Essay: Budgeting System In Aramex - An Analysis" (70 Characters)

Perform planning and controlling activities within the context of master budgets, flexible budgets, standard costs, variance analysis and performance reporting.

Apply the ethical responsibilities of a management accountant to all aspects of decision making.

Evaluate performance in decentralized organizations utilizing responsibility accounting and  balanced scorecard.

The research paper presented here discusses and analyzes the budgeting system of company operating in United Arab Emirates. Analysis of budgeting system in Aramex have been demonstrated which is the leading global provider of transportation solutions and comprehensive logistics (Aramex.com, 2018). The budget is an important instrument for planning, controlling and executing that helps in creation of guidelines of managerial and operational decision making by converting strategic objectives into operational goals. It also intends to reveal the budgeting significance to organization, identification of budgetary problems and suggesting budgetary solutions. The method of scientific literature analysis, case analysis and comparison of case analysis with analysis generated from literature review contributes to the objective of writing this research paper. For this purpose, several articles depicting budgeting concepts, its importance, issues and suggested solutions have been analyzed. Furthermore, the case analysis demonstrates the proposed budgetary techniques and approach for the selected company.  

Literature addresses the process of budgeting and identification of more efficient process and practices, investigation should be done in a more ample manner. Budgeting system is an effort on part of organization to quantify the utilization and intake of resources concerning two functions of management that is controlling and planning. The corner stone of control process of management is budgeting that helps in planning and targeting of financial values making the progress transformed into strategic ideas and easily measurable. Nevertheless, organization using traditional budgets fails to meet the demand of competitive environment and they are criticized on ground of increasing budget games and impeding efficient allocation of resources. Such budgeting system is criticized because of its costly and time consuming character along with its lack of ability to adapt to changing environment of organization in which it operates.

The predominant theme that has been identified in the literature is that the budgeting and planning process used in organizations are failing to deliver the required results. The alternative budgetary methods have been considered in the literature by accounting for criticism and limitations of traditional budgeting. With the modern business environment, the traditional concept of budgeting has lost its relevance because the needs of managers are no longer satisfied by it. The shortcomings of traditional budget is addressed by proposing two distinct approaches and such budgeting approach comprised of better budgeting and beyond budgeting approach (Kwa et al., 2015). Under the approach of better budgeting, the budgeting process is presumed to be improved by focusing on problems associated with budgeting planning. Approach of beyond budget on other hand concentrates on the problems of performance evaluation relating to budgeting by making radical changes to budgeting (Butler & Ghosh, 2015). It has been ascertained that among many companies, the most common budgeting practices is traditional budgeting that is understood as annual fixed budgets. The shortcomings of traditional budgeting practices are addressed by development of new approaches of management control (Burns, 2015). Such methods involve rolling budgets, activity based costing and forecasting. Scientific literature demonstrates different types of budgeting namely fixed, zero based, flexible, continuous and ABC. However, it is indicated by empirical research that organizations feel increasingly disappointed with traditional budgeting and requires changes in this particular field.

Limitations of Traditional Budgeting

Goal establishment by management is entailed in the basic concept of budgetary control and budgeting and this will guide in planning activities and quantifying in financial terms. Organization makes use of policy or regulatory framework for exercising budgetary control within the organization.

The significance and nature of budgets that are significant to organizations comes with suggestions that most of the problems associated with the budgets can be avoided through an integrated approach. Such integrated approach combines multiple types of budget and eliminating the weakness and strength by using strengths. In many organizations, there is no alignment between the budget objectives and strategies as they are involved in making operating and annual budgets. Weakness of budgets should be precluded by combing several budgets such as operating, annual, flexible and strategic budgets (Nicovich, 2015). Therefore, budget is required to include both strategic and annual budget.

