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Importance of Budgeting in an Organization

University: University of Wales

  • Unit No: 10
  • Level: Post Graduate/University
  • Pages: 7 / Words 1817
  • Paper Type: Assignment
  • Course Code: LCBB5002
  • Downloads: 762
Question :

This assessment will cover the following questions:

  • Examine the informational requirements of management pertaining to decisions including revenues, cost, and other criteria.
  • What are the methods and techniques used to appropriate cost and management accounting?
  • Critically analyze the significance of preparing budgets and balanced scorecards of the organization.
Answer :

INTRODUCTION

Managerial accounting refers to the process of analyzing business costs and operations for preparing internal financial records and reports and for accounting to help managers make decisions for achieving the goals and objectives of the business(Otley, 2016). In other terms, it refers to the process of using financial and costing data and then making the effective translation of data into useful and meaningful information for executives and management of the business. The report will involve a critical analysis of needs and the process of preparing the budgets. This will provide a detailed analysis of modern budgeting processes like activity-based budgeting and balanced scorecards.

MAIN BODY

Management accounting has been used for centuries to calculate the costs of products. Accounting techniques were even used by households and businesses like preparation of cash budgets or activity based. These budgeting techniques helped them to spend as their available and framed budgets. This helped businesses and households in preventing going out of cash due to overspending. As time has changed management accounting techniques have evolved and enhanced as per the needs of businesses. To date, various management accounting theories and concepts have been developed by various authors.

Managers of the enterprise use management accounting information to properly inform themselves before any decision is taken about the matter within the organization. This helps management in managing and performing the control functions (Quattrone, 2016). According to “The Institute of Management Accounting” it is a profession involving partnership in management decision-making, devising planning and performance management systems, and providing expertise in financial reporting & controls for assisting the management in the formulation and the implementation of organizational strategy.

Management accountants look at events happening in and around the business considering the needs of the business. These data and information are used for emerging estimates. Cost accounting refers to the process of translating these data and estimates into knowledge that will be used ultimately for guiding the decision-making process. Consistent with the role in modern corporations, managerial accounts have dual reporting responsibilities. As a strategic partner & as a provider of decisions based on operational and financial information. Managerial accountants have the responsibility of managing the business teams and at the same time reporting relationships & responsibilities entity's finance organization (Bromwich and Scapens, 2016). Management accountants provide for planning, forecasting, performing variance analysis, reviewing and monitoring costs inherent in the business, and having dual accountability for both finance and business teams.

Money and time are scarce resources for all organisations and individuals therefore the effective and efficient use of resources requires proper planning. Planning and control together are required to enhance the business. Budgets are the tools used by managers for planning and controlling use of the limited resources. Budget refers to a plan showing the objectives of the company and how management will be acquiring and using these resources to attain the objectives.

Corporations, not-for-profit organizations, and government units use different types of accounting budgets. The responsibility budget is designed to judge the performance of individual segments or managers. Capital budgets are prepared for evaluating long-term capital projects like additions of equipment or relocation of plants. Master budgets of the company consist of planned operating and financial budgets. Operating budgets help in planning the future earning and it results in projected income statements. Financial budgets help management to plan for financing of the assets and it results in projected statements of financial position.

The budgeting process involves planning for future profitability as earning reasonable returns over resources is the primary objective of the company. Companies should devise methods for dealing with the uncertainty of the future. Most companies devise blueprints for actions that will be taken given foreseeable events that might occur.

A budget shows the operating plan of the management for coming periods. It formalizes plans of management in quantitative terms. It forces every level of management to think ahead, in anticipating results and taking actions to improve the poor results. It also motivates the individuals to strive and achieve the stated goals. Corporations could use the actual budgets for comparison and evaluating individual performance. For example, standard variable costs for producing personal computers at an enterprise are budget figures. The figure is then compared with actual costs for producing customers for evaluating the performance of production managers of computers and employees engaged in the production activities of business (Weetman, 2019).

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There are various other benefits resulting from the preparation & use of budgets:

  • Activities of the business could be better coordinated.
  • Managers of the business are aware of the plan and direction on which to proceed.
  • It helps in making employees cost conscious which helps in developing the habit of conserving resources.
  • The company reviews organization plans and modifies them whenever essential.
  • Budgets help in fostering vision that otherwise would not have developed.

