Budgeting Contradictions - Management Accounting - Essay Example

A discussion of budgeting Contradictions - Management Accounting Name Course Institution August 4, 2010 Introduction A budget is a monetary document which shows future expenses and income. The process can be done by companies or individuals and this helps in estimating the effectives and whether the person will continue to operate the company or not. A budget can also be defined as a list of planned revenues and expenses. It’s a plan which shows amount saved and what is spent. A budget can also be defined as a plan which is expressed in dollar terms and acts as a map on how to carry the company’s strategies, objectives and assumptions. The role of budgeting in an organization is critical despite facing criticism as an unnecessary evil or a corporate repression. Budgeting is unnecessary in an organization and should be done away with as a management process. This paper looks at the perceived importances of budgeting as well as the limitations connected with budgeting. Importance of a budgeting The purpose of budgeting include but not limited to: A budget helps an individual or company to know its revenues and expenditures that is it shows how a business performs in monetary terms .It also helps in measuring how a business operates financially when measured against its forecast. A budget helps managers to know what results they are expected to yield. As a result they will pull up their socks in areas of importance in order to meet those targets as per the budget. Decision making in managerial level is also improved as emphasis is made for future outcomes and the opportunities associated it. In management, a budget helps in better management of the employees, subordinate employees. This helps in good running of the organization. People budget for a (rainy day), that is to say persons need to budget for unforeseen or contingencies such as sickness, repairs of roofs and pipes incase they burst. This means that it is essential or important to put some money away and in order to achieve this person need to live on a budget. A budget helps individuals, companies and states to know what expenses are due and at what time. It also helps them to know their habit of spending. This to some extent prevents the habits of overspending or impulse buying mostly to individuals (Sid & Eric, 2003)). For instance, every year, most states reads their previous budgets and also makes plans for a current budget for that financial year. As a result they will be able to know their sources of income and how to spend it. Budgeting also helps individuals to adapt a continuous savings plan. Persons will always maximize their incomes and minimize the expenditures, as a result they will tend to consume less and save more. Some people also save a certain percentage of their pay and this will only apply to a well budgeted income. A budget helps in controlling and monitoring how resources are used. It helps in comparison of the budgeted plan to the actual results achieved. This helps in making judgments as required and adjustments are made as required. The budget as a tool also gives the basis for the following year’s budget meaning that it’s an important tool for evaluation and comparison (Sid & Eric, 2003). Certain institutions such as academic institutions may create an operating budget. This provides the institution basis for core activities such as research, teaching and public works. Various departments in the institution prepare an operating budget which they present to the campus capital budget for funding and provision of various major facilities such as infrastructure, equipments among others. Disadvantages associated with budgeting Budgeting has faced a number of criticism and contradictions in various organizations as well as from individuals. The fact that a budget is set to monitor and or predict the organization’s financial performance, a budget encourages gamesmanship among managers. This is because, managers are aware that they will get deducted or are rewarded in effect by getting what they probably desired for (Sandra, 2006). A budget sets the managers to constrain on some important maters at the expense of the organization’s success for fear of failing to meet ambitious goals. Consequently, a budget may end up rewarding managers who stipulate modest target during a given period and penalizing those who are too ambitious, setting high targets and later fail to meet them. This is a discouraging perception and may affect the general and the ultimate goal of an organization. Hence, budgeting in this case appears to be restricting factor to the free and fair operations within an organization which in turn affect performance, efficiency as well as autonomy of employees to execute important duties and responsibilities that are beneficial to the organization. The budgeting process is systematic and puts into consideration a number of factors that do not favor every department or individuals working for the organization (Hassan, 2007). The process of budgeting entails judgment and subjectivity that makes budgeting an incredible management exercise. Management in an organization is meant to ensure that there is mutual benefit between the employees, the organization and the business clients. In the case of budgeting, the concept of subjectivity and also judgment. In addition, the concepts of quality and customer service are never considered while budgeting. The mutual benefit expected between a corporate organization and their client is jeopardized during budgeting, which makes budgeting an ‘evil’ exercise (Ray & Jeffrey, 2008). Budgeting may enhance the gap between the customers and the organization hence affecting the ultimate goal of making profit as well as maintaining a clientele base. Quality of the services provided by any given organization determines the future and the existence of the business in a competitive market. Therefore, budgeting compromises this critical aspect making the business to face a possible future downfall. Anything that hinders or risks the success of a business is termed as a risk or an obstacle to the business, such as the budgeting process. A budget can also be seen as a pressuring device obliged by the management which result in poor labor relations. A budget stipulates conditions that should be put in place within each and every department for a given period of time, usually a year. When people are set to spend on a given scale, they tend to work strictly within this scale. This is disastrous because it makes the workers to have limited autonomy which influence their decision making. The organization may end up losing important opportunities as the employees in the respectful departments are tied to the budget stipulation. Organizations should thus set their employees free and let them operate freely to enhance good labor relations. It is hard for most people to stick to the plan or targets as it can cause pressure. For instance an individual or company can plan for a certain amount but fail to realize it at the end of that financial period. The expenditures out do the incomes thus they prefer to do away with the budget. A budget can also restrict various business activities and this may result in loss of business. Managers may end up blaming each other if targets are not achieved. Incase of a fixed budget there is no room for unexpected expenses as there is no room for revisions. But this mostly applies when the resources are unlimited Incase the resources are limited, it makes no sense in revising the budget. Budgets involves time and cost to prepare. This may be too demanding for individuals and companies while others may not afford the cost (Hassan, 2007). Consequently, a budget could lead to conflict within the organization’s various departments as departments dispute over the allocation of resources and turning blame to each other in case the set target are not met. A budget places departments at a defined position and the members are hence confined in these particular lines throughout their duties, which give rise to conflict among them. The organization’s resources may end up being under used or misused when a budget is not well drafted to cater for each department’s roles and responsibilities (Ray & Jeffrey, 2008). On the other hand, a budget fails to reconcile individual/personal and corporate goals. Budgets made in an organization are targeted towards the business and have little or no interest on personal goals of individuals. This also brings about tension and affect performance as the goals of individuals does not match those of the organization. Managers are also forced to overestimate costs when budgeting so as to avoid being blamed later should they overspend. In this case, the managers act out of fear of failure and not for the well being of the company. Consequently, budgeting makes people to act in order to meet the expectations of individuals rather than for the organization’s ultimate goal. Conclusion In conclusion, even though a budget seems important in running an organization, its effects are many and act as an obstacle to the general goal of an organization. Budgeting is a process that involves subjectivity and judgment that make the process unnecessary to a business. When the values and the autonomy of the employees are overlooked to suit or fix an appropriate budget, the organization is the loser and hence budgeting can be avoided to maintain these values. Bibliography Ray R., &Jeffrey K. (2008), Cost and value management in projects, New York, Sage. Hassan, M. (2007), Beyond budgeting, London, Routledge. Sid K. & Eric D. (2003), Budgeting for managers, Michigan, Michigan University Press. Sandra, D. (2006), Budgeting, London: Oxford University Press. Read More