Budgeting In Management Accounting: Control And Planning Essay.

You are required to prepare a report about your findings from the literature research, and discuss how it has helped your understanding of your chosen topic. The report should cover the following:

a. An explanation of the selected management accounting topic.
b. An explanation of the purpose of the two studies and what research question(s) they set out to explore about the topic.
c. A discussion about the similarities and differences in the findings of the two studies.
d. Provide four (4) specific outcomes or lessons learned from the two studies’ research findings that will be useful for management accountants in Australian companies to learn from, and justify your answer [i.e. provide 2 outcomes from each study].

The management of particular organizations uses budgeting as a tool for planning and control of various activities. The tool is typically used to plan for the present and future activities. Normally in the organizations, the actual costs are estimated against the projected expenditures with the aim of ensuring that the various activities are controlled with the aim of reducing wastage. The key aim of this report therefore is to illustrate the applications of budgeting in management accounting for fundamental functions such as control and planning. The report also focuses on two case studies of how certain organizations use budgeting for different purposes.

Purpose of the Two Studies

The two studies aim at explaining the key concepts of budgeting by illustrating the different categories of budgets, functions of budgeting and the behavioral effects of budgeting in different organizations.

Research Questions

This report aims at addressing the following questions as listed below in the paper;

• What is the meaning of budgeting?
• What are the various classifications of budgeting?
• What are the key functions of budgeting in management accounting?
• What are the behavioral effects of budgeting on the employees of a business enterprise?

Meaning of Budgeting

Budgeting is the process of making various budgets with the intent of planning for the future operations of a particular organization (Almazan, Chen and Titman, 2017 p.2200). Such operations could be long term or short term. Budgeting is an essential element in every organization and this has been due to its key roles in planning and control of different activities.

Budgeting Process

The process of budgeting is often considered as a complex task for most of the organizations. Often a committee is formed to help in the preparation of budgets and this mostly done for the large organizations which a lot of information is relied on to prepare the budgets. There are a variety of procedures which are involved during the preparation of budgets and the steps are outlined as indicated below;

Estimation of Information Flow

Various types of information are gathered in the organization which will aid in the preparation of the budgets. There are usually two techniques which are used in the collection of information in different organizations and this entails, the top down and bottom up methods. The top-down technique entails the provision of information by the top level management to aid in the preparation of the budgets. The bottom-up approach on the other hand involves the provision of information by lower level management and the subordinates.

The process entails the selection of various items to be measured during the preparation of the budgets. The selection of the items is usually based on an organizational structure of the particular organization (Grigg and Votaw, 2016 p.364). Some of the key elements often estimated during the preparation of the budgets include, the expenses and revenues of the particular financial year.

Research Questions

Gathering of Historical Information

The various past data in regards to an organization is gathered by the individuals concerned. Before the collection begins, the different operations are segmented. There are a variety of items in which the historical information can be obtained and such include, statement of financial position, income statement and cash flow statement (Gonçalves, 2014 p.100). The other areas in which the historical information can be obtained could be in the sales relating to customers and the production levels. Further, the past information on the expenses such as fixed cost, variable costs and indirect costs can aid in the preparation of budgets.

Developing the Projections

The different projections on a variety of items are prepared in this step of making the budgets. The preparation of such projections is typically complex during the preparation of the zero-based budgeting (Baiocchi and Ganuza, 2014 p.40). The establishment of the projections is only easy when making the incremental budgeting since they are prepared based on the past performances of an organization.

Establishment of the Break Even Point

In this step, the break-even point is determined. The key items to be used in the establishment of the break-even point should be comprehended properly by the organization to clearly give a true reflection of the particular firm. It is a complex process and hence the individuals concerned with the preparation of the break-even point must be extra careful. The items of the break-even point usually include, the contribution margin. The needs of an organization must also be taken into account during the determination of the break-even point.

The incremental budgeting is a simple type of budget which is easy to prepare. During its preparation, the data relating to the expenses of an organization in a particular financial year is gathered. Also the decreases and increases in the expenditures are determined to help in adjusting the budgets where necessary (Cokins and Dybvig, 2018 p.40). A key limitation of this type of budgeting is on its inaccuracy which may result in losses being made in every particular financial year.

The preparation of program budgeting usually entails the identification of various programs in an organization and an estimated budget is then made for them. The primary focus of program budgeting is typically on the outputs and not in the inputs of an organization.The organizations using this types of budgeting are mainly the non-profit making organizations and the voluntary associations.

The preparation of the zero-based budgeting involves placing all the essential activities of an organization at zero (Gulpenko, Tumashik and Filiasova, 2017 p.08103) A key assumption of this type of budgeting is that the preparation of budgets should not be dependent on the future preparation of budgets. However the zero based budgeting have certain disadvantages such as being time consuming and expensive. It is also assumed to be more accurate.

