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Advantages and disadvantages of different types of planning tools used for budgetary control

Part B: Presentation

Refer to PPT

Advantages and disadvantages of different types of planning tools used for budgetary control:

In the words of Nielsen, Mitchell and Nørreklit (2015), budgetary control is the method through which future budgets are formed these are compared with the real performance for detecting variances, if any. This would assist the management in undertaking corrective actions without any kind of delay.

The advantages of various types of planning tools utilised for budgetary control are discussed briefly as follows:

  • It helps in describing the plans, goals and policies of the organisation. In case, there is absence of a fixed goal, the efforts would go in vain in accomplishing some other goals.
  • Budgetary control helps in fixing targets, in which each department is compelled to work effectively in accomplishing the target (Noordin et al. 2014). Hence, it is an effective process to control activities of different departments of business unit.
  • It helps in securing effective coordination among different departments.
  • If the expectations are not met with the help of performance, budgetary control enables the management to find up the responsibility.
  • Budgetary control minimises the production cost by eradicating the wasteful expenditure.
  • Through the promotion of cost consciousness amongst the staffs, budgetary control brings in economy and efficiency.
  • Budgetary control helps centralised control with decentralised activity.
  • As planning is made in advance, it enables in smooth functioning of the organisation.
  • It guides the management regarding the area of action for resolving issues without any sort of delay.

The demerits of various types of planning tools used for budgetary control are discussed briefly as follows:

  • It is extremely troublesome to develop budgets rightfully under inflationary situations.
  • Budget requires huge expenditure that small organisations could not accommodate.
  • Budgets are developed for future years, which is highly uncertain. This is because the budgets might be upset with change in future conditions (Nørreklit 2017). Hence, the utility of the budgetary control system is minimised by eliminating future uncertainties.
  • As budgetary control is only a tool of management, it could not replace management in decision-making, since this is not a management substitute.
  • The budgetary control success relies on the support of the top management. In case, the management fails to provide adequate support, this would result in failure (Nuhu, Baird and Bala Appuhamilage 2017).

Use of different planning tools and their application for preparing and forecasting budgets: 

Strategic planning relies on different instruments and strategies for characterising and deciphering data to view at choices. The use of planning tools and their application for forecasting and developing budgets are demonstrated briefly as follows:

Methods to settle issues:

Each arranging group needs scientific meticulousness and inventiveness for characterisation of issues and looking at the alternatives (Otley and Emmanuel 2013). Thus, a few organising strategies advance both meticulousness as well as inventiveness.

Methods to evaluate between sectoral and spatial associations:

The strategies becoming ready for the provided organisation requires to depict crosscutting valuable and spatial associations. These strategies rely on maps and arranging region in the local monetary topography.

Methods for ecological, social and monetary investigation:

The arranging group is required to envisage ecological, social and financial impact of the proposed activities and techniques. A few systems are accessible for this (Otley 2016).

Methods to talk about future events:

Planning is about ascertaining the future and choosing the way of being prepared for the same. The arranging group ought to rehearse and gain from fates investigation methods.

Thus, the arrangement of instruments does not require being quantitative for being useful. There is necessity of quantitative models; however, they are not the only effective procedure for advancing the approach of frameworks to contemplate an issue and it’s conceivable arrangements (Quattrone 2016).

Evaluating the way organisations are adapting management accounting systems to respond to financial problems:

The modern day organisations are confronted with the question of the way to adapt their strategies, business practices and models for responding to environmental and social challenges while developing financial value and success for the shareholders (Shields 2015). The report recommends many ways through which the management accountants could guide the organisation towards achieving business success:

  • Identifying the social and environmental trends that would influence the ability of the organisation in developing value over time
  • Connecting sustainable business challenges to the strategy of the organisation, performance outlook, business model and license to operate (Strumickas and Valanciene 2015)
  • Explaining the effect of the sustainability issues in effective business terms, including when and how they could influence the business
  • Developing knowledge performance indicators for supporting sustainable and strategic goals
  • Applying the tools and techniques of management accounting like scenario planning of availability of natural resources, lifecycle costing and carbon footprint for enabling to integrate matters of sustainability into the process of decision-making (Suomala, Lyly-Yrjänäinen and Lukka 2014)
  • Developing reports that comprise of data on sustainability effects for informing pricing and budgeting decisions, strategic planning and investment appraisal
  • Producing a strategy of reporting for integrating the issues of sustainability for assuring that pertinent financial and non-financial information, which needs to be disclosed (Tappura et al. 2015). The Global Integrated Reporting Framework developed on the part of the Global Integrated Reporting Council is an instance.

