Budgeting is typically a tool which is critical in management since it aids in control and planning purposes. Most of the organizations use budgets to plan for their present and future expenditures. The budgets are compared with the actual costs of items in a particular fiscal year and this done to ensure expenditure is controlled in various organizations. This report aims at illustrating how budgeting is applied in management accounting for various purposes such as control and planning. It will also focus on cases in the organization where budgeting has been used as a toll in management accounting.
Purpose of Two Studies
The purpose of the two studies is to understand what budgeting entails and this includes, the various types of budgets, roles of budgeting in management and the key implications of budgeting in a particular organization.
The study aims at exploring the following questions on budgeting and this include;
- What is budgeting?
- What are the types of budgeting?
- What are the purposes of budgeting in an organization?
- What is the role of budgeting in management?
- What are the implications of budgeting in an organization?
A budget is a plan for the future operating activities, and it could be short-term or quantitative. It has been considered as a fundamental element in control and planning systems in the organiations.Budgeting, therefore, is the process which entails the preparation of budgets.
Process of Budgeting
It entails the formation of committees in charge of the preparation if the budgets and this is especially in the large organizations. The whole process of budgeting entails five steps as discussed below;
Determination of Flow of Information
In this step, an organization collects information to help in the compilation of the budget. Such a step is done in two ways that are the bottom up and top down. For instance, the heads of units may be asked to provide certain key information (Bogsnes, 2016). Also, the top level management can develop the projections and priorities of an organization and that way data can be obtained to help in the preparation of budgets.
Decision on What to Measure
While preparing budgets, it is prudent to decide on the item in the organization which an individual is to measure and this usually depends on how such an organization is organized or may be how it intends to set it up. The elements to be measured may include, the revenues and costs and the items can be classified according to the distribution and manufacturing units such as revenue and cost centers.
Collection of Historical Data
According to Bogsnes (2016), the historical information in regards to the past performance of the organization is collected, and this is done after a decision has been made on the basics of segmenting the various operations of the organization. The historical information can be obtained from the financial statements such as cash flow statement, incomes statement and statement of financial position. Additionally, the organization can collect information on sales, and this is in regards to the customers, regions and product lines. Also, a company ought to obtain information on the expenses which have already been covered such as the variable costs, direct costs, fixed costs, and indirect costs.
Preparation of Projections
The step entails the preparation of projections for the performance of the company in the future. Such a task is typically complicated, and this is especially when preparing the zero-based budgeting. However, when preparing incremental budgeting which predictions are based on the past performance, they are considered easy to make (Baiocchi & Ganuza, 2014).
Determination of the Break-Even Point
The estimation of the break-even point is considered to be the hardest task and step. It is important to understand certain key items before the preparation of the break-even point. Such may constitute, the contribution margin. In the process of preparing the break-even point, there are certain needs in an organization which must be taken into account such as the break-even by sales and break even by units.
Purpose of Budgeting
Budgeting has several roles which it plays in every organization. For example, budgeting can be used to help in the allocation of resources of the organization, and it thus prevents wastages. Another key purpose of the budget is that it is a motivating factor for the employees since the workers of an organization always towards the achievement based on that which is indicated in the plans (Baiocchi & Ganuza, 2014). It also helps in controlling of operation and profits such that the expenditure on various activities will entirely depend on the estimated budgets and there will be no expenditure beyond that which is put.
The other purpose of the budgeting is that it is a tool which is used during the evaluation and hence assessment of the performance of the organization. The actual expenditure is often compared with the budgeted expenditure, and this will help in ascertaining the level of performance for a particular fiscal year. Budgeting is also used to facilitate coordination and internal communication in organizations (Bogsnes, 2016). It is the budget through which the management of an organization communicates the critical objectives of the company to the employees and hence ensure that they all work towards such goals. Further, budgets in the organizations can be used to displays the plans of the organization and this in financial terms. The plans of action could be to make more profit or even increase the sales volume.
Types of Budgeting
There are various types of budgeting, and this is as discussed below;
In zero budgeting, all the fundamental activities of an organization are usually set at zero. It also assumes that the budget prepared by a company an item in one year should not be based on the budgeting in the future (Gonçalves, 2014). A key limitation of this type of budgeting is that expensive and time-consuming. However, it is more accurate compared to the other types of budgeting.
It is considered one of the simplest budgets and hence it easy to prepare. It usually involves the collection of information on the expenditure by a company in the other previous fiscal year. The increases and decreases are then estimated (Bogsnes, 2016). Incremental budgeting is however not accurate, and this is because a company which uses such a method of budgeting will repeat the same mistakes over the years and this may result in losses made by the company.
