Discuss about the Managerial Accounting: Management Formulation and Implementation.
Budgeting is the process whereby the companies make an estimate of their cash flows for a future time period. Budgeting is regarded as the vital step towards because financial planning depends on it. To ensure that the organization drives in the correct direction it is essential that the budget is prepared in a manner that will provide maximum yield to the organization. The whole process of budgeting makes the purpose of decision making very easy for the management (Vanderbeck, 2013). Just like dieting is a plan of what to eat and what not budgeting is the plan of how much to spend and what to spend. Budget in simpler terms can also be called financial planning. The whole process of making a budget and implementing it is not very easy. Once it is prepared the resources are required to be allocated proportionately among all the departments. In case of shortfalls the resources are cutback from all the departments. It is a very important component of financial success (Kaplan, 2011). In short it can be commented that budget and budgetary control are easy to pronounce but implementation needs skills and time of managers. In the study below we will learn all about budgeting and budgetary control along with the challenges and how to face them.
Budgetary control is the control technique whereby the actual results of the company are compared with the budgeted. The variances which arise on these are assigned to the control action team or the original budgets are made to be revised. In order to implement the whole of the process of budgeting more properly, they are assigned to managers of functional units or responsibility centres. The main responsibility centres are revenue centres, expense centres, profit centres and investment centres (CIMA, 2016). He manager of these responsibility centres are responsible for the functions of these units. After, they are done preparing and administrating the budgetary policies of each function, all the functions are grouped together to represent the organisation (Needles & Powers, 2013). There are majorly three steps involved in budgetary control. Firstly a budget is prepared, then the actual results are obtained and lastly, the actual and budgeted performance is compared for variance analysis. The main objectives of budgetary control are planning, co-ordination and control.
The system of budgetary control has made the whole process of planning easier but it has some challenges. The whole process of making budget is based on planning and forecasting. The step which involves forecasting is very difficult because if the budgets are prepared based on these forecasts, the whole budget may become a fail (Otley, 2001). There are a lot of uncertainties in a business, also circumstances keep changing, and this may result in shortfall of resources which will later effect the production of the business. In order to implement the budgetary control it is important that co-operation exists among with the willingness to accept, in case people lack the will to co-operate it may make the execution difficult. This will result in inefficient performance (Otley, 2001). We should not forget that it is just a tool; it needs the management involvement for proper execution. Lack of personal involvement of management will lead to the whole process failure. The process of budgetary control has most of the tie proven to be cumbersome and time consuming. It requires using a lot of labour.
Challenges in Budgetary control
To overcome the limitations of budgetary control there are modern budgeting tools which help make the whole process of budgeting a lot easier. The tools and techniques are devised so that flexibility is introduced and the procedure is ironed out. To bring some flexibility in the whole budgeting process the concept of flexible budget has been introduces (Shim & Siegel, 2009). Therefore, the process and concept of budget and budgetary control has undergone immense changes with the due passage of time and this is done to ensure a better performance and effectiveness. This helps the organisations to prepare budget at various levels of production. As discussed the budgetary process is cumbersome and time consuming, in order to reduce this stress activity based budgeting has been bought into existence whereby the managers which perform certain functions are responsible to make budget for their own process, all these budgets are later consolidated in order to make them one, as a whole for the organisation (Robinson & Last, 2009). Also, the variance analysis from the budgeting process can be made more effective with implementation of Kaizen budgeting which provides better performance with reduced costs. All these measures help to provide the entity improved performance with reduced cost and effort.
The process of budgetary control is directly related to performance management and intercreative mechanism. Performance management refers to evaluation of the activities and processes of the enterprise in order to check their performance and efficiency. Intercreative mechanism refers to use to best use of all processes in order to make the process of budgetary process more useful (Robinson & Last, 2009). The whole process of making a budget and variance analysis provides a basis for comparison. The process of variance analysis provides the management with the basis of performance management. It helps the company to evaluate the performance to each activity by analysing the variance. Also, when the responsibilities of preparation of budget are given to the departments separately and when it has to be consolidated, and then the departments need to use their intercreative skills. Once the budget is prepared it becomes the responsibility of all the departments to implement it.
The traditional budgeting system is the one where the money available is allocated for a set time period. The available resources are decided to be spending according to a set of plans and procedures. The major steps involved in traditional budgeting system are analyzing spending, development of a plan; create expenditure amount and fine tune spending. However the need of traditional budgeting is day by decreasing due to development of other modern techniques (Ryan, 2007). According to the experts the time covered by these budgets are incorrect, they depend on incorrect measures and they are either too simple or too complex. The major drawbacks of the traditional budgeting system are that more rules by the past decisions of the company which are the part of long term planning process.
Modern Budgeting Tools
Incremental budgeting is the budgeting tool which helps the organisation prepare budget based on the increased figures from the last periods data. It is one of the traditional approaches where the management does not want to invest in a lot of labour into making of budget or also in cases where there is no requirement to re evaluate the whole of the business performance. It happens in the industries where there is no huge competition and the profits are expected to be more or less the same (Merchant, 2012). The main advantages of this type of budgeting are that it is simple, provides financial and operational stability.
The management budget is the type of budget which provides data for the use of the management of the company to take decisions other than the financing decision. The normal budget lays down a financial plan for the company whereas the manage budget helps the company to take decisions related to other matters of the company (Lanen et. al, 2008). The area which requires attention of the management is taken care of. The main advantages of this type of budget is that the management the overview of the performance of the company for other than the core business.
