Managerial Accounting: Traditional Budget - Essay Example

Managerial Accounting-Traditional Budget Name: Course: Tutor: Institution: Date: Introduction The eternal market environment also categorized as the macroeconomic environment is gradually changing. In this case, the macro economic factors changes necessitate ad influence operational changes in organisations. However, unlike internal organizational changes that an organization’s management has control and influence over, they have no influence and control on the macro economic factors. As Ryan (2007) noted, over the decades, organizations have resolved to overcome the challenge through the application of strategic management planning and evaluation forces. The strategic management approach in organisations includes the application of approaches such as planning, implementation, as well as evaluation and control. In this regard, one of the commonly applied planning and evaluation tools in organisations has been the use of budgets. On its part, a budget can be classified and singled out as a tool through which resources utilization in an organization is planned. In this case, a budgetary plan offers a strategic plan and roadmap through which an organization could spend up and utilize its resources over a given period of time. However, despite the merits and positive implications of the budgetary control system, the changing business environment exposes the process to a range of challenges in the market. As such, this essay evaluates the merits and challenges facing budgetary control measures thus offering a conclusion on whether budgets preparation should be continued or discontinued into the future. Merits of Traditional Budgets Planning Merit On one hand, it is imperative to evaluate the positive implications and effects of use of budgets in the business environment. As such, as already discussed, the use of budgets despite the changing market needs and external environment factors has positive implications. On one hand is the planning of resources. Ghallab, Nau and Traverso (2004) discussed the concept of planning as the approach through which organizations allocate the respective resources at their disposal. In this regard, through the development and use of budgets have over the years been applied as an approach through which organizational managers develop and establish approaches through which to subdivide the resources to the respective organizational needs. In order to evaluate the efficiency of the overall budgets use as a resource allocation tool, Bronic, Ott and Urban (2012) in a case study of local governments budgets conducted a study evaluating the extent to which budgets development enhance organizational management success. In its analysis, the study evaluated organisations applying the use of budgets as a resource planning tool. In this case, it revealed that through the development and use of resources allocations budgets, organisations increased their resources use efficiency in the market. In this case, it facilitated fair and sound allocation of resources to the various organizational functions and needs. In addition, the use of budgets has over the years adopted and applied the approach of forcing the leaders and organizational managers to adopt a futuristic approach on the organizational perception. In this case, the use of budgets requires the managers to adopt a future perception on their management through long-term planning of the resources utilization in the market. As such, long term allocation of resources through long term budgets provides a legal and managerial framework through which managers develop a future perception approach thus allowing for increased probability of the organisations future success. Evaluation and Control On the other hand, the use and adoption of the budgets allow for the evaluation approach. As a management function, evaluation and control includes the process of evaluating the performance and success of adopted organizational strategies and approaches. In this case, proper evaluation tools and process adoption enables organizational managers and leaders develop a framework and perception on the success or failure through which the managers can develop subsequent decisions in the market. Nik Nazli, Sulaiman and Norhayati (2003) in an evaluation of Malaysian companies conducted a study through which to evaluate the role of budgets as evaluation and performance tools. In this regard, the evaluation established that through increased budgets use organizational apply the blue ocean management strategy. Some of the discussed issues increased use of the blue ocean strategy in the market that allows the organization to evaluate its performance and overall success based on its previous performances in the market. Therefore, through this strategic approach, budgets allow the organisations to evaluate their success rates based on a self evaluation approach in the market. In this case, this evaluation establishes that through increased budgetary allocations to the acceleration of a budgetary process allows for increased organizational systems evaluation and control for the application of the continuous improvement process that incorporates the building up the respective successful allocations in the market. Traditional Budgets as Rigid Tools Focus on Finances The budgetary control system includes the application and division of resources to the various organizational functions. In this case, the allocated resources are targeted at enabling and supporting the various organizational activities to their successful completion in the market. However, it is imperative to note on the challenges of such a resources allocation system. On one hand is the focus on finances allocation. In this case, the old and traditionally budget system includes and majorly focuses on the allocation and disbursement of financial resources. As Dugdale and Lyne (2010) argued, the process of budgeting pegged on the process and belief of the role of capital as a key organizational resource. Although in the traditional past capital served as a key resources, changes in the external market environment have altered this standing. In this case, increased multinational organizational developments as well as high capital investments as well as the presence of capital fund generation approaches, capital as a tangible asset has reduced its role as a key competitive edge in organizations. With this development have emerged the aspects of intangible assets as key among the organizational competitive edges. Therefore, a mere financial resources allocation is no longer enough to propel and increase organisations market performance as well as guarantee their ultimate success. As such, based on this review evaluation it is apparent that the traditional budgetary control system is no longer a sufficient control and evaluation tool. Consequently, this review essay establishes that the traditional budget control system no longer holds as an ideal management success position. As such, the emergence of intangible assets factors such as the organizational culture, HR capabilities among others. Therefore, in order to guarantee and increase the overall organizational success possibility in the market, it is imperative to change the current budgeting control system that focuses on the financial aspects as traditionally held. Alternatively, a new budgeting and organizational evaluation control should be established to incorporate and include the aspects of organizational intangible assets that are increasingly and to a great extent influence by the changing market competition landscape. Internal Conflicts and Challenges As already discussed in this essay, the budget control system includes the allocation and administration of resources to the various organizational functions and activities. In the organizational a management and administration structures, they are classified and divided into respective functions and department. Nicholas (2008) discussed on the common organizational structures in the market. In this case, the evaluation evidenced the argument that most of the