The hybrid budgeting method is done based on the past performance of a company. Most of the organizations across the world entirely depend on this type of budgeting. The technique also takes into account other elements such as macroeconomic forces and industry trends.
A variety of programs are typically identified in the organization. Also, the key goals of the different programs which have been identified are set, and then a budget is prepared for each of the programs (Gonçalves, 2014). The program budgeting often puts a lot of emphasis on the outputs rather than the inputs of an organization. Additionally, such a budget is most used in organizations which are non-profit making and also other fundamental departments.
Role of Budgeting in Management Accounting
Budgets are often considered to be significant tools for communication in an organization, and this entails providing details on financial and operational goals. Often, the budgets convey information to the middle and upper management, and this is typically the top management's expectations. The various priorities of the management are also communicated to the lower levels of management through the use of budgets (Kelly & Rivenbark, 2014). Additionally, budgeting plays a key role in the control and planning of a company's activities, and this forms the key roles of management in an organization. Budgeting also plays a role in performance evaluation, and this is fundamental in management accounting. The manager must be in a position to assess the performance of an organization, and this helps in identifying certain key areas which should be improved.
Behavioral Implications of Budgeting in an Organization
Everyone in an organization is often affected by the budget, and they will always tend to work hard to keep with the targets set. The reactions of the workers including the top level management often have different impacts on an organization. When the reactions are positive, such an organization will experience high performance, and this is unlike when the reactions are negative (Rubin, 2016). Another implication could be an excessive pressure mounted on the employees, and this could be as a result of budgeting. Such an implication is usually a result of tight goals set in the budgets. The budgetary slack is another implication of the budgeting process, and this is when the management overestimates costs and underestimate the revenues and then later asking for more money to finance the budget.
Similarities and Differences of the Journals
The journals chosen were Accounting, Auditing and Accountability Journal and the Journal of Applied Management Accounting Research.
Accounting, Auditing and Accountability Journal
According to the above journal, the budgeting practices are usually done in response to various changes in the environment which may lead to a financial crisis in a particular organization. The above circumstance was witnessed in the hospitality organizations in Greece, and this was in 2007-2010 (Ferry, Eckersley & Zakaria, 2015). At the time, there was a continuous financial crisis in Europe. Often budgeting in consideration to the management accounting is done to help an organization to configure itself (Demirag, 2017). Such a configuration is based on the arrangements for control, and this is done to allow an organization to adapt and hence survive in a dynamic environment.
Bracci, Humphrey, Moll & Steccolini, (2015), argues that under the situations of financial crisis in the companies, budgeting is often considered as the only way in which the control practices laid out by such an organization will adapt with such prevailing condition. The shift towards budgeting is often viewed as difficult and this because they cannot easily reflect the dynamic changes in the environment. In such situations, the budgetary control is abandoned. However, the practices and procedures in management accounting have to be complied with even with such prevailing situations.
Budgeting, therefore, plays a key role in helping an organization to adapt to certain dynamic conditions in the environment. Most of the managers, therefore, tend to adopt budgeting when conditions in the environment typically change, and it can result in adverse implications on the particular organization (Wildavsky, 2017). In management accounting, budgeting is considered to be a strategic function of the management of an organization. It is a control practice and structures, and they help in maintaining the stability of the various structures in an organization.
The hotel was built in the 1990s, and it was a single hotel by then. Later another hotel as built. Over the years, it has grown leading to the construction of more hotels. The organization was involved in the management and administration of all the hotels (Becker, Jagalla & Skærbæk, 2014). The key objectives of the organization typically revolve around the innovation and constant improvement in new markets. It also focuses on the enhancement of quality and investment in those infrastructures which are considered to be luxurious.
Often the organization prepares its budgets on a yearly basis, and this is done in October. The president of the organization in a variety of its formal meetings stipulates the projections and directions for the next year (Brown, Dillard & Hopper, 2015). At the time when the president is making such sentiments, the marketing department will have made already their projections and this in regards to the prices and occupancies per market. Once that has been done, all the views are unified, and revenue is estimated based on the views provided by the marketing department (Hyndman, Liguori, Meyer, Polzer, Rota & Seiwald, 2014). The budget forms will then be sent to all the departments in the hotel by the fiancé department, and this is done in November. The forms contain the standard costs for all the hotels. The budgets for the hotels will then be submitted to the senior management who consult and finally agree on the estimated costs and details provided in the budget.
