Budgeting, Management Accounting - Essay Example

Management Accounting By Student’s name Code+ course name Professor’s name University name City, State Date Table of Contents 1.1.Synopsis 2 1.2.Introduction 3 1.3.Budgeting process 4 1.4.Types of organizations budgeting 5 1.4.1.Traditional budgeting 6 1.4.2.Zero-based budgeting 7 1.4.3.Priority-based budgeting 7 1.4.4.Activity-based budgeting 8 1.5.The role of Budgeting in organizations located in Australia. 9 1.6.Conclusion 10 BUDGETING 1.1. Synopsis This article covers organizational budgeting. The article gives a brief overview on budget and how budgeting process is being implemented in the organization. Traditional budgeting has been discussed in depth because it is the most commonly used type of budget in most organizations based in Australia. These organizations prefer traditional budgeting because it is easy to use and does not demand much time and resources to implement. However, experts have criticized it saying that traditional budgeting has a lot of challenges making it ineffective in the management of the organization. The study has therefore given a few alternatives that can be used in place of traditional budgeting and their strengths. These other types of budgeting can also be incorporated and used together with traditional budgeting. Finally, the article has given most of the roles that budgeting is playing after it is well implemented in the organizations based in Australia. 1.2. Introduction Budgeting is one of the crucial activities that most business have to undertake in every year. It can be done either as a long-term or short-term practice (Bierman and Smidt, 2012). Short-term budgeting can be used as a business strategy for an organization to manage their monthly finances so as to achieve the long-term goal that is set. The long-term budgeting is mostly done annually just after the end of the organization’s financial year. Budget is defined as a financial plan that is used to control the performance of organizational activities over a given period (Baiocchi, Braathen, Teixeira, Bonapartism, Budgeting, Anjaria, and Exclusion 2013). Budgeting deals with allocation of resources in accordance with the established financial goals. Corporate Budgeting is not just about planning, but it also involves allocation and monitoring of the whole process. This process is very sensitive and its carried out by the departmental heads, the managers, finance team and professionals in the organization. These people are involved because the implementation of the budget affects everyone in the organization and its the role of team leaders to ensure that the activities of the departments conforms to the set budget. Most of organization in Australia use the traditional budgeting. However, due to a few shortcomings with traditional budgeting realized in the recent years, they have preferred to seek alternative means types of budgeting (Mithas, Tafti, and Mitchell, 2013). Below is a discussion of how budgeting is implemented, an overview of traditional budgeting, alternatives of other budgeting process and the role budgeting is playing in Australian organizations. 1.3. Budgeting process A good budgeting process requires budgeting of the income before it is used. Every organization has its fixed cost that it has to cater regardless of its monthly expenses (Chen, and Jermias, 2014). For example; rent of one of their warehouse. These fixed cost should be equated to the reliable revenues. It is because the organization can do little to alter them. The decisions made during the making of the budget are influenced by the priorities, fiscal accountability, the goals and the mission statements of the organization. The following are some of the steps that are necessary for the organization budgeting process (Köseoglu, Topaloglu, Parnell, and Lester, 2013); As the manager, you should ensure that the whole budgeting process documented. This makes one to focus and monitor their progress. The second step is to determine who will participate in the budgeting processes. Most organizations prefer to use staff members rather than board members because employees have more details about the operations of the organization. The head of departments and the managers are also some of the people who should not be left out (de Azevedo, de Oliveira Lacerda, Ensslin, Jungles, and Ensslin, 2012). Come up with a timeline stating when to start and finish the budget. The budget needs to be complete two months before the end of the current financial year. It is because it needs to be approved by the board members and in case of any amendment it should be done early enough to avoid inconveniences. The team should come up with a list of items and activities that need to be served by the budget. The items should then be arranged according to the priority assigned. This list will be used to allocate resources. Ensure that the budgeting list is in-line with the finances available. This is to ensure that each activity has been assigned adequate resources for it to operate efficiently. Develop worksheets, templates and tools that will accommodate the budget item and allow room for adjustments. Come up with policies that are to be used to implement the budget. This will include documentation of tasks, a list of responsibilities, assignment and deadline to be achieved during the implementation of the budget. These are some of the steps that lead to successful making of the budget for an organizations. The type of budget can also be used to determine the approach to be taken in the budgeting process. 1.4. Types of organizations budgeting Most of the organization use traditional budgeting. It is more preffered because it is termed as cheap, and easy to use. However, experts have discredited it saying that this type of budgeting restricts creativity and is not effective when used alone in the organization. Zero-based budgeting, priority-based budgeting and activity-based budgeting have been considered to be the alternatives types of budgeting. It is recommended that an organizations combine two or more of these types to come up with a strong budgeting process that will efficiently serve the organization (Deng, and Peng, 2011). 