting
system in a business and how the same impacts the decision-making process of the business. The
traditional budgeting system effectively portrays the targets, which are set by the management of
the company and the necessary steps which are taken by the management of the company for
formulation of appropriate strategy towards achieving its goals. The traditional budgeting is
mainly used for the purpose of planning and forecasting of revenue, which is to be generated by
the business during the period (Ahmad, 2014). The assessment would be focusing on relevance
of traditional budgeting practices from the viewpoint of the business. In addition to this would
also be discussing beyond budgeting techniques such as standards costing and how the same is
used in business organization.
Body:
In a business organization, traditional budgeting practices in a business is considered to
be important as the same is used by the management of the company for effectively planning the
activities of the business in an effective manner. The budgets are prepared by the management
after considering the current market trends, past year’s information and goals and objectives of
the business for preparing an appropriate budget (Estermann & Claeys-Kulik, 2013). Traditional
budgeting practices are used in most of the businesses for different activities of the business and
also for maintaining the activities of the business. In addition to this, it is also to be noted that
traditional budgeting system plays a vital role in decision-making process of the business
(Krumwiede & Charles, 2014). The management of the company considers key elements such

2COST AND MANAGEMENT ACCOUNTING
sales, costs, financing requirements for the purpose of decision-making and the same are
included in the budgets, which is prepared by the management of the company.
Traditional Budgeting practices of the business are considered to be important for the
decision-making process of the business. Some of the important advantages which is associated
with traditional budgeting practices is basically associated with the planning process which is
undertaken with the help of budgets which are formulated by the management of the company
(Aminbakhsh, Gunduz & Sonmez, 2013). The management can effectively plan regarding any
new venture or even existing venture and forecast the expenses and revenue, which can be
generated from the operations of the business. In addition to this, budgets help in scrutiny of the
records, which are maintained by the business and are useful for spotting any errors and
variances, which takes place between budgeted performance and actual performance of the
business. Therefore, in other words, it can be said that the budgets which is prepared by the
business acts as a game plan which the management of the company follows for achieving the
targets of the business (De Jong, van Beek & Posthumus, 2013). Traditional budgeting practices
also help in controlling and guiding the actions of individuals in pursuance of the goals and
objectives of the business. Moreover, Traditional budgeting also allows the management to get
access to appropriate sources of finance, which can be used, for financing the activities of the
business in order to generate appropriate revenue for the business.
The advantages of traditional budgeting are numerous but the same technique also faces
certain limitation, which are needs to be considered before implementing the practice in the
business. One of the main limitations is that budgeting practices are only successful if the same
involves accurate forecasting and estimation of results of the business. Inaccurate presentation of
the information can lead to misrepresentation of goals of the business and therefore, the sense of

3COST AND MANAGEMENT ACCOUNTING
direction of the business is lost due to such a process (Becker et al., 2016). Traditional budgeting
is a very time-consuming process and requires detailed estimation of the resources. It is also to
be noted that the process of estimating process takes lot of time and therefore it would be a waste
of resources of the business (Robinson, 2013). In addition to this, there is also an element of
human error, which can affect the entire estimation process and even lead to misrepresentation of
the goals of the business. As per the view point of Jenson, Corporate budgeting practices is a
joke as the same consumes significant amount of time, executive’s efforts and engages them in
continuous meeting and discussion process which wastes valuable time for the business. It is
appropriate to say that budgeting practices of a business is complex in nature, as the same
requires setting of appropriate goals of the business (Cardoş, 2014). Moreover, the budgeting
setting process is also very complex in nature and requires appropriate estimation of items which
are to be included in a budget which is set by the management of the company. Any changes in
the market trends or objectives of the business require detailed changes in the budgeted estimates
so that the same is representing appropriate targets for the business (Zeller & Metzger, 2013).
One of the examples, which can be provided which shows that the traditional budgeting
system is not appropriate for a significant area of the business are of compensation system,
which is followed under traditional budgeting system. As per Jensen, the tradition budgeting
system follows traditional pay-out system for compensating the employees of the business. In
this system, the pay-out for the employee is constant to extent of performance and if a certain
level is achieved, the employee would be entitled to bonus which would further increase as the
performance of the business increases. However, at maximum cap limit the same would be
constant again. A graphical representation of the same is provided in appendix 1, which helps in
detecting the maximum level of cap limit.

