Investigate the sequence of budgetary process and critically examine issues of relevance in behavioural aspects of budgeting process.
The sequence of the budgetary process
Budgets are usually the integral parts of management accounting or management control built to uphold the efficient and effective utilization of resources and give support for other crucial functions of an organization. The degree to which any budget is successful is extremely dependent on its embrace and the attitude of the organization towards it. Therefore this paper is based on the critical roles of the behavioral aspects of budgeting and how comprehending its usefulness results in a desirable budgeting process. It presents the scope and the nature of budgeting and gives critical analysis regarding budgeting in management accounting. Similarly, the paper shows the importance of budget to organizations and its impact on workers and finally its behavioral aspects.
A budget sequence alludes to the procedure by which governments make and endorse a financial plan, which is as per the following: The Financial Service Department gets ready worksheets to help the office head in the planning of office budget estimates. The Administrator assembles a conference of managers, and they show and talk about plans for the next year's projected level of activity. The directors can work with the Financial Services, or work alone to set up a budget estimates for the divisions coming year. The finished spending plans are displayed by the supervisors to their Executive Officers for audit and endorsement. Avocation of the spending solicitation might be required in composing (Schick 2015). Much of the time, the chief administrators chats with their regulatory officers about spending necessities. Changes by the spending accommodation might be required because of this stage all the while. Budgeting is the setting of expenditure levels for every one of an association's capacities. It is the estimation and portion of accessible capital used to accomplish the assigned projects of a firm.
In Management Accounting, for managers to make informed or rational decisions and coordinate their decisions and activities of the various organizational divisions, they need to establish a plan for profitability. Typically they would create annual budgets, which once assented or approved becomes the Annual Budget. This will ultimately help management gain consensus how the organizational resources should be allocated towards the realization of the companies desirable and goals for that particular year. It will also act as a goal setting plan that provides the metric for the assessment and evaluation of the company performance (Bryer 2007). Managers will also use budgets as a framework for the approval of the company process hand projects at every level. Now, to be very effective, the budget process should contain several fundamental elements for instance; Effective Communication, Clearly Defined Goals, Management Involvement, Coordination, and Actual Performance Reporting.
It is imperative for the management team to embrace effective communication to help them translate or coordinate goals into a working budget (Denison 2009). They have to create a timetable to set clear their expectations and timeframes. An organization convening to communicate such processes is aiming at ensuring that everyone receives the same and relevant information. After that, a budget package is disseminated to management with the relevant message to help establish the budgets.
Appropriate Budgeting methods for the organizations
At the very start of the processes, the financial goals or objectives of the organization need to be made clear. Generally, a typical goal would focus on net income growth, revenue growth, and departmental growth at a varied growth levels. Ideally, depending on the organization, each department has varied growth goals. Organizations with research and development activities, for instance, usually devolved a larger amount to R&D investments (Smith 2007). Anyway, the process of establishing desirable goals starts with the analysis of the previous year’s performance and insights of the relationships existing in revenue.
For the budgeting process to be successful, management involvement is very critical both in the planning process, monitoring and management of the actual performance. Despite the fact that different departments in an organization maybe in a competition for the same resources, the aim and the purpose of the budgeting exercise are to achieve a uniform consensus from everyone. Essentially, the ultimate desire of this process is to bring everyone on board so that they have a full comprehension of where their compromises and interests all interact or intersect with company’s goals.
Typically, for the process to yield, someone must be in charge and drive it towards its desired end. This is the duty of the managers and the chief executives or otherwise chief financial officers of the company. They are obliged to prepare information for goal setting, create worksheets, consolidate the information and avail themselves to facilitate the process up to its desired end.
The success of the process is usually determined through the comparison of the actual performance with the budget. It is very important for the company for the management to make such comparisons so that they can ascertain the areas that were underperformed from the budget for future adjustments. Many organizations allow expenditures that were asserted in the budget process but demands an extensive explanation if they were not.
