Advantages of Budgeting
Budgeting has become a household name, where everyone wants to keep a check on their spending habits and expenses. Budgeting is, in simple words, means planning of the finances, regarding what amount to spend and what amount to save and also how the money should be spent. Budgeting helps in the management of finances. With budgeting one forms a habit of savings and thoughtful spending. Without the presence of a budget, one is not able to identify and locate the area of greater spending and even there would not be proper savings. Preparation of a budget helps people in avoiding unnecessary spending (Baker, 1989). We can therefore determine that budgeting is just a tool to enable people to spend their money wisely. Budgeting is significant in each and every sector and field, be it in the household or in corporate world, management of finance is crucial for every person. A budget in the corporate world helps an organization in meeting the goals of the management. With the help of budget management gets a hold on its finances. With the help of budget, management is able to allocate the resources properly, evaluate the staff performance as well as in formulating future business plans. In case of new businesses, a budget plays a very important role in financial planning and management of cost. There are various types of budgets used in the corporate world (Boccia & Leonardi, 2016). These are Zero based budgeting, activity based budgeting, flexible budget, functional budget, production budget, sales budget, cash budget and performance budget. All these budgets are being used by different departments of different organization in different industries. Budgeting is thus very important for running a business with ease and in a smooth manner. Planning a budget helps an organization to have a control over the finances of business, in ensuring that the business will be able to fulfill its commitments in regards to its debts, it also enables the business of any organization in meeting its goals and objectives and in making confident decision in relation to finance of the organization, preparation of the budget also ensures that the organization has sufficient amount of money to meets all the requirements of the projects which are oriented towards future. Almost every organization benefits from the preparation of a budget (Calvasina & Calvasina, 2017). A manufacturing organization prepares production budget to analyze the costs related to the production process as well as to evaluate the unused or spare capacity in the production process and also by reducing the production cost and with the help of sales budget they are able to meet sales related goals as the budget guides towards ways of increasing the sales quantities and in setting proper sales price. The organization is also required to measure its performance foe which it prepares the performance budget; this helps the management of organization to analyze the result of their decision making and make proper corrections where required. Budgeting apart from the benefits it provides to the business and other entities also involve many merits and demerits also, which have been discussed below in this report (Choy, 2018).
Disadvantages of Budgeting
As discussed above, budgeting provides many benefits to an organization in various fields. It is aver important aspect of carrying on a business. Even though, we have mentioned few of its advantages below:
There is no doubt that the primary objective of the preparation of a budget is to have a proper and uninterrupted control over the money by the management of an organization. Thus budget helps the business in deciding how and when the money is to be spent by the management, in a way suitable and beneficial for the business.
Budgeting helps the management to focus more on the proper estimation of the revenue and in planning the expenditure required to be incurred in the course of the business. The budgeting enables the restriction on the incurrence of those expenditure which are considered as unnecessary and does not form part of the plan(Axelsen, et al., 2017).
Budgeting helps the management in the proper allocation of the money by ensuring that the money is spent on those things and activities which enables the management in the meeting of the organization’s strategic goals and objectives.
Budget if prepared properly and correctly covering all the aspects of the business which is required to be covered as per the respective budget is able to communicate well with its users, which helps getting a clear view of the priorities of the business of the organization(Grenier, 2017).
Preparation of a budget requires the involvement of the employees of the organization. This provides the organization with a chance to share the vision and forecast of the business within the organization.
Budgeting truly is very important in the business organization but no matter how much advantages it have, it still faces criticism due to various issue involved with its preparation. Some of these issues are being discussed below:
The important factor for the criticism of budgeting is that it takes under consideration only those matters which are related to finance and ignore other non-financial issues. This is to say that the basis budgeting is in numeric terms and it also tends to merit the attention of the management on those matters which are in quantitative terms rather than qualitative terms. However, the customers are more oriented towards qualitative factor, the concept of which is practically not possible to introduce in budgeting(Eddy, et al., 2004).
The expenses are allocated amongst the various departments as per the budget prepared. However, the managers responsible for each department may raise question on the method of allocation used in the budget for the purpose of allocation. As this may result in allocating higher amount of expenses in some departments and lower in others.
Discussion on the two studies
The management review the budget prepared on periodical basis. On the basis of the outcomes of a budget the managers allocate the responsibilities of various persons responsible for different functions. In case the outcome of budget is not favourable the managers of different departments may start blaming other department for not meeting the goals set by the business organization. This may create a strife among different departments(Erik & Jan, 2017).