4COST AND MANAGEMENT ACCOUNTING
The appendix 1 appropriately shows the kink in the performance of the business on the
minimum target, which the employee can achieve, and the maximum cap after which the
incentive income, which is generated by the employee, becomes constant. As per Jenson, this
approach is inappropriate and can cause misrepresentation in the budgets, which is prepared by
the management of the company for the period. Therefore, the above examples make it clear that
the traditional budgeting system is ineffective in certain areas of performance of the business.
The limitations of traditional budgeting are highlighted in the Journals provided by Jensen and
Hope, which indicates about the loopholes in the current additional budgeting system. However,
the budgeting system that does not indicate any kind of problems loopholes as it allows the
organization and management to adequately evaluate the future performance of the process. This
eventually helps them to support the future expenses and ensure the availability of resources,
which is needed to complete the process. The budgeting system is considered to be Critical part
of the organization performance as it allows the management to understand the level of resources
that will be needed for supporting its future operations.
Moreover, the traditional budgeting system directly provides adequate information
expenses that each be conducted throughout the production process. This analysis of the
traditional budgeting system directly allows the management to utilize different methods such as
zero based budgeting and activity based budgeting which could help in minimizing the level of
expenses, while maximizing the revenue generation capability of the organization. The loopholes
in traditional budgeting is relatively focused on the managers that conduct prepare the budget, as
the limitation of the knowledge and information would restrict the budget to provide adequate
support to the operations of the organization.

5COST AND MANAGEMENT ACCOUNTING
Standard costing method is one of the major components that are used by current
businesses for effectively setting relevant goals for the operations. The standard costing level is
used by companies for comparing the actual cost with the estimated values and determines
whether the production process was efficient or it incurred high cost. The standard cost is
considered to be a careful predetermined measure of cost under standard conditions. Moreover,
the standard costs are estimated with as the relevant goals of the cost, which needs to be achieved
by the company during the financial years. This estimate directly allows the organisation to
determine the level of cost and expenses, which will be conducted in the production condition.
Maskell, Baggaley and Grasso (2016) mentioned that with the help of standard cost settings the
companies are able to detect the level of efficiency of the production process in minimising the
cost and wastages of essential raw materials. Therefore, standard costing is an essential measure
that is needed by the organisation for detecting the level of expense that could be incurred during
financial year. Standard costing method is helpful in preparing and comparing the relevant cost
incurred by the company during the production process. The management relatively compares
the standard cost with the actual output determine the relevant variance is and their causes which
increase the level of expenses in production process. This directly helps the managers to
distinguish the level of activities and probable causes that is affecting the production process of
an organization. Thus, adequate management plan are imposed to minimize the negative impact
on the probable causes while improving the production process (Shingo, 2019).
The standard cost is mainly evaluated for manufacturing companies, as it focuses on
providing the overall costs that would be required for completing the production process. In
addition, the standard costing method directly establishes the standard cost of each product by
establishing the standard cost of direct materials, direct labour, and manufacturing overhead,

6COST AND MANAGEMENT ACCOUNTING
which is required for completing the production process. The determination of the cost would
eventually help in detecting the level of expenses that needs to be conducted by the company for
supporting its production process. Hence, the management can use the standard costing method
for adequately measuring and understanding the level of expenses that needs to be conducted by
the company to smoothly compete their production process. In addition, the standard costing
method is directly used for detecting the level of cost of direct labour and direct material that
could be used for analysing the financial performance of the organisation. Wan et al., (2014)
criticises that standard costing is relevantly an estimate, which is taken into consideration by the
organisation, where the actual expenses could be much higher than the anticipated expenses.
There are specific journals that directly indicate about the problems conducted by
Standard costing, negatively affect the overall operations of the organization. Standard costing is
a measure that allows the organization to determine the level of expenses on a particular product
that will be conducted in future operations. However, journals produced by Jensen and Hope
directly indicate about the loopholes in the current standard costing method that is used by
companies and managers to evaluate the cost and financial expenses of the production process.
The problems in the valuation of standard costing method would directly hamper the level of
estimations, which directly increases the level of expenses incurred from operations. Burns,
Stevens and Lee (2016) stated that with the wrong estimation the overall expenses of an
organisation will increase drastically, which might hamper the progress and profitability
conditions of the company.
There are specific advantages and disadvantages of standard costing method that is used
by companies for estimating the level of cost incurred in their production process. The relevant
advantage to the standard costing method is that it provides a guide to the management while

7COST AND MANAGEMENT ACCOUNTING
formulating the level of prices and production policies. This relatively allows the management to
effectively introduce the level of prices for its products to maintain the level of revenue and
profit. Moreover, with the help of standard costing method and effective cost control is possible
by the management as it is regularly analyzed for relevant improvements. The management after
detecting the level of problems takes relevant actions that reduce the deviations from the
standard costing and to minimize the cost of production. Therefore with the help of standard
costing organizations are able to access the level of income and reduce the level of expenses
incurred from their operations. With the help of variance analysis that is conducted by using
standard costing method managements are able to identify and detect inefficiencies or mistakes
that are made by the managers during the production process.
Moreover, with the help of standard costing predetermined cost is used by the
management for planning and budgeting, which effectively helps in detecting the cost price
volume relationship for improving the decision-making process in future. Furthermore, the
standard costing system is implemented to have adequate savings in expenses that is conducted
by the organization in their production process. The management with the help of Standard
costing system is able to eliminate extra cost that is incurred by the company in their production
process (Maskell, Baggaley & Grasso, 2016). The system also helps in preparing the profit and
loss account for a short period to identify the level of trends in the business, as it helps the
management to make adequate and provisions regarding future activities. Likewise, with the help
of standard costing method the management is able to improve the efficiency of its production
process as it relatively helps in improving the cost center and standard of the overall process.
Moreover, efficiency of the labor is promoted with the help of standard costing method as it
helps in reducing the wastage of relevant time. Furthermore, inventory valuation system is