These were the traditional methods of budgeting. There are few modern budgeting concepts which are simpler and provide more accurate results. These budgets are more advanced and are more of activity oriented (Nordmeyer, 2015). These budgeting tools cover more comprehensive details and provide better results fast per the requirements. It is based on future and helps to Supports Company’s strategy. It provides the space for utility innovation. It provides a systematic support for decision making (Lanen et. al, 2008). It mainly focuses o the future goals without having to explain the reason of the transactions happened in the past. The modern techniques of budgeting provide plans for the company in the volatile environments.
Zero based budgeting is the kind of budgeting system which the budgeting for every function is to be started from a scratch or as we say zero base. ZBB assists in the implementation of the top level strategic goals which can be applied in the budgeting system by fixing them to the functional area within the organisation, where the costs are firstly grouped and then they are calculated as per the previous results along with the adjustments of the current expectations (CIMA, 2016). The zero based budgeting is constitutes of few stages description of each organisational activity, evaluation of decisions and ranking according to priority and allocation based on priority (Horngren, 2011). It is a detailed budgeting tools and it is done once in several years with only few functional areas which are reviewed the mangers.
Traditional Budgeting system
As the name suggests, it is the budgeting procedure whereby the budget is prepared for an activity. The budget is prepared for the expenses incurred on a single activity which is used in various functions of the organisation. A view at the cost structure of an organisation through the process which are actually being acted upon makes the mangers more effectively analyze the profit earning capacity of the various products and services of the company (Kirche & Srivastava, 2005). The managers can compare these figures in order to evaluate the cost efficiencies of these activities which are performed in various functions.
The planning is programming budgeting system is the one which lays down a strong relationship between planning and making a budget. This concept of budget originates from government policy of making a national budget and its implementation which becomes a tool of national development (Barnat, 2014). It is the combination of the available allocated resources and the implementation of policies. This system requires the mangers to make a policy, calculate its output, determines the expected revenue to be generated and costs to be incurred in the long run by this policy (Horngren, 2011). This is a multi yes programme which helps to determine the structure of a policy. It is a detailed relationship between programming, planning and budgeting.
The concept of flexible budgeting is an extension to the traditional form of budgeting. A flexible budget is budget which adjusts and changes according to the volume and capacity. A flexible budget is more sophisticated and more useful than a static one, which tends to be the same at all level of outputs (Drury, 2011). For example, if a budget is prepared for materials of 1000 units at the rate of $1 per unit, and the actual consumption shall be 900 units then the flexible budget shall show the material to be 900 units at the rate of $1. It is a flexible tool and helps the company to make quick and constant decisions for important manners (Nordmeyer, 2015).
As we already know that budgeting is required to forecast income and expenditure, it is a tool of decision making and also a means of business performance. All these are internally used by organisations to evaluate their performance and efficiency. But all these reports which are used internally are also used externally (Merchant, 2012). The budget reports are used by the stakeholders and bankers in order to evaluate the future performance of the organisation. These reports are sometimes the basis of credibility on which the banks approve loans. The banks need to check before sanctioning of loan if the creditor is capable to pay it back (Christensen, 2011). The company needs to check if they will be having sufficient funds at the time when instalment falls due.
Beyond budgeting refers to the management model which is more adaptive and empowered. It refers to the policy where instead of allocation of budgetary control, more of adaptive processes are implemented. It is a planning and decision making tool which is more of a modern technique (Barnat, 2014). In the today’s hostile environment where it is very important to adapt oneself according to change, one just cannot stick to their old budget. They need to be competitive and always ready for what can come anytime. In order for the organisations to adapt to these hostile economic structure the organisations to implement the concept of beyond budgeting. This concept of beyond budgeting can be achieved by setting base goals with respect to external benchmarks, rewards should be paid not as per fixed contracts but as per the efficiency, planning should be a continuous process and not annual, resources should not be allocated from before, dynamically adopt to cross company changes and controls should be based on effective governance and not on fixed reviews which are made annually depending on the budget (CIMA, 2016).
Balanced scorecard is a planning and management system which is widely used in various industries, organisations in order to regulate the business activities with its vision and mission, also it helps to improve the communications within and outside the organisation. It also assists to monitors the organisation performance against strategic goals. It was originated by Dr. Robert Kaplan and David Norton. Though the balanced scorecard is a multi-dimensional performance measure it has a few points which are argumentative. The balanced scorecard method was first developed keeping in mind the manufacturing firms. So, there are a few thoughts which say that balanced scorecard is not an efficient tool for other sectors. There are a few positive effects which can be achieved using balanced scorecard method such as better strategy making, awareness, communications, etc. But the main motive behind implementation of balanced scorecard is increased performance which in most of the cases has not been achieved. Few say that an organisation cannot simply survive on the balanced scorecard method. Whereas, the other say that the balanced scorecard measure takes time for formulation and implementation. All in all, balanced scorecard method has been increasingly adopted all over the world; it fits better to some and not for others.
Therefore we see that budgeting is a relevant component of financial planning and is not very difficult to implement. The essential step or the initial one begins with budgeting. It provides solidity to the functioning of the business. Though there are few limitations on this, but they can still be used. As it is well known that there are certain constraints that come in the way but having a strong procedure leads to effectiveness. Budgetary control is not only for the hard times. This can be implemented all the times, whether the company has sufficient funds or not (Van, 2000). Also they can be implemented with businesses of any goals, size, industry, etc. It provides a long term and short term projection for the future cash flows. Moreover, budgetary control provides the organization with variety of options that can be used if there is an alteration in the main plan. This helps us to get a basic picture of the financial picture of the company which is very relevant. It helps the management to prepare for the storms which are about the come (Drury, 2011). There is a lot that can be achieved with the help of budgetary control. Organizations that have shown a strong system and success are entirely by dint of budgetary control. Budgetary control is a strong tool in the hand of the management that helps to attain a formidable result.
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