Planning processes result in formal budgets providing opportunities for various levels of management to think through and committing plans.

Various kinds of budgets are prepared by organizations.

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Activity Based Budgeting

Activity-based budgeting refers to a process for the creation of blueprints or financial plans in advance that will act as a yardstick to address individual activities. These activities are to be carried out by an organization with the given resources using the research tools & allocating resources as per the priorities in budgets (Mahal and Hossain, 2015). The allocation is made as per the expected costs that are required for spending.

Components and process of activity-based budgeting:

  • It begins with identifying the activities that revolve around resource consumption. Activities are classified mainly as main and secondary activities denoting the degree of importance and involvement of activity to the organization based on their priority. Main activities refer to activities that are related directly to objectives and necessary.

  • Secondary activities refer to activities creating added value for customers and changing their preferences in favor of organizations that involve significant resources.

  • After defining activities, the next step is to identify the method of distributing resources and costs accordingly between activities that are done by inducers. These are factors to define consumption levels among the different activities.

  • There are mainly three inducers influencing the decisions time representing the duration for processes, resources required for each activity and the last is several times activities are repeated after gathering all facts for calculating the appropriate costs.

Advantages:

  • Budgeting takes focus on forward activities instead of looking toward the previous activities which is a common feature under traditional budgeting. It emphasizes the steps to be undertaken and the areas of improvement instead of reviewing things that were done earlier and allocating costs accordingly.
  • Budgets are sourced based on the resources and activities allowing better insights into inefficiencies in the process and sources of imbalance. This helps managers in finding areas in which improvements can be made to make the jobs more efficient (Rodrigues, 2016).
  • In a dynamic environment, this budget has a practical approach and makes it easier for managers and employees to communicate and execute activities in time time-bound way. This also evaluates performance by fixing the accountabilities for specific activities

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Balance Score Cards

A balanced scorecard refers to performance results and targets showing the performance of the organization in meeting the objectives of stakeholders. This is a management tool recognizing the organizational responsibilities of different stakeholder groups like suppliers, employees, customers, community, business partners, and shareholders. Different stakeholders have different needs and desires which are required to be balanced by the organisation. The concept of balanced scorecards is to measure the performance of the organization in different activities.

Balance scores cards used and developed in most companies. It is used primarily at the top management levels to support the development of organizational strategies (Tan, Zhang, and Khodaverdi, 2017).

This is approach seeks to provide comprehensive and balanced frameworks for judging the performance of organizations from different perspectives. It also helps management in assisting and controlling organizations in a unique and modern way.

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Balance scorecards have four perspectives of analysis.

  • Financial perspective – This perspective indicates whether the operations and strategy of the company add value for shareholders.
  • Customer perspective – It involves seeing business from the eyes of consumers. It involves identifying the extent to which the expectations of customers are met by the company.
  • Business & production process perspectives – The points attention on the performance of the major internal processes driving the organization.

Learning & growth perspectives

This perspective considers the potential future performance of the organization directing the attention based on future success infrastructure and people of the organisation.

Advantages:

  • BSC facilitates understanding and communication of business strategies and goals at every organizational level.
  • It brings the vision and strategy of the organization to the focus of management preventing deviations (Ibrahim, Yulianti, and Christian, 2018).
  • It integrates non-financial and financial goals & performance measures in a single system that is not considered by traditional controlling methods.

CONCLUSION

The study helps in concluding that budgets are very important for business enterprises. Budgets are been prepared by organizations to have a proper and planned structure to be followed by organizations. The budget helps in preventing unnecessary expenditures of the company and allocates resources over productive activities.

Related Sample: Importance of Accounting in the Organisation

REFERENCES

  • Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research.31.pp.45-62.
  • Quattrone, P., 2016. Management accounting goes digital: Will the move make it wiser? Management Accounting Research.31.pp.118-122.
  • Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years on. Management Accounting Research.31. pp.1-9.
  • Weetman, P., 2019. Financial and management accounting. Pearson UK.
  • Mahal, I. and Hossain, M.A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting.6(4). pp.66-74.
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