organisations despite the increased efforts to reduce on bureaucracy through reduced management levels retained their functional departmentalization as a form of increased governance efficiency, resulting to respective departments’ existence such as the HR department, finance department, production department among others. In the traditional budgetary allocation system, organisations required the various departmental functions to develop budgetary estimates outlining their activities as well as financial requirements. Consequently, the executive management relied on the developed budgetary estimates as a basis on which to develop and allocate resources to the various functions. In this regard, although as a viable planning approach the practice exposed organisations to increased internal conflicts mainly as a result of result constraints and competition for the budgets allocation, in fighting and conflicts that have numerous negative implications on enhancing organizational development and market performance. In this case, this essay establishes that the use of budgets as the basis for funds allocation as adopted traditionally has increased the overall management challenges. Consequently, this essay recommends the adoption of alternative control measures to funding and allocating resources in organisations. As such, one of the fundamental alternatives to traditional budgeting that organizations can adopt is through specific projects evaluation. In this regard, instead of funding and allocating budgets to the respective departments, allocation should be project based allowing for actual projects funding all of which should be based and constitute of cross functional teams sourced from across the respective departments. Such a revolutionized new budgetary control approach would ensure overall reduced conflicts within organizational departments. Management Control As already discussed, the traditional budgeting process includes the process of estimates development by the respective involved employees as well as approval and allocation by the executive management. In this respect, although the employees and line managers develop the estimates, it remains at the reserve of the executive management to allocate the resources. Therefore, the traditional budgeting system is rigid and concentrates power to the management. This decision making power concentration on the executive management is on defiance to the global management changes. Subramaniam and Mia (2001) conducted a review on the growing management changes on decentralization. As such, the evaluation established that the market is highly dynamic and changing. As such, this demands and calls for increased changes in the structure and budget management system. As it stands, the traditional budget system is rigid in that it limits the responsibility and power of the employees to execute and allocate resources. Instead, the system empowers the executive management to allocate resources. Although the management has knowledge on strategic market aspects, the drastic changes in the market require increased flexibility. Among the reasons for changing resources allocation includes changing consumer preferences and competitors actions. As such, at times, market changes call for change of spending strategies by respective organizational functions. Unfortunately, as Otley (2001) stated, the traditional budgeting system does not provide for these changes. In this regard, the system demands that funds should be utilized and spent only for the allocated functions by the executive management. Consequently, this leads to reduced organizational flexibility to adapting to market changes dynamics. As such, this evaluation essay conclude that based on this establishment for increased rigidity and the potential organizational market failure and loosing of competitive edges in the long run, the traditional budgeting system should be abandoned. Instead, organisations should develop new alternative budgeting systems. In this regard, instead of treating and perceiving the overall organizational as a whole, such organisations should consider enabling and providing resources allocation powers to the respective functions. In this regard, such a modern budgeting system would ensure that respective organizational systems allocated resources to their desired activities as well as acquire increased flexibility to respond to market changes, a virtual development that would increase the overall organizational competitiveness and success chances in the highly dynamic market setup. Increases Expenses Besides its already discussed rigidity challenges, the traditional budgeting process is increasingly lengthy. In this regard, the budget system includes and involves a chain of activities that have two strategic organizational implications namely time and funds consumption. On one hand, the lengthy process takes an increased number of times to develop the estimates, authenticate them and develop resource allocations by the management. On the other hand, the process includes the application and use of resources in the preparation process. In this case, although the budgeting process as traditionally perceived aims at increasing resources efficiencies it leads to increased resources use. Therefore, as Wim (2000) stated, such challenges increased the risk of a budget slack. In this case the budget development process involves much funds use thus isolating the idea behind the budgets development. In this regard, it is imperative to change and shift the existing rigidity in the budget preparation system. In addition, n additional cost challenge in the traditional budgets development process is through historical evaluations as base for new consecutive allocations. In this case, this leads to reduced innovation. In this regard, organisations should adopt and develop new budgetary systems. As such, on one hand, the new system should reduce on the budget preparation system and the process system. Consequently, the new system should eradicate the budgetary preparation system through empowering respective departments into making their own budgets. On the other hand, the budgetary system should develop new evaluation systems in the market. In this case, instead of using the historical reviews as the base years, the system should adopt a new zero based budgeting system in which every year budgeting needs are developed based on the forecasted needs rather than on historical evaluation on past allocations. As such, this would reduce on the overall costs and time undertaken in developing organizational budgets as well as executing and controlling and evaluating their overall performance and success. Conclusion In summary, this evaluation essay develops a critical evaluation of the budgeting and budgetary control systems in organisations. In this case, the essay develops a strategic evaluation of the merits of the traditional budgeting system but also on the justification as to why that despite the merits, the system should be adjusted to reduce on its evident rigidity. In this case, key among the merits of budgeting as a management tool as discussed include proactive planning and performance evaluation to increase resources utilization efficiencies. However, on a similar note the essay establishes that the traditional budgeting approach is rigid in that it focuses on capital and financial resources rather than on intangible resources as the dynamic market changes demand. Moreover, increased concentration of resources allocation mandate by the management reduces flexibility to market changes as well as increasing internal conflicts. Therefore, the essay concludes that indeed the traditional budget is a rigid tool and should be discarded. 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J., 2008, Introduction to psychology, UCT Press, Cape Town. Subramaniam, N. & Mia, L. 2001, "The relation between decentralized structure, budgetary participation and organizational commitment The moderating role of managers' value orientation towards innovation", Accounting, Auditing & Accountability Journal, vol. 14, no. 1, pp. 12-29 Read More