1.4.1. Traditional budgeting This type of budgeting is easy to use since it is based on historical information that uses the incremental approach (Zeller, and Metzger, 2013). The budgeting panel will just take results from last year’s budget and adjust them in consideration of growth and inflation. The changes that are obtained are then added or subtracted from the expected results. The budgeting panel uses the previous year budget as the baseline in which a cost reduction initiative needs to be applied. Each departmental head comes up with a cost reduction strategy that will be used to reduce cost in the coming financial year without necessary damaging the organizational operations (Pietrzak, 2014). The traditional budgeting is carried out in two ways; The bottom-up approach The top- down approach The bottom-up approach is when the unit managers are supposed to create their budget based on their department. The budget is then forwarded to the central management that reviews it. In case of any changes, the two parties negotiate, and the changes are implemented (Zeller, and Metzger, 2013). On the other hand, the top-down approach is when the central management comes up with a budget that contains targets for each unit. The manager of each unit expands it customized their budget as per that unit and also be in line with the primary budget. Both approaches leaves a planning gap that is created due to the differences between the performance level and the expectations of the senior management. To fill this gap it takes a lot of time and in some cases the two parties may not have agreed on the issues of the budget when it is being implemented. This makes the implementation of the budget by the unit managers hard and can sometimes lead to the failure of the whole budget (Pietrzak, 2014). 1.4.2. Zero-based budgeting This type of budgeting can be combined with the other types so that to effectively run the organization. The zero-based budgeting requires that all the expenditures above zero should be defined and justified (Works, 2015). That is, the organization should list all the proposed costs in the budget in a detailed form. The panel then reviews the expenditures, and a cheaper alternative means are identified. This type of budgeting is mostly used during a cost reduction exercise. It is a strategy that most organizations would use with the aim of increasing their profits. However, in case of fixed costs that can hardly be changed, this type of budgeting will have little or not effect on the organization. It is regularly combined with the traditional budgeting to maintain regular financial control. 1.4.3. Priority-based budgeting Priority-based budgeting is common in most organizations. The resources in the organization are never adequate. It is for this reason that the organization makes a competitively ranked listing that ranks activities competing for resources from the highest to the lowest. Items in the ranked list are commonly known as decision packages. This list determines which activities receives financing first also which activities are supposed to be substituted or eliminated in the organization. This type of budgeting is similar to zero-based budgeting only that zero based starts by elimination unnecessary expenditures but they both serve the same purpose (Pal, Kumar, and Sen, 2012). 1.4.4. Activity-based budgeting Activity-based budgeting monitors the organization’s activity. It operates in line with the set corporate set goals. It is used as a long-term drive to shape the organization and to improve the delivery of services (Hansen, 2011). All activities are listed with their costs. A target or budget is then set for these activities and costs which monitors productivity, efficiency, effectiveness, utilization and capacity of those activities as they are being implemented. The major difference between activity budgeting and traditional budgeting is that in activity budgeting, the historic expenditure are not factors that are considered. Activity budgeting considers factors that drive these activities rather than the past expenditure. For example, the volume and quality of the activities should be an essential driver to the allocation of finances. The budget is then derived from activities using their estimated cost rates. Activity-based budgeting is preferred because it reduces the complexity of the budgeting process and concentrates more on the management of the business not necessary considering the cost (Pietrzak, 2014). The budgeting process is necessary for the organization, and it is sometimes challenging for the managers and their employees to operate without it. The managers have opted to combine a few types of budgeting styles so as to take care of the challenges that come up when using a single method. However, for the budgeting process to be successful, it will require a lot of planning, persuasion, intelligent interpretation, proper management, and supervision (Pal, Kumar, and Sen, 2012). Most organizations in Australia have adopted the budget as a tool to help the manager and the workers to manage the activities and resources of the organization. 1.5. The role of Budgeting in organizations located in Australia. The implementation of the budget has had direct and indirect effects on the organizations. These has resulted to the improved level of services in the organizations and also increased profits (Chenhall, Hall, and Smith, 2015). Budget is playing the following roles in the organization: Planning Control Measuring performance Enhancing communication across the organization Encourage coordination and teamwork. