Management and Cost Accounting: Planning, Control and Budgeting - Essay Example

?Management and Cost Accounting Table of Contents Table of Contents 2 Introduction 3 a) The terms Planning, Control and Budgeting 4 b) Process Involved in the Preparation of Annual Master Budget 10 c) Behavioural Issues in a Budgeting Process and the Use of Budgetary Information 12 Conclusion 15 References 16 Bibliography 19 Introduction Accounting is a process of tracking record of varied transactions in an appropriate manner. Moreover, accounting is a procedure of recording transactions of businesses with relation to receipt and payment as well as incomes and expenditures. Furthermore, accounting is an important method of providing precious as well as significant information to people who are involved with business activity of an organisation which comprise shareholders, employees as well as managers among others. Management accounting is an important source of information for the people involved inside an organisation. Moreover, management accounting also assists in better evaluation of operations of business activities as well as in formulating enhanced decisions with the objective of improving the performance of an organisation. Furthermore, management accounting also aids an organisation to devise strategies as well as plans for improving competencies and efficiencies of an organisation. Management accounting is also known as internal accounting which is useful in improving internal business operations as well as effectiveness of an organisation. Management accounting is mainly utilised by managers of an organisation for enhanced decision making as well as in initiating strategies for successful performance of an organisation. Cost accounting is a process of determining production cost as well as cost involved in conducting business activities of an organisation. Moreover, cost accounting also offers valuable information as well as facilitates in making decisions for effective control along with reduction of cost (The Institute of Cost Accountants of India, 2012). The paper will emphasize on the terms planning, control and budgeting as well as on the relationship between these terms. Moreover, the processes involved with the preparation of master budget of an organisation will be discussed. Furthermore, the paper will emphasize on the behavioural issues which arise due to the process of budgeting. The usage of budgetary information will also be discussed in the paper. a) The terms Planning, Control and Budgeting Planning Planning is the first stage of the budgetary process. Planning is usually formulated with the objectives of accomplishing certain specific goals in future prospects. Moreover, plans are formulated on a long-term basis for better controlling as well as directing operations of an organisation for accomplishing organisational objectives in an effective manner. Long-term planning is also known as strategic planning. Whereas, planning for short period of time is also known as budgeting. Budgeting assists in better allotment of resources of an organisation as well as in determining financial resources available with an organisation (Drury, 2007). There are a few stages involved in the planning process which are as follows: Stage 1: Establishing Objectives This is the first stage of the planning process which relates to the development of objectives. The objectives are required to be established in accordance with the mission of an organisation for improved performances of the organisation. Long-term planning is formulated with the intention of directing operations in a more effective manner in the future prospects. There should be certain measurable methods for monitoring objectives which are accomplished. Moreover, monitoring accomplished objectives will aid in bestowing motivation among people involved with an organisation (Drury, 2007). The objectives of an organisation are differentiated into three forms which are as follows: Mission of an Organisation An organisation usually conducts business operations with certain specific mission. The organisational mission provides purpose as well as motive to the organisation for performing business activities accordingly. Moreover, organisational mission also provides the organisation with the basis for existence as well as the characteristics for conducting of business activities of an organisation. It also provides information in relation to the customer segments the organisation is willing to target. Furthermore, the mission of the organisation constitutes vision projections on the basis of which it is willing to perform. The objectives stated in the mission of the organisation signify that these are the goals which are required to be achieved for successful performance of the organisation (Drury, 2007). Corporate Objectives Corporate objectives are the objectives which are measurable as well as determined in financial terms. Moreover, the corporate strategies are normally denoted in terms of profits or volume of sales as well as in terms of return of capital employed along with the extent of market share of an organisation. Furthermore, corporate strategies are devised by board members of an organisation (Drury, 2007). Unit Objectives Unit objectives of an organisation depict that each business unit of the organisation is provided with certain objectives which are required to be accomplished for better performance of the organisation with competitiveness (Drury, 2007). Stage 2: Identifying Potential Course of Action An organisation is required to formulate strategies in accordance with the objectives of the business. These strategies will assist the organisation to perform business activities in an enhanced manner as well as in accomplishing determined objectives efficiently. Moreover, appropriate strategies are required to be formulated for better performance of the organisation (Drury, 2007). Stage 3: Evaluation of Strategic Options Alternate strategies formulated by an organisation are required to be evaluated in accordance with suitability of such strategies with regard to improvement in strengths as well as opportunities of an organisation. Moreover, the alternate strategies formulated are required to be feasible in monetary terms. Furthermore, implementation of alternate strategies depends on certain factors that whether such strategies will be efficient in improving profitability of an organisation as well as in minimising the level of risks faced by an organisation (Drury, 2007). Stage 4: Select Course of Action The management of an origination is required to choose as well as implement