According to Ahrens & Ferry (2015), the hotels use budgeting for cost control and planning purposes. Such a control mechanism using the budgets helps to ensure that more variances in the cots items do not occur. The management, therefore, uses a budget as a tool for control and planning, and such constitute some of their fundamental functions in an organization. The organization has often used budgeting in the events of a financial crisis (Ferry & Eckersley, 2015). For instance, in 2007, one of the hotels faced certain challenges, and this was due to the low occupancy rates. However since the senior management had made projections for the hotel, the crisis persisted. The management was therefore forced to re-adjust towards the self-sustainability instead of growth. Later in 2008, the organization prepared their budget, and this was done from a zero base.
Based on the projections which had been made by the management that the next year would be a difficult one, it was different from such a projection in the following year. The dynamics in the environment adversely impacted the budgeting of the organization, and the management admitted that the prices in the market had become sensitive resulting in depression (Oulasvirta, 2014).
Journal of Applied Management Accounting Research
In past few years, the matter of how the preparation of budgets tends to affect the organization behavior has been a significant concern for management accounting. The process of budgeting has often been associated with enhanced performance of a particular organization.
This journal focuses on the impact of budgeting in managerial performance in the Macau service sector (Hiebl, 2014). According to the journal, managerial performance cannot be as a result of the budgetary participation by the managers. However, at times, the performance of the managers varies due to the budgetary participation.
According to Otley (2015), the process of budgeting tend to vary in different organizations, and this is based on the size of such organizations. The larger organizations who allow their management to pay a key role in the preparation of budgets typically perform well compared to the others. Additionally, their workers are often motivated to work towards the objectives as set in the budgets (Anessi-Pessina, Barbera, Sicilia & Steccolini, 2016). The uncertainties in the environment tend to restrain the managers from participating in the preparation of budgets. In the event that the managers realise that they will not attain some of the budget goals, they become reluctant, however when they perceive success they hesitantly prepare the budgets (Nitzl, 2016). Based on the budgetary participation, companies can be categorized into two that is defender companies and prospector companies. The defender organizations put a lot of focus on the achievement of the targets of the budget, and this forms the basis of the bonus remuneration. The prospectors' companies, on the other hand, tend to focus on financial reporting which is frequent and use of a uniform control system. In such companies, the managers tend to have positive performance unlike those of the defender companies (Lukka & Vinnari, 2014).
Just like in the previous journal, budgeting helps an organization to overcome certain financial crisis which may arise. Use of certain intervening factors could establish the absence of a relationship between participation in the preparation of budgets and managerial performance. Such factors may help stimulate certain variables such as attitude, motivation and job-related tensions (Chong & Mahama, 2014). Apart from the intervening factors, there are also other factors which can be used to depict the relationship which exists between participation in the budget process and managerial performance. Based on the moderating factors, when higher levels of budgetary participation are used together with the less difficult task, there are high chances that the performance of the management will typically be high. One of the key moderating factors was the information asymmetry (Park & Jang, 2014).
Such a moderator means that the junior employees in an organization may have more valuable information than the top level management (Lavia López & Hiebl, 2014). Additionally, they can have a greater comprehension of the standards on which to attain the set projections by the organization. The factors of information asymmetry typically contribute to the relationship which exists between the participation in the preparation of budgets and managerial performance and this is especially in slack relationships. When the management highly participates in the preparation of budgets, the subordinates who possess a lot of information tend not to participate, and this results in a slack relationship (Hoque, 2014).
Learning Outcomes of the Journals
From the study of the journals, it is clear that budgeting enhances performance of an organization and this is especially when there are financial crisis. Such an outcome is significant to the management accountants since it will enable them to focus on the budget which provides the key goals of an organization. Another learning outcome is that the dynamics in the environment tend to affect budgeting and hence the management accountants should be vigilant while preparing the budgets (Hoque, 2014). The learning outcome is useful to the management accountants in the sense that they should take into account the environmental conditions during the preparation of budgets.
Further budgeting is used for cost control and planning purposes in the organizations and it is therefore a fundamental aspect in the organization which the management accountant should take into account. The key roles of a manager involves planning and control and thus budgets can be used as tool for planning and control by the management accountants (Ferry & Eckersley, 2015). Lastly, budgeting tend to vary with the size of the organization such that large organizations prepare a more complex budget compared to those in smaller organizations. The above learning outcome is important to the management accountants of Australia since it will enable them to prepare budgets based on the size of the organization they are employed.
In summary, it is clear that the budgeting process is significant for the success of any particular organization. It plays certain key roles such as planning and controlling of various activities in a firm. Such roles typically help the management to work towards the attainment of that which is set in the budgets. However, there are certain reasons which may prevent the management from participating in the preparation of budgets. For instance, the dynamics in the environment which tend to reduce the possibilities of attaining some of the set goals in an organization.