Incremental budgeting- this is the type of budgeting where the current revenue and sales are quantified, and the figures are taken into account by the company. Meaning that the company gathers data or information regarding its current year sales, after which the emphasis is made on the trends that may help in the coming business year (Robinson et al., 2013). Basing on these trends, the percentage change in sales, cost and the profit margin are determined by the company. The change in percentage is determined through the use of current values and then summed up to draft a budget for the following financial year.
Zero-based budgeting- this is the method where the old values are not used. The budget report is made through the identification of all the business activities. After which the necessary resources are assigned to the activities to establish the budget. The values of these activities are approximated to prepare the budget out of it. The major disadvantage of using this particular method is that a lot of error or unrealistic values can be made since it relies on approximations.
Top-down budgeting- here, the cost factors at the summit are determined in the budget at the very beginning. Then the lower cost factors are envisaged by the largest level activity cost. In this context, top and the middle-level management work harmoniously, therefore, the budget is called the top down budgeting.
Examining behavioral features of the budgeting process
Ideally, the level of participation should be equal with the level of job technicality. Various studies had shown that participation was a success when job difficulty and participation were both high, and the vice versa is true. Therefore, when the job is less technical, the proposed budget may be readily embraced, however, this is very unlikely possible in a difficult or in an environment full of uncertainties. Despite the fact that participation may lead to success or desirable behavioral outcomes, the cost factor may not coincide the benefits accrued (Smith 2007). This is so because sometimes managers may seize that ground to discriminate estimates or inflate the significance of their division in competing for resources. Otherwise, it is wise for a company to create a cost-benefit analysis and chase the paths of explicitly communicating it while sustaining that mode of participation.
The people participating in the budgetary process must have the relevant information about its purpose and benefits in the entire sense, and avoid the negative perceptions and minimize the dysfunctional behavior that always arises in the process (Wong-On-Wing 2010). Explicit and precise explanations of the long-term organizational obligations within the operating parameters of the budget must be addressed to the budgeteers. According to some scholars like Hopwood and Horngren, the multiple objectives of an organization like for example, profitability, customer service, growth, product quality, employee welfare and contribution to the community should be made known to the workers. Performance feedback should be availed periodically for the workers to encourage even higher performance.
There has been a point of contestation and varied views regarding the relationship that exists between the performance and commitment of workers in the budgetary process. Some views challenge the notion that commitment is dependent on participation, saying that it can only be so in an environment full of mistrust, where the top management may attempt to engender participation even if it is viewed suspiciously by the subordinates (Malmi and Brown 2008). While other views show that, participative budgeting doses not necessary lead to the maximum utilization of resources. In contrary to these views, scholars like Becker and Green agree to the view that, participation upholds the interaction of the workers and by wider aspect the group cohesiveness. These factors they posit if carefully interlinked with the incentives, can results in either or lower performance based on the nature of the environment and the prevailing conditions. Senior managers from either the private or the public sectors or organizations can provide aid through budgetary control information as equipment for managers to apply constructively, not just as a method of apportioning blame and penalizing those who fail to achieve the target. Otherwise, things like the validity of the national budget as a tool for planning, control and decision making has various concerns in the public sector, since, the politicians often use it to gain political mileage.
Management accounting provides understanding into the company's cost structure and revenue processes. The cost structure that encompasses, cooperate manufacturing costs and managing expenses, like the workers' salaries, bills, and utilities. Therefore, budgetary control helps the managers ensure that the expenditures limits are adequate. This control is very vital since overspending has unfavorable effects on the company's profits. Also, they get to monitor and spending levels in operating activities (activity-based costing).
By discussion above it is worthwhile to conclude that companies must engage in budgeting and budget processes to control cost. Therefore, budgets and variance analysis can be utilized by the firms because on the event that these techniques are timely utilized, the management can assess the level of their performances and ascertain whether it is well or not. And of course, by formulating the alternative strategies on time, the performance can improve for the preceding periods.
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