What is budgeting in managerial accounting?
This report brings out the discussion on budgeting based on managerial accounting. A budget is a pre-determined statement of cost of project. To control the cost of a project, a budget plan estimates the cash flow associated with the control. A final cost provides a baseline to assess the financial performance of the project. The extent to which cost is within the detailed cost estimation, the project is still under the financial control. As soon as the cost overruns, the possibility of occurring problems become severe. Preparation of budget follows an organisational pattern of responsibility and authority. Budget provides a control system through which both feed forward and feedback are connected.
The purpose of using feedback can enable organisation to find out the variation between executed budget and the actual performance. This report bring out the discussion on two reviewed articles of renowned journals named Auditing & Accountability Journal. Both articles have discussed two different viewpoints. First has discussed the case study of Main freight that layouts and follows non-budgeting method in its management control system. The another article highlights the public budgeting that determines how public administration operates with the modern and new approaches of budgeting.
According to Leoissac, (2018), Budgeting is a procedure of making a strategic plan that elaborates how to spend the money. A systematic expenditure plan of money that determine in advance that how the assigned money to an task will be spent or how the business plan do the things to use the particular sum of money for a particular task to attain maximum satisfaction. Budgeting is an inseparable of business operations because it is an economic concept that resources are always scare. Experts plays an important role in accomplishing their goals or set objectives through proper planning by applying their knowledge and experiences to make a plan. Once experts prepare the budget and starts using the scare resources accordingly. It gives them a sense of satisfaction after 6 months when they find them efficiently by following the roadmap. Budget will always give a feeling that you have an assigned amount of money for a particular task or next task.
According to Andor, Mohanty and Toth, (2015), Following a budget or expenditure plan will assist the company to form its capital structure whether the operations of the company should rely on capital and debt or decide the proportion of debt or equity in the budget plan. By forecasting the future financial expenditure, it gives an overview of which month will be financially tight once the annual budget report are forecasted. Using a realistic and efficient budget helps to forecast the spending for a fiscal year that will result in long-term financial planning. It enables the vision to complex current market situation that can make realistic assumptions regarding annual income, planning for long term goals, buying the investment, and recreation property. There is no particular single budget defined for business. Budget assists the business to track and manage the resources. Business entities use a varied kind of budget for every department. Budgeting decides the expenditure and form effective strategies that will maximise the revenue and valuation of assets.
Types of budgets used in business
Otley, (2016), Common types of budgets used by the business such as master budget, static budget, financial budget, cash flow budget, and operating budget. A master budget is aggregation of the entire individual budget plan of each department from operation, marketing, sales to finance. A master budget reflects a complete picture of the financial health of the business. There are several factors that is contained in master budget such as sales, asset valuation, outstanding payments, operating expenses, and income streams. These factors allow the entities to establish the objectives and analyse the overall performance as well as it also includes individual cost centres of the organisation.
(Source: Leoissac, 2018)
While making business plan, a manager calculates the estimated income and expenses to find out whether the plan would be profitable or not. Forecasting and estimating income and expenses help the decision maker to try other business plan trials and alternatives. It enables the manager to calculate opportunity profit from all the available alternatives and options (Andor, Mohanty, and Toth, 2015).
According to Uyar, (2009), Cash flow budget is projection of the process how and when cash comes in and flows out from the business in a specific time period. It helps to maintain ratio analytical performance of current assets of the company. There is an ideal ratio of current ratio i.e. 1:1. Current ratio is the ability of the company to payment its outstanding expenses from its liquid assets (cash and cash equivalents and bank). It enables the company to manage its cash flow wisely. This type of budget considers several factors such as accounts receivable and accounts payable that helps the company to assess whether the company has an appropriate sum of liquid cash to continue its operations. This budget formulates the cash expenditure plan to spend its cash productively and the ability of the action to generate the cash in future. For example- An infrastructure company uses the cash flow budget to decide whether it has the ability or enough liquid cash to start a new construction project before they are paid for their work (ACCA, 2018).
As per the perception of JBlöndal et al., (2008), A financial budget brings out the company`s strategy to manage the assets, income, expense, and cash flow. This budget is used to establish and reflect a true picture of organisation`s financial health. Financial budget present a comprehensive and consolidated overview of relative spending of cash to generate cash from core operations (principlesofaccounting, 2018). For instance- A software company can use the financial budget to determine the value in relation to public stock offering or acquisition. An operational budget forecasts and analysis the projected expense and income in a particular course of action. To reflect a true picture, operating budget account for several factors such as material costs, production, overhead, labour cost, overhead, and administrative costs. This is the most active budget that is prepared most frequently on a regular basis weekly, monthly or annual basis. An analyst compare the operational activity of each week or month to ensure that a company overspends on supplies of raw material.