Nonetheless, a mixed picture is presented by the literature regarding usage of alternative budgeting techniques. It has been found that a wide range of budgeting tools are used by organizations while smaller companies make least use of budgeting tools. Since every organization for their financial planning has their unique requirement makes budgeting stand at cross roads. Creating selection between alternative and traditional budgeting system is not a simple choice and direct and indirect effects are produced by each budgeting model because each model generates a non intuitive outcomes and complex interactions (Ansari et al., 2017). The findings generated from several studies seem contradictory and there exist difference in system of budgeting due to organizational cultures, inevitable influences and specific business environments. Studies from literature has examined that companies prefer modifying the budgeting method and adapting to the needs of managerial requirements rather than moving away from traditional budgets. The evolution of budgets has received contribution from each alternative budget systems. Moreover, the alternative methods of budgeting do not offer standardized solution for the problems of budgeting in every organization (Seaopenresearch.eu, 2018). Each organization is required to find out their combination of tools of management so that they are able customize their internal system of budgeting while considering structure, culture, information technology infrastructure, history and other internal requirements (Lu & De Bock, 2015).

It is suggested by literature that the most suitable method of budgeting for service companies in general is activity based costing. The world class logistics integrators are the good example using approach of Activity based costing that helps in analysis of cost of controlling process, delivery routes, pricing of services and customer profitability studies. Service orientation of ABC becomes more obvious when it is extended to include the activities of logistics, sales, marketing, corporate staff and purchasing (Hansen, 2017). The managerial issues faced by service companies are exactly same as that of manufacturing companies. Method of ABC is required to create link between cost of resources they supply to the revenues earned by servicing customers and selling individual products using such resources. This is so because once supply of resources has been committed, the operating expenses are fixed and therefore, service organizations require more insight into costing compared to manufacturing organizations. Understanding the cost of business process, customer, products and cost of activities are useful to service companies and such cost information is demanded due to different classes of managerial decisions (Bhimani et al., 2017). Such decisions are classified into budgeting the supply of resources to organization, managing services, customers and products and configuring of delivery chain for customer service.

Alternative Budgeting Approaches

Budgeting in many firms is considered as a game to play and beat unfortunately. Any positive variances in the budgets are set to be discouraged by performance systems and rather than concentrating on overall performance of firms, it accounts for functional performance. Budgets prepared by logistics organization are not any exception to such inefficiencies. It is constantly reminded by logistics managers that the costs contained in the budget should be minimized whilst increasing the level of services provided. Accomplishment of increasing service level and reducing costs are done up to some point of time after which there might be failure of logistics system resulting from successive attempts to achieve these outcomes. Accomplishment of such goals within the budget is not linked with the corporate objectives or goals. Hence, there is requirement of control and planning system that would facilitate process management requirement in improving quality. Budgets serve as a mean of coordinating and achieving plans and action of organization when they are effectively utilized within the framework of effective and predetermined control (Hofmann & Bosshard, 2017).

Findings generated using some information extracted from other research work indicates that budgetary control is considered to be of highly importance in making managerial decisions. The decision making of organization in regard to performance indicators is also influenced by budgetary control system. However, implication of budgetary control has been criticized by conclusion of some other research work or article analyzed.

The performance and productivity of warehousing, transportation and inventories are measured in four separate stages.  Budgetary variances in transportation and service are done by comparing analysis of actual cost versus budgeted cost. This would further assist in highlighting the reasons associated with budgetary variances.  For warehouse activities, there is introduction of activity budgets and physical measures. Introduction of phased activity budgets is possible with the identification of data on physical units such as warehouse labor, warehouse labor hours and non labor costs. Evaluation of tradeoffs across warehouse activities is done by incorporating the use of measures of budgeted performance. Different stages in the performance measures of different activities are done using a formal budgeting system across logistics (Noreen et al., 2014).

The analysis of budgeting system has been done for Aramex that is the leading global provider of transportation solutions and comprehensive logistics. The detailed budget and forecasted calculations form the basis of impairment computation of organization. Such budgetary calculations are done for over a period of five years and the transaction volume are based on individual cash generating unit budgeted  performance (Aramex.com, 2018). The evidences for logistic organization to implement adaptive control and flexible budget in their budgetary process are gathered from multiple sources.  Data collection regarding the appropriate use of budgeting system has been strengthened using different sources. This research paper has accounted for secondary data where conclusion and findings from case study and research work has been found to be convincing and accurate.