Preparation of various budgets is aver time consuming process. The management has to assign different staff members for the preparation of different budget. This also increases the cost of the business. Moreover, apart from the time spent on the preparation of the budget, the management’s time is also consumed as they have to review each and every budget for the decision making process and any mistake which appears in front of them in the budget is also required to be corrected, which again is a time taking process.
For this assignment, we are required to take under consideration any two journals relating to budgeting. So here are the details of the journals being considered by us for the preparation of this assignment. The first journals is “Practice Developments in Budgeting: An Overview and Research Perspective” by Stephen C. Hansen of The George Washington University, David T. Otley of Lancaster University and Wim A. Van Der Stede of University of Southern California and the second journal is “Budgeting Research: Three Theoretical Perspectives and Criteria for Selective Integration” by Mark A. Covaleski of University of Wisconsin – Madison, John H Evans III of University of Pittsburgh and Joan L. Luft and Michael D. Shields of Michigan State University (Meroño-Cerdán, et al., 2017).
The first journal deals with the approaches relating to the shortcomings in the traditional budgeting and also the improvements in the same while the second journal discusses the research three theoretical perspectives on budgeting and the four criteria which are interrelated for the study of integrative research.
In the first journal the authors have discussed about the various shortcomings in the budgeting followed by improvements required in the same. They have noted the various drawbacks in budgeting which the preparers and the management of the organization s have to deals with (Hansen, et al., 2003). To be put together, there is no denial that preparation of budgets is time consuming, budgets might acts as a barrier to any change in the business environment, budgets encourages gaming the system approach and also wicked behavior within the organization, generally the budgets are prepared on the basis of assumption which are itself baseless, the focus of the budgets are to reduces costs and not in creation of value, the structures of networks which are adopted by the organization are constantly improving, but the budgets does not reflects any such thing, it does not add much to the value, since the time required for its preparation is high, moreover the frequency with which the budgets are updated is very low, it tends to give results with the use of outdated methods, with the method of allocating expenses to various departments, the budgets might become the reason for departmental strife in case of inequitable allocations, the budgets are generally contradictory and often makes the people feel inferior (Hall & Rapanotti, 2017). Although not everyone agrees to the above drawbacks of budgeting, various authors like Schmidt 1992, hope and Fraser 1997, 2000, 2003, Marcino 2000, Jensen 2001, etc. believes in the dissatisfaction of various users of budgets worldwide. The authors have discussed two approaches in their journal, one is the activity based budgeting approach (ABB approach) and the second one is the beyond budgeting approach (BB approach). In the activity based approach the authors have provided of various points for the improvement in budgets. As the name suggests, the activity based budgeting approach prepares the budget using the activity based technique of the entity rather than the traditional approach. The primary objective of the activity based budgeting approach is the expansion of the concept of activity based and management of capacity into the budgeting system of the organization. While the beyond budgeting approach focuses more on the evaluation of the performance against the targets set by the organization, under this approach targets are set in the beginning of the period and any changes are incorporated on the basis of past performance during the period. According to this approach the management is required to prepare the budgets for the financial planning but these budgets will not act as the target for the evaluation of the performance of managers within the organization (Sithole, et al., 2017). The authors have also discussed the various involved in both the above approaches.
The authors of the second journal put emphasis on the integration of various cost accounting with the preparation of budgets. Budgeting involves almost every aspect of the management accounting which includes cost accounting, responsibility accounting, compensation and measurement of costs (Covaleski, et al., 2003). Budgeting is being considered as one of the most researched topic in the management accounting because of its application in almost every sector in every type of industry. The authors of this journal have discussed all the three theoretical perspectives based on the research on budgeting. Every perspective focuses on different issues relating to various budgeting (Lavassani & Movahedi, 2017). This journal also focuses on the integration of various criteria in order to give a more clear understanding of budgeting. The authors have disregarded the theoretical approach of budgeting which has been traditionally followed and instead supports on the adoption of integrated strategy since the theoretical perspective provides assistance which are restricted to stating alternate assumptions and estimating their effects. While discussing the three perspectives the authors have stated in this regard that various research questions about the economic value that budgeting has in relation to the owners and employees of the organization, its psychological impact like the effect budgeting practices has on the behavior, performance and mental health of an individual and also the influence budgeting has on the decision making process as well as the bargaining processes in the organization. The authors have also discussed the analysis of various levels along with assumptions taken including both in relation to rationality and equilibrium. The budgeting and non-budgeting variables are also discussed in this journal (Linden & Freeman, 2017). Budgeting variables are variables like, budgeting characteristics, compensation practices being followed by the organization such as capital budgeting, participative budgeting, budget based contracts, performance evaluation as well as the usage of operating budgets for the purpose of management control. Whereas the non-budgeting variables are the variables like, skills and preferences of employees, labor market, structure of information, both public and private, uncertainty of state, welfare of individuals, performance of organization as a whole including task uncertainty, attitudes of employee and mangers, etc. the authors have done research on the various perspectives in budgeting like, psychological perspectives and sociological perspectives in detail.