The uncertainty to accomplish the targets in the budgets results in lack of participation of the management in the preparation of budgets. The lack of participation will typically lead to poor performance of the organization. Usually, the Managerial performance and budgetary participation relationship fail to exist, and this is based on the research which had been conducted. However, the relationship can be built using certain factors referred to as the moderating factors. One of the fundamental moderating factors is the information asymmetry where the subordinates who tend to possess a lot of information concerning an organization are involved in the preparation of the budget. Such an involvement usually speeds up the preparation if budgets and hence high performance is attained.
Ahrens, T., & Ferry, L. (2015). Newcastle City Council and the grassroots: accountability and budgeting under austerity. Accounting, Auditing & Accountability Journal, 28(6), 909-933.
Anessi-Pessina, E., Barbera, C., Sicilia, M., & Steccolini, I. (2016). Public sector budgeting: a European review of accounting and public management journals. Accounting, Auditing & Accountability Journal, 29(3), 491-519.
Baiocchi, G., & Ganuza, E. (2014). Participatory budgeting as if emancipation mattered. Politics & Society, 42(1), 29-50.
Becker, S. D., Jagalla, T., & Skærbæk, P. (2014). The translation of accrual accounting and budgeting and the reconfiguration of public sector accountants’ identities. Critical Perspectives on Accounting, 25(4-5), 324-338.
Bogsnes, B. (2016). Implementing beyond budgeting: Unlocking the performance potential. John Wiley & Sons.
Bracci, E., Humphrey, C., Moll, J., & Steccolini, I. (2015). Public sector accounting, accountability and austerity: more than balancing the books?. Accounting, Auditing & Accountability Journal, 28(6), 878-908.
Brown, J., Dillard, J., & Hopper, T. (2015). Accounting, accountants and accountability regimes in pluralistic societies: taking multiple perspectives seriously. Accounting, Auditing & Accountability Journal, 28(5), 626-650.
Chong, K. M., & Mahama, H. (2014). The impact of interactive and diagnostic uses of budgets on team effectiveness. Management Accounting Research, 25(3), 206-222.
Demirag, I. (2017). A framework for examining accountability and value for money in the UK’s private finance initiative. In Corporate Social Responsibility, Accountability and Governance (pp. 77-92). Routledge.
Ferry, L., & Eckersley, P. (2015). Budgeting and governing for deficit reduction in the UK public sector: act three ‘accountability and audit arrangements’. Public Money & Management, 35(3), 203-210.
Ferry, L., Eckersley, P., & Zakaria, Z. (2015). Accountability and transparency in English local government: moving from ‘matching parts’ to ‘awkward couple’?. Financial Accountability & Management, 31(3), 345-361.
Gonçalves, S. (2014). The effects of participatory budgeting on municipal expenditures and infant mortality in Brazil. World Development, 53, 94-110.
Hiebl, M. R. (2014). Upper echelons theory in management accounting and control research. Journal of Management Control, 24(3), 223-240.
Hoque, Z. (2014). 20 years of studies on the balanced scorecard: trends, accomplishments, gaps and opportunities for future research. The British accounting review, 46(1), 33-59.
Hyndman, N., Liguori, M., Meyer, R. E., Polzer, T., Rota, S., & Seiwald, J. (2014). The translation and sedimentation of accounting reforms. A comparison of the UK, Austrian and Italian experiences. Critical Perspectives on Accounting, 25(4-5), 388-408.
Kelly, J. M., & Rivenbark, W. C. (2014). Performance budgeting for state and local government. Routledge.
Lavia López, O., & Hiebl, M. R. (2014). Management accounting in small and medium-sized enterprises: current knowledge and avenues for further research. Journal of Management Accounting Research, 27(1), 81-119.
Lukka, K., & Vinnari, E. (2014). Domain theory and method theory in management accounting research. Accounting, Auditing & Accountability Journal, 27(8), 1308-1338.
Nitzl, C. (2016). The use of partial least squares structural equation modelling (PLS-SEM) in management accounting research: Directions for future theory development. Journal of Accounting Literature, 37, 19-35.
Otley, D. (2015). in Management Control. Critical Perspectives in Management Control, 27.
Oulasvirta, L. (2014). The reluctance of a developed country to choose International Public Sector Accounting Standards of the IFAC. A critical case study. Critical Perspectives on Accounting, 25(3), 272-285.
Park, K., & Jang, S. (2014). Hospitality finance and managerial accounting research: Suggesting an interdisciplinary research agenda. International Journal of Contemporary Hospitality Management, 26(5), 751-777.
Rubin, I. S. (2016). The politics of public budgeting: Getting and spending, borrowing and balancing. CQ Press.
Wildavsky, A. (2017). Budgeting and governing. Routledge.