those strategies which will be appropriate for better profitability of an organisation. Moreover, the selected strategies must assist an organisation in accomplishing long-term plans which were formulated by the management of an organisation (Drury, 2007). Stage 5: Implementation of the Long-Term Plans Long-term plans of an organisation are implemented with the assistance of budgeting. Budgets are normally prepared on a shorter time period basis which makes it more specific. Moreover, budgets are prepared with the intention of better allocation of resources as well as for accomplishing objectives inside budgetary period. Furthermore, budgeting aids an organisation in providing valuable information for accomplishing objectives of long-term plans. Therefore, budgeting is also considered as an important component for implementing long-term plans (Drury, 2007). Stage 6: Monitor Actual Result The strategies which were implemented for accomplishing objectives of an organisation are monitored and the outcomes of these implemented strategies are compared with the formulated ones for better evaluation of results (Drury, 2007). Stage 7: Respond to Divergences from Planned Outcomes The divergences of the planned outcome for any strategy are required to be evaluated as well as necessary steps must be devised for improving outcomes of those strategies. The plans are required to be formulated and coordinated in an appropriate manner. . Moreover, the plans of an organisation must be communicated effectively (Drury, 2007). These are the varied stages followed by an organisation for formulating plans for the organisation in a suitable manner. Control A budget assists the management of an organisation with important information for better coordination as well as in monitoring business activities performed by the organisation. Moreover, budget also aids an organisation in comparing actual performances with proposed budgetary amount. This comparison of actual with budgeted amount will help the management of an organisation in ascertaining costs as well as determining strategies which have been quite ineffectively performed in accordance with pre-determined plans. Furthermore, preventive measures as well as actions are required to be initiated for offering better remedies to minimise risks as well as uncertainties. The management of an organisation is also required to monitor that the formulated plans are executed in an effective manner for tracking performance progress. The comparison which is conducted between actual as well as budgeted amount is known as performance report. Performance report assists the management of an organisation in determining plans that have deviated from the formulated plans. Moreover, performance report assists in determining those areas where modifications as well as remedies are required to be implemented for effective performance of an organisation (Drury, 2007). Budgeting A budget is an important tool of management for conducting planning as well as monitoring along with controlling finances of an organisation. Moreover, a budget assists in determining income and expenditure of an organisation for a specified mentioned date. Furthermore, a budget helps an organisation in allocating resources in an efficient manner (The World Bank Group, 2013). There are varied approaches which are included in the formulation of a budget such as ‘program budgeting’, ‘planning-programming budgeting’, ‘performance budget’, ‘management by objectives’, ‘output budgeting’ as well as ‘output-purchase budgeting’ (Shaw, 2007). There are different types of budgets prepared for monitoring as well as controlling finances of an organisation such as ‘master budget’, ’production budget’, ’cash budget’, ’material purchase budget’, ‘cash flow budget’, ’human resource budget’, ’revenue and expense budget’ as well as ’capital expenditure budget’ (DuBrin, 2008). Planning as well as controlling along with budgeting are inter-connected as these are the elements which are utilised for planning, monitoring as well as controlling plans and financial resources of an organisation. These elements are part of budgeting process. b) Process Involved in the Preparation of Annual Master Budget A master budget of an organisation encompasses operating budget as well as financial budget along with investing budget for a specified period of time. An organisation normally prepares a master budget annually including all budgets involved with operating budget as well as financial budget along with investing budget for better evaluation of performances of the organisation. Moreover, a master budget is considered as an important tool for managing as well as controlling business operations of an organisation (Camillus, 1986). The preparation of master budget commences with the formulation of operating budgets. The operating budget of an organisation consists of ‘budgeted income statement’. Moreover, the budgets of income statement are prepared with the help of ‘sales budget’, ‘direct labour cost budget’, ’production budget’, ’factory overhead cost budget’, ’direct material purchases budget’, ’cost of goods sold budget’, ’direct labour cost budget’, ’selling and administrative expenses budget’. Furthermore, with the assistance of all these budgets, a budgeted income statement is prepared. After the preparation of budgeted income statement, a budgeted balance sheet is formulated. A budgeted balance sheet comprises cash budget as well as capital expenditure budget and with the aid of these two budgets a budgeted balance sheet is prepared (Warren & et. al., 2011). This is the process through which a master budget is prepared for an organisation. A master budget is formulated with the assistance of all these budgets and a master budget is also known as ‘Comprehensive Budget’ as it comprises operating budget as well as financial budget along with investing budget. A master budget is formulated with the objective of determining proposed ‘Profit and Loss Account’ as well as ‘Balance Sheet’ of an organisation. Moreover, a master budget is prepared with the intention of determining strategies as well as plans to be devised for enhanced performances of an organisation in future prospects (Texas Wesleyan, 2012). The major objectives for the formulation of master budget are better coordination as well as communication of activities which are to be conducted by an organisation. Moreover, it facilitates better coordination as managers of different management levels work together for the formulation of master budget. Furthermore, master budget also assists in enhanced communication which helps an