Meaning of Budgeting

The past performance of an organization is used in the preparation of this type of budgeting. The hybrid budgeting is considered as one of the most accurate budgeting and hence it has been adopted by most of the organizations worldwide. During the preparation of the hybrid budgeting, there are various elements which are usually considered such as the industry trends and macroeconomic forces.

Budgeting has had a variety of implications on the behavior of the workers in particular organizations and this has been due to the pressure mounted on them with the aim of meeting the set targets in the budgets. The management and the employees have different reactions to the budgets and such reactions impact greatly to the different operations of an organization (Miller, 2018 p.50). A positive reaction often results in better performances and this is unlike when the reactions are negative, the employees may become demotivated leading to poor performance of various operations. Some of the key implications entail budgetary slack which entails the overestimation and underestimation of the costs and revenues respectively and seeking for more funds to finance the deficit in the budgets.

Functions of Budgeting in an Organization

There are many roles which budgeting plays in the organization. Budgeting for example is used to motivate the employees of an organization by directing their efforts towards the attainment of key objectives of the organization. Budgeting is also used to allocate the various resources of the organization and this is done to control the resources available to prevent wastage (Wildavsky, 2017 p.80). The other function of budgeting is on control where it is used to control various operations in the organization. Usually, the expenditure on different activities is based on the budgets estimated and no expenses should be above that which has been measured already in the organization.

Budgeting is also used as a communication tool to convey information on the goals of the organization to different employees to direct them towards a common goal of such an organization which could be either profit maximization or maximization of shareholders’ wealth. Another function of budgeting entails being used as a tool for assessment of the performance of a particular organization such that the estimated expenses are compared against the actual expense with the aim of determining the performance level of a financial year (Van der Stede, 2015 p.5).

Budgeting in Management Accounting

The management of an organization uses budgeting to carry out most of his or her functions. For example, it is used for control and planning of the different activities of an organization and this therefore helps in the coordination and direction of the efforts of the workers towards the attainment of the essential objectives of such an organization. It is also used in management accounting as a tool for communicating the various targets and objectives to the organization (Rubin, 2016 p.100). Some of the goals could be operational and financial goals. Additionally, budgeting has often been used as an evaluation tool for performance in the organization and this is considered as a key aspect in management accounting. It is of significance that the performance of a particular organization is done to know the key areas which must be improved on to increase the level of performance.

Budgeting Process

The journals which were selected for the report were Journal of Applied Management

 Accounting Research and Accounting, Auditing and Accountability.

Accounting, Auditing and Accountability Journal

This journal provides a case study of how budgeting was used in Frac Hotel Organization in Greece.

Frac Hotel Organization

According to Grossi, Reichard and Ruggiero (2016 p.600), It was established in the 1990s and it began as a single hotel. Over the years it grew to become one of the largest hotels in the country. The Frac Hotel firm was formed to help in the management and administration of various hotels. It mainly focused on the improvement and innovation of the different hotels in the new markets (Anessi-Pessina, Barbera, Sicilia and Steccolini, 2016 p.500). In regards to the preparation of the budgets, the company typically prepared its budget annually in the month of October.

According to Carnegie and Napier (2017 p.1650), before the preparation of the final budgets, the estimated projections are laid out by the president of the firm during the formal meetings. The other departments such as the marketing department also provide a view of their estimated projections during the meetings and this usually relates to the occupancies rate and prices in the market. The different opinions of the president and those of the departments are assessed to determine the best ideas so as to prepare a complete budget without any kind of error. In the month of November, the forms containing the budgets are sent to every particular department by the finance department seeking their opinion on the budget (Demirag, 2017 p.85). The standard costs for all the hotels managed by the organization are indicated in the budget forms.

The key purpose of budgeting in the firm is to plan and control the various activities of the different hotels. The application of the budgets has enabled the company to ensure that there are no variances in the cost items when carrying out the various activities of the organization. The key function of the company is to manage and administer the operations of the hotels and hence budgeting has enabled them to perform most of these functions (Ozdil and Hoque, 2017 p.320). The other use of budgeting in the company is relating to certain events of a financial crisis and this was witnessed in 2007.

The budget however did not help a lot since the crisis was enormous and they were therefore forced to prepare another budget in 2008 using the zero base. Based on the study of the organization, the different environmental factors greatly impact the process of budgeting (Shaharuddin and Sulaiman, 2015 p.83). For example, the government policies regarding the management of hotels resulted in decline in prices and this led to losses being made by the organization since they had based their operations on the estimated budgets.

Estimation of Information Flow

The Journal of Applied Management Accounting Research provides a case study of how budgetary participation influences managerial performance and this typically focus on the Macau Chinese Bank. In the company, the performance of management was compared to their participation in the preparation of the budgets and it was found out that the budgetary participation of the managers in the preparation of the budgets does not have much impact on the performance by the management (Otley, 2015 p.27). The company indicates that the managers’ performances varies with the budgetary participation.