8COST AND MANAGEMENT ACCOUNTING
improved with the help of standard cost, as it minimizes the level of expenses inventory stock
process.
The relevant limitation of the current standard costing method, as it uses high degree of
Technical skills which is costly for small and medium sized organizations. The standard costing
method directly uses excessive cost for completing the overall method. The various sources
found with the help of standard costing method you are not fixed by the organization due to the
complex production process. In addition, there are non-controllable portion of the production
process that cannot be altered by the organization to improve its costing conditions. Standard
costing method uses of the liberal or project costing measures as it is based on the average past
results obtained by the organization. Therefore organizations can improve their theoretical
performance which is relatively not viable and possible in the real world conditions (Seuring,
Archangelidi & Suhrcke, 2015). This is a major limitation of standard costing method as it does
not allow the management to attain the target efficiency and cost level, due to the limitation in
the current production process. Standard costing relatively change you do the impact of different
conditions on the operations of the organization. The revision of standard reach creates many
problems for the inventory adjustments and standard costing method.
Conclusion:
The overall assessment directly value weights and discuss the relevance of traditional
budgeting in standard costing in contemporary business environment. The analysis has directly
provided information about the overall significance and limitations of both traditional budgeting
and standard costing method. The relevant evaluation of journals presented by Jensen and Hope
directly indicates about the loopholes in traditional budgeting and standard costing method.

9COST AND MANAGEMENT ACCOUNTING
However, relevant criticism of the journals is provided which indicate about the limitations of
the paper.

10COST AND MANAGEMENT ACCOUNTING
References and Bibliography:
Ahmad, K. (2014). The adoption of management accounting practices in malaysian small and
medium-sized enterprises. Asian Social Science, 10(2), 236.
Aminbakhsh, S., Gunduz, M., & Sonmez, R. (2013). Safety risk assessment using analytic
hierarchy process (AHP) during planning and budgeting of construction projects. Journal
of safety research, 46, 99-105.
Becker, S. D., Mahlendorf, M. D., Schäffer, U., & Thaten, M. (2016). Budgeting in times of
economic crisis. Contemporary Accounting Research, 33(4), 1489-1517.
Burns, E. R., Stevens, J. A., & Lee, R. (2016). The direct costs of fatal and non-fatal falls among
older adults—United States. Journal of safety research, 58, 99-103.
Cardoş, I. R. (2014). New trends in budgeting–a literature review. SEA–Practical Application of
Science, 2(04), 483-489.
De Jong, M., van Beek, I., & Posthumus, R. (2013). Introducing accountable budgeting. OECD
Journal on Budgeting, 12(3), 1-34.
Estermann, T., & Claeys-Kulik, A. L. (2013). Financially Sustainable Universities, Full Costing:
Progress and Practice. European University Association: Brussels.
Farquhar, M. C., Prevost, A. T., McCrone, P., Brafman-Price, B., Bentley, A., Higginson, I. J., ...
& Booth, S. (2014). Is a specialist breathlessness service more effective and cost-
effective for patients with advanced cancer and their carers than standard care? Findings
of a mixed-method randomised controlled trial. BMC medicine, 12(1), 194.

11COST AND MANAGEMENT ACCOUNTING
Guckenberger, D. J., de Groot, T. E., Wan, A. M., Beebe, D. J., & Young, E. W. (2015).
Micromilling: a method for ultra-rapid prototyping of plastic microfluidic devices. Lab
on a Chip, 15(11), 2364-2378.
Krumwiede, K. R., & Charles, S. L. (2014). The use of activity-based costing with competitive
strategies: impact on firm performance. In Advances in Management Accounting (pp.
113-148). Emerald Group Publishing Limited.
Lovald, S. T., Ong, K. L., Malkani, A. L., Lau, E. C., Schmier, J. K., Kurtz, S. M., & Manley, M.
T. (2014). Complications, mortality, and costs for outpatient and short-stay total knee
arthroplasty patients in comparison to standard-stay patients. The Journal of
arthroplasty, 29(3), 510-515.
Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Robinson, M. (2013). Performance budgeting. In The international handbook of public financial
management (pp. 237-258). Palgrave Macmillan, London.
Seuring, T., Archangelidi, O., & Suhrcke, M. (2015). The economic costs of type 2 diabetes: a
global systematic review. Pharmacoeconomics, 33(8), 811-831.
Shingo, S. (2019). A revolution in manufacturing: the SMED system. Routledge.