How budgeting helps in financial planning
In regards to a business organisation, a budget is a broad overview of financial plan to achieve financial and operational objectives of an organisation. A budget is an roadmap to organisation`s strategic plan. While developing a budget, a company plans to achieve the objective of acquisition of business operations and use of its resources. A budget is a valuable benchmark to decide how well the procedure steps are taken by the management to ensure that they can achieve the objectives. Budgets enable to coordinate the business activities between different departments and aligning these activities to picture or make big strategic plans.
(Source: Carnegie Mellon University, 2018)
From the above diagram, it can be analysed that how nearly proportion of work completed is associated to expenditure of a task. The graph gives an average perception of required expenditure to accomplish task completion because the deviation to standard is not wide. There is a progress in a new job as when compared to historical data (Wanna, 2018). Point A in the graph suggests higher expenditure than the normal expenditure for the proportion of work completion. Here, 40 percent of work is completed by expending 60 percent of the budget. The historical data suggests that 50 percent of resources should be used to incur the 40 percent job and this indicates 10 percent deviation or overrun of cost even when work efficiency is increased. If the cost has overruled, then cost to compete the whole job would increase (MyMoneyCoach, 2018).
According to Uyar, (2009), during preparing budget, trade-offs in the programs should ensure that the budget formulated fits the required government policies. Further, a cost-effective budget plan should be selected. The budget formulation procedure has some important dimensions such as setting a fiscal target and level of autonomous consumption suitable for these targets, which always remained an objective to be achieved in macro-economic framework. Moreover, there is a need to form a policy regarding the expenditures such as adequate allocation of resources with confirming both polices and the fiscal targets that remains the main objective and the core process of preparing budgets. Finally, budget addresses the operational efficiency and sort the performance issues (Carnegie, Christopher, and Napier, 2017).
In context to managing a business organisation, there are mainly three purposes to formulate budget plan such as a forecast of income and expenditure statements. It act as a tool for decision-making and a mode to check business performance. The purpose of two studies is based on two different articles based on budgeting. The first article evaluates the budgeting approaches such as traditional budgeting, improving budgeting system, and making decision beyond budgeting. The research articles outlays review on case study of Main freight that was never based on traditional budgeting. Moreover, it also covers the new approaches of budgeting. This article view budget as a central component of (MCS) management control systems. This beyond budgeting system opposes that manager should develop employ more control system to replace budgets. This article examines the MCS (management control system) which never engaged tradition system of budgeting(Grady and Akroyd, 2016).
Importance of cash flow budget
Another article from Accounting, Auditing & Accountability Journal purposes budgeting as a central concept in public organisation. According to the researcher, budgeting is a multifaceted and knowledge rich topic to research on. The changing institutional, social, and economic needs, it require assessing the role, and featuring while assessing the accounting studies with the topic. The purpose is to review the public budgeting that determines how public management and public administration engage the traditional as well as modern budgeting theories in contribute a long-term sustainability of business.
The two research questions in both the articles covers the particular discussion on-
How new budgeting approaches analyses the effectiveness of both approaches in companies?
How far public budgeting is associated with current budgeting theories and practises to analyse the market?
The major differences between the two studies is that case study of Main freight never involved traditional budgeting system in management control system. Whereas, the second article engages both traditional and modern budgeting theory are the major priorities of public budgeting system. Moreover, the article based on usage of both approaches of budgetary methods which in return contributes to long-term sustainability (Nielsen, Mitchell and Nørreklit, 2015).
First article shows how organisations can work without using any traditional budgeting system and still cope up with and maintain a high level of control. Article 2nd originates how budgeting plays an important role in public companies and it use the budgeting method to allocate large share of NNP (net national income) national incomes (Brusca et al., 2016).
The case study of Main freight describes that management control system is designed on the basis of administrative and cultural system that helped to support planning and reward systems mangers that have used to monitor the key drivers of short and long-term performances to focus profitability. This case study has discovered that these findings give more holistic view of management control system and understand how this control is accomplished within the organisation that are moved beyond budgeting. There are very organisation, which cannot work budgets but organisations that never had budgets limits the opportunities to check how MCS (management control system) plan to function without budgets. This case reveals the design of integrated non-budgeting management control system (Grady and Akroyd, 2016).