Comparison of Budgeting Approaches

One of the useful and common methods of logistic management control that is used by Logistics Company is flexible budget which varies which change in level of activity. Under such budgeting system, the components of variable and fixed costs are identified separately and the actual operating level is computed using planned level of expenditure. The budget prepared are compared with actual expenditures and the analysis of resulting variance or differences is done for determining the differences between actual and planned performances whether it was due to inefficiencies or efficiency of activities, changes in product mix and differences in cost or price (Lukinskiy & Dobromirov, 2016). In addition to this, organization are provided with the most effective method of controlling by the standard that is used a part of flexible budgeting system. Determination of standard costs based on historical or predetermined costs where the analysis of work and operations are done for determining reasonable and efficient operating rates for a given tasks (Epure, 2016). It is difficult to determine standard for distribution activities because of casual and complex relationship of such activities.

It has been suggested by some authors that responding to change by projecting the possible future system should be the focus of logistic control. An organization such as Aramex operating in logistic and service delivery sector can accomplish this to some extent through flexible budgeting and separately projecting variable and fixed costs (Nilsson et al., 2017). Nevertheless, in some scenario, flexible budget might respond inadequately. It should be the focus of organization to implement the adaptive control that enables management to make comparison with the planned future. The reason for adapting adaptive control is attributable to the fact that it takes into account possible future considerations rather than assuming continuation of past that helps in guiding decisions and planning to responses (Ahmadian et al., 2015).  In addition to this, organization can also implement budgeting practices such as zero based budgeting and activity based budget.

This particular section demonstrates the comparison of analysis of literature review and the findings and proposed analysis of given case study. Literature review analysis by reviewing articles and research work has generated different results. Some studies has evident that alternative methods of budgeting is viable because it helps in generating solutions to common problems that are identified in the traditional or annual fixed budgeting system. Moreover, company takes little efforts in moving away from traditional budgets to advance or alternative budgetary methods. Implementation of alternative budgetary methods on other hand does not provide with standardized solutions to budgetary problems faced by organization. Many advanced companies relies on adoption of alternative budgets system to deal with the shortcomings annual fixed budgets (Houe & Murphy, 2017).   

Activity-Based Costing as the Best Budgeting Approach for Service Companies

The proposed approach identified in the case analysis provides considerable information about flexible budget and its importance in logistics management control. It has been found that the most effective part of management control is setting standards that form a part of flexible budgeting system. Adaptive control is another approach that should be implemented by Logistics Company which forms a focus of locus control. When controlling logistics activities, the common problem that has been cited is information availability. Logistical controllership is faced with the challenge concerning requirement of data that results in consistent measurement and performance information (Fry & Fiedler, 2014).

Business in the growing competition due to continuing global recession has pressurized organization to implement simple and incremental method of cost cutting. It has been examined that organizations would be able to make fundamental choice about deployment of resources in the business objective pursuits by using a holistic approach of zero based budgeting. Logistics and transportation companies would be able to achieve sustainable and meaningful cost reduction by pursuing this particular approach to budgeting (Bühler et al., 2016). In wide range of business circumstances, the approach is regarded as pragmatic, particle and applicable.

Therefore, it can be inferred from the comparison of case analysis and analysis presented by literature review that former takes into account specific budgeting practices that are suitable to the logistics and transportation organization and former provides with a mixed view regarding traditional and alternative budgetary practices (Kim et al., 2017).

Conclusion:

The research paper contributes to literature and managerial accounting knowledge and literature analysis is devoted to budgeting and thereby providing theoretical significance. Some specific budgeting problems due to traditional budgeting methods have been pointed out by surveys, theoretical researches and case studies. Contradictory findings are generated from budgeting study and the differences in budgeting system and its significance is due to inherent factors such as culture of organization and inevitable influences. A positive relationship was found between decision making, performance management and budgetary control, organization should uphold the appropriate system of budgetary control. Therefore, organization should not abandon the traditional budgeting system altogether and for this purpose, they should implement the appropriate budgeting methods. For planning the financial of organizations, every organization needs to take into account their unique requirements. One of the common aspects of logistics management is the control process and logistic activities are difficult to control. The differentiation between logistics orientation and other functions of organization is the reason attributable to such problem. Therefore, organization should design own combination of management tools using budgeting techniques.

Budgetary Control in Logistics Organizations

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