According to Ter Bogt, Van Helden and Van Der Kolk (2015 p.300), the management of the organization argues that when the management is allowed to participate in the process of budgeting, the performance of the organization would typically perform well. The employees of the organization get motivated to put more effort towards the attainment of the goals by set budget. Often the participation if the management in the budgeting process is hindered by a variety of uncertainties in the environment (Larsen, Nissen, Lueg, Schmaltz and Thorhauge, 2015 p.546). Often in this company, when the top level management acknowledges the fact that they will not achieve the set goals, they will not participate in the process of budgeting. In regards to the budgetary participation, the company can be classified as a defender organization.

A defender organization can be defined as company whose primary aim is to achieve the set objectives in the budget and this has helped the organization to improve on its performance in the last few decades. A defender organization motivates its employees to work towards the attainment of the goals of a budget through the bonus remuneration. Just like in the previous mentioned case study, the Macau Chinese Bank, often uses the budgeting as tool to overcome the circumstances of financial crisis which may arise (Nimtrakoon and Tayles, 2015 p.285). In 2008, when it was faced by a financial depression, the company was able to adjust its budget to accommodate the prevailing situation in the economy and hence it did not makes much losses compared to the other companies in the banking sector.

The existing correlation between the managerial performance and budget participation process can be illustrated using the moderating factors in the company. For instance, the company uses the information asymmetry as one of the moderating factors (Hoque, 2018 p.100). This it achieves by encouraging the junior workers to provide information during the budget making process since they may possess certain valuable information which would aid to prepare a perfect budget for the financial year.

Gathering of Historical Information

The other reason for the use of the junior employees is because they have a clear understanding of the different standards which would aid in the set projections to be relied on by the organization. It is argued that the information asymmetry widely contributes to the slack relationship which is the relationship between the managerial performance and the budgetary participation by the top level management (Heupel and Schmitz, 2015 p.730). The slack relationship usually occurs when the junior staff fails to participate in the preparation of budgets due to high participation of the top level management.

Based on the two journals, the key similarities are that budgeting is used as control and planning tools. Budgeting also influences the managerial performances of organizations. There certain are differences existing between the two journals, for example, the Journal of Applied Management Accounting Research indicates that, there is no relationship between the managerial performances and the budgetary participation by the top level management and this is unlike in the other journal which emphasizes that a relationship exist between the two. Another key difference lies in the use of budgeting during a financial crisis. The Accounting, Auditing and Accountability Journal advocates for the use of budgets to overcome the key challenges experienced during a financial crisis, however that is not the case for the Journal of Applied Management Accounting Research which calls for the use of other mechanisms to aid in overwhelming the challenges.

The two case studies for the journals indicate the key roles played by the budgeting in the organization. For example, budgeting can be used to improve on the performance of a company. Such a performance can be measured in terms of how far the fundamental objectives laid out in the budgets have been attained (Aleksandrov, Bourmistrov and Grossi, 2018 p.1120).Additionally, budgeting can be used overcome some of the challenges during the financial crisis. In the two studies, it is clear of how budgeting was applied to overwhelm the difficulties and this entailed even adjusting the budgets to meet with the demands of in such a situation.

The other learning outcome is that budgeting is often used as control and planning tool and it is considered as a fundamental element in management accounting. Another learning outcome is that the size of an organization determines the level of complexity of a particular budget such that the large organizations tend to prepare more complex budgets due to the many varying activities (Pavlatos and Kostakis, 2015 p.150). The management accountants concerned with the preparation of the budgets should take into account the size of an organization before the preparation of such budgets. The last learning outcome is that, budgeting is often affected the different changes in the environment. It is therefore prudent for the individuals concerned to consider such dynamics when preparing the budgets to avoid making losses in a particular organization.

Developing the Projections

Conclusion

In summary, budgeting is a vital aspect which determines the success or failure of an organization. There are various roles of budgets in a variety of companies. The key roles of budgeting are controlling and planning. The management uses the budgets to direct the efforts of the workers in an organization. The participation of the management in the preparation of budgets is usually based on various factors. For example in the circumstances which the managers perceive that the set objectives on the budgets will not be attained, they may decline to participate to avoid cases of embarrassment which could damage their level of motivation to perform in the particular organization. The changes in the environment are one of the typical examples of cases which may prevent the management from participating in the preparation of the budgets.

Further, the relationship between the performance of the management and the budgetary participation is considered to be non-existent. However, there are certain factors which can be used to develop the relationship and such factors are referred to as the moderating factors. The information asymmetry is one typical example of the moderating factors. In entails a situation in which the junior officers tend to possess more information regarding a company than the top level management and hence there is the need to involve them in preparing the budgets.

References

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