organisation to improve its outputs in terms of sales as well as profitability. Master budget comprises all the future activities which are to be performed for enhanced performance of an organisation with respect to profitability along with improving operations of an organisation. These are the varied utilities of master budget which assist an organisation in devising strategic plans with the intention of improving future performances of an organisation (Narotama University, 2012). c) Behavioural Issues in a Budgeting Process and the Use of Budgetary Information Budgets are required to be formulated in accordance with both behavioural as well as technical aspects for better coordination of financial operations of an organisation as well as for having a clear concept of the information acquired from those budgets. The technical elements of a budget deal with the computation of proposed expenses as well as costs involved for conducting operations of an organisation. The behavioural elements of a budget assist in performing technical parts of budgets with the assistance of people. The budgeting process of an organisation is required to be supported with changes pertaining to behaviour of people involve with the operations of an organisation (Raghunandan & et. al., 2012). There are certain behavioural issues which are related with the budgeting process that include budget slack, overreaction as well as pumping. Budget Slack Budget slack signifies the differences between the actual performances with respect to expected or determined performances in relation to resources of an organisation. When a budget is prepared by managers on their own perspective along with formulating budget in terms of non financial resource data, in such budgets managers may exceed in terms of allocation of resources than required. Moreover, excess allocation is prescribed with the intention of performing in a better manner at times of uncertain circumstances. Furthermore, budgets are prepared by managers on the basis of underestimating productive capabilities of an organisation (Roge & Linn, 1995). Budgetary slack is involved in a budget with the motive of performing certain activities or operations for better accomplishment of those operations in an effective manner. It also assists in evaluating performances of an organisation in accordance with formulated budget (Al-Rwita, 2011). Budgetary slack is considered as an important behavioural issue as it may lead to overspending of resources of an organisation than required. Moreover, after the completion of the budgetary period, an effective analysis of resource spending is not conducted. Furthermore, budgetary slack may also decrease coordination as well as communication among people of an organisation as these budgets are prepared by managers themselves (Abraham & et. al., 2008). Pumping Pumping is another behavioural issue related to budgeting process. It signifies that managers while preparing budget transfer a cost included in their budget to the budget of certain other managers. Moreover, cost is transferred from one budget to another with the intention of assigning department manager of an organisation to perform required activities in an efficient manner. Whereas, the other department managers to whom such cost is transferred are charged with excess stock of resources. Therefore, the transfer of cost is considered to create congestion of stocks as well as can result in inefficient performance of every department of an organisation (Abraham & et. al., 2008). Overreaction In a few organisations, performances of managers are evaluated by the accomplishment of budget. However, this notion of performance evaluation of managers is not an appropriate procedure as budgets are prepared with the notion of better coordination of activities as well as resources of an organisation in the future prospects. Moreover, managers preparing budgets devote excess time in resolving faults as well as errors in their budgets which in turn results in minimising confidence as well as morale which might hinder Management Information System (MIS) process. MIS is an important element of budgeting for effective management of organisation. Furthermore, overreaction will also hamper the management of organisational operations as well as resources of an organisation (Abraham & et. al., 2008). The budgetary information are utilised for better directing as well as planning along with controlling the activities of budgeting process. Moreover, budgetary information also assists an organisation to perform operations with better allocation of resources as well as funds. Furthermore, budgetary information are utilised for evaluation as well as formulating strategies to improve future performances of an organisation. Conclusion Budgets are prepared with the motive of allocating business operations as well as resources of an organisation in an effective manner. Moreover, budgets assist an organisation is formulating strategic plans for improving performance of the organisation with regard to profitability. Planning as well as control along with budgeting are important elements in the budgeting process. These elements assist an organisation in better coordination of financial resources for superior performances of the organisation. A master budget is prepared with the assistance of all the budgets prepared at lower level. Moreover, a master budget comprises operating budget as well as financial budget along with investing budget. Furthermore, master budget is prepared in an organisation with the motive of devising future plans for improving profitability as well as performance. There are certain behavioural issues which are attached with the budgeting process that include budget slack as well as pumping along with overreaction. Moreover, these behavioural issues may hamper the management of operations of an organisation. References Abraham, A. & et. al., 2008. Accounting for Managers. Cengage Learning EMEA. Al-Rwita, S. S., 2011. Budgetary Slack: The Effects of Truth-Inducing Schemes on Slack and Performance. The Concept of Budgetary Slack. [Online] Available at: http://faculty.ksu.edu.sa/Alrwaita/DocLib/Res.%20New.%20Budgetary%20slack.pdf [Accessed January 02, 2013]. Camillus, J. C., 1986. Strategic Planning and Management Control: Systems for Survival and Success. Lexington Books. DuBrin, A. J., 2008. Essentials of Management. Cengage Learning. Drury, C., 2007. Management and Cost Accounting. Cengage Learning EMEA. Narotama University, 2012. The Master Budget and Responsibility Accounting. Files. 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