We have observed the following similarities between both the above journals:
- Both the journals have focused on the budgeting practices followed by an organization.
- Both the journals are based on various research done on the budgeting practices(Kew & Stredwick, 2017).
We have also witnessed certain differences in the above journals:
- While the first journal focuses on the development of budgeting, the second journal focuses on the theoretical perspectives of budgeting.
- The first journal highlights the shortcomings and improvements in budgeting while the second journal discusses the approaches in budgeting.
The various outcomes that we have observed from the study of the first journal are being jotted down by us as follows:
- The budgets are being prepared for the purpose of effective decision making and better control over the business’s finances but rather budgets are way more expensive than the value of the benefits they provides.
- The business environment keeps on evolving; these changes demand updation on a continuous basis in the system, however, the frequency with which the budgets are update is rather very low(Raiborn, et al., 2016).
- Relative performance standard should be used instead of fixed budget for the purpose of performance evaluation.
- The approaches which have been discussed in the above para emphasizes on the expansion of the budgeting research to involve the behaviour of both the middle and lower level managers.
From the second journal we have learned the following points:
- In order to resolve the differences in the various perspectives the management should involve in the research relating to specific details of practices involved in budgeting.
- No matter how useful budgeting might be in the business organization, it has to face a lot of issues and dissatisfaction amongst its users. This can be resolved by bringing about improvement in the budgeting practices with the help of constant research and updation(Visinescu, et al., 2017).
- The budgeting practices adopted by an organization does not solely depends on the practice which actually fits into the environment of the organization but is also dependent on the time duration required by the organization for the adoption of such budgeting practices.
References
Axelsen, M., Green, P. & Ridley, G., 2017. Explaining the information systems auditor role in the public sector financial audit. International Journal of Accounting Information Systems, 24(1), pp. 15-31.
Baker, W., 1989. Why traditional standard cost systems are not effective in today’s manufacturing environment. Industrial Management,, 31(4), pp. 22-24.
Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and Appropriate Economic Models, pp. 1-16.
Calvasina, R. V. & Calvasina, E. J., 2017. Standard Costing Games that Managers Play. Journal of Management Accounting Research, 12(2), pp. 33-65.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
Covaleski, M., Evans, J., Luft, J. & Shields, M., 2003. Budgeting Research: Three Theoretical Perspectives and Criteria for Selective Integration. JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH, 15(3), pp. 3-49.
Eddy, C., F. & Warlop, L., 2004. The Value of Activity-Based Costing in Competitive Pricing Decisions. Journal of Management Accounting Research, Volume 16, pp. 133-148.
Erik, H. & Jan, B., 2017. Supply chain management and activity-based costing: Current status and directions for the future. International Journal of Physical Distribution & Logistics Management, 47(8), pp. 712-735.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), pp. 241-256.
Hall, J. & Rapanotti, L., 2017. A design theory for software engineering. Information and Software Technology, Volume 87, pp. 46-61.
Hansen, S., Otley, D. & Stede, W., 2003. Practice Developments in Budgeting: An Overview and Research Perspective. JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH, 15(2), pp. 95-116.
Kew, J. & Stredwick, J., 2017. Business Environment: Managing in a Strategic Context. second ed. London: Chartered Institute of Personnel and Development.
Lavassani, K. & Movahedi, B., 2017. Applications Driven Information Systems: Beyond Networks toward Business Ecosystems. International Journal of Innovation in the Digital Economy.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, pp. 1-15.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
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