The similarity found in both the articles in every case either non-budgeting system or public budgeting system is that use of accrual and cash based accounting is used and raises similar accounting concepts. Every accounting principles and standards has to be followed in the same way (Schaltegger, and Burritt, 2017). The questioning and filing is based on regulation-bases approach to implement and execute in policies through budget. Problems encountered in fusing budgeting and implying different control system, the policy making remains same despite of implementation side as they can produce different results. Stability and clarity differs when both organisations follow different management control systems. The entire request incorporated in budget cycle differs because non-budgetary may have more flexibility but the typical budgetary system is inbuilt through a highly structured manner. The standard responses may differ among the budgetary and non-budgetary responses. Any type of control system is important for organisation; it is not a necessary obligation to accomplish to either public budgeting or traditional (Blöndal et al., 2008). Every control system result to act as a tool to manage the costs and cash flows. Any control system is important to make business decision and long-term business planning process. Management control system estimates and plans a future objective.
The role of financial budget
(Source: Colorado Springs Airport, 2018)
From the above diagram, it is observed that to achieve the pre-decided objective, it has a set of goals to achieve an overall objective of business. After a particular time, officials’ measures the action executed and performed or the current actions to standard set to find out the deviation. Every budgeting system set some standards that helps the company to establish a decision-making. Charts and graphs help the companies to make concise and clear plan and budget of any project (ACCA, 2018).
Four specific outcomes or lessons learned from the two studies’ research findings that will be useful for management accountants in Australian companies
By going through both the research articles, it is observed that in any of the case, a manager has to identify the information regarding awareness of any issue. A better understanding of issues can lead to better quality decision making. In Australia, Management accountants employed in hospitals, other non-profit organisation and other local authorities such as clubs and charities need statistical data and analytical information of several previous years. Statistical data is derived and calculated through various statistical tools and deviation methods. The same way public organisations require planning the budget that will lead to development of certain lagging behind areas (Pessina et al., 2016).
The public budgeting do not focus on profitability. It focuses that how the entire economy of that particular place can be affected positively. For example- a government should have the knowledge of what resources are available to them and determine how capital structure of a projected work is to be decided by estimating the amount of annual subscription and interest payment of debt in total capital structure. Management accountants should derive such a combination of financial and non-financial information that can calculate the average cost of the budgeting cost undertaken (MyMoneyCoach, 2018).
While considering the growth of non-profit organisation, it is judged on the basis of inputs and output that can tie into value for money in near future. For example- the public sector organisation has to use a wide range of performance indicators. In Australia, the government maintains an extra budgetary fund because when procedures are not appropriate for managing any particular type of task (Otley, 2016). Such procedures do not permit various spending agencies to use this revenue from cost recovery system especially when certain priority activities need protection. IMF code of transparency has revealed that Australia have set up its EBF (extra budgetary funds) to keep it out of the annual budget appropriations. Australian government have strictly followed transaction related to public financial resources are bound to be at the same legislative approval process as same as the annual budget (Pessina et al., 2016).
In recent years, Australian companies have applied different mechanism in Medium-term expenditure frameworks that have leads to improve the quality of regular and timely update to make appropriate allocation of resources. Inclusive of modern budgeting control system, companies started playing to create an adversarial bidding process between the governments. Apart from this negative impact, a bidding process can facilitate appraisal of nearly spending proposals because ministry itself defends it new spending proposals to find if it can generate more saving from any other proposals (CPA Australia limited, 2012). It is observed that the department of finance has underwent a traumatic situation where the organisation started using modern budgeting control system instead of traditional approaches (World group bank, 2018).
Conclusion
From the above discussion on budgeting and its review of literature, it is analysed that it has become mandatory to comply with standards, rules and regulation whether a company follows traditional or modern budgeting control system. It is not necessary that new budgeting process would only lead to successful operations. In Australia, traditional cost budgeting process practises may be more popular rather than contemporary issues. With the rise in input price fluctuations, the company may fall to face various turbulent financial crisis. A case study based on the working clearly does not follow budgeting as a method of control in its management. However, it is important for the public companies such as charities and clubs to maintain public budgeting system because the governmental infrastructure company uses statistical tools to figure to the previous year`s data and plan the budget accordingly.
References
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