In responding to financial problems, management accounting can lead organisations to sustainable success:

The business organisations are confronted with countless decisions on regular basis. The information related to management accounting delivers data-driven input to such decisions, which could improve the decision-making process of the organisation in the long-run. The business owners could leverage this powerful tool for ensuring the success of the business by understanding the way the management accounting helps in the context of common business decisions.

Pertinent cost analysis:

The information related to management accounting is used for ascertaining the things to be sold and the way of selling them. For instance, a business owner might not be confident of the area to concentrate on marketing efforts. For analysing this decision, the accounting manager could investigate the costs that vary between advertising options for every product by not considering the common costs. This procedure is adjudged as pertinent cost analysis and it is a method taught in basic courses of managerial accounting. The same method could be used to ascertain whether to include product lines or discontinue operations.

Use of different planning tools and their application for preparing and forecasting budgets

Activity-based costing techniques:

Once the organisation has ascertained the products to sell, the business requires ascertaining to whom the products would be sold. By using the techniques of activity-based costing, the management could ascertain the activities need to manufacture a product line. The customer cost is included in this information as well. By determining the most and least profitable customers, the business owners tend to concentrate on advertising towards the customers that are highly profitable.

Make or buy analysis:

A basic function of the information of management accounting is to deliver information used in production. For instance, if a business owner might be considering whether to make or purchase a component required to produce the primary product of the organisation. After finishing make or buy evaluation, the most profitable choice could be ascertained. Although this technique is highly valuable, the business owners need to utilise these evaluations in the form of a factor in the decision (Theriou and Aggelidis 2014).

Utilisation of data:

The information related to management accounting offers a data-driven look at the way of developing a business. The projections of financial statements, budgeting and balanced scorecard are few instances of the way management accounting information is utilised to give information to enable the management in guiding the future of the organisation. By concentrating on this data, the managers could undertake decisions that intend for continual development. These are justifiable depending on intelligent evaluation of the organisational data in contrast to gut feelings.

Participation in planning process:

The management accountants participate in the planning process at both operational and strategic levels, which takes into account the framing of policies and the development of budgets. In addition, they are engaged in the provision and initiation of guidance for management decisions by taking into account the evaluation, generation, presentation and interpretation of pertinent information.

Evaluation of stocks:

The management accountants are used in analysing stocks and developing monthly results with greater speed, which is a portion of the management accounting system and cost. This is because the role of management accountant is greater on contributing to its development and lesser on forecasting of future.

Therefore, it could be stated that management accounting plays a major role in the modern day organisations. The top accountants in such organisations act as the controllers. All the functions of accounting report to this individual, which include tax accountants, cost accountants; systems support personnel and internal auditors. Although the origination of management accounting is within these positions, every decision-maker in the organisation needs to understand the way of developing and using effective information related to management accounting. Hence, by responding to the financial problems, the management accountants help in ensuring success of the business organisations.

References:

Nielsen, L.B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 64-82). Elsevier.

Noordin, R., Zainuddin, Y., Mail, F. and Mail, R., 2014. Strategic Management Accounting: State-of-the-Art. Malaysian Journal of Business and Economics (MJBE), 1(1).

Nørreklit, H. ed., 2017. A Philosophy of Management Accounting: A Pragmatic Constructivist Approach. Routledge.

Nuhu, N.A., Baird, K. and Bala Appuhamilage, A., 2017. The adoption and success of contemporary management accounting practices in the public sector. Asian Review of Accounting, 25(1).

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

Quattrone, P., 2016. Management accounting goes digital: Will the move make it wiser?. Management Accounting Research, 31, pp.118-122.

Shields, M.D., 2015. Established management accounting knowledge. Journal of Management Accounting Research, 27(1), pp.123-132.

Strumickas, M. and Valanciene, L., 2015. Research of management accounting changes in Lithuanian business organizations. Engineering Economics, 63(4).

Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A reflective analysis of conducting interventionist research in management accounting. Management Accounting Research, 25(4), pp.304-314.

Tappura, S., Sievänen, M., Heikkilä, J., Jussila, A. and Nenonen, N., 2015. A management accounting perspective on safety. Safety science, 71, pp.151-159.

Theriou, G.N. and Aggelidis, V., 2014. Management Accounting Systems, Top Management Team’s Risk Characteristics and Their Effect on Strategic Change. International Journal of Economics and Business Administration, 2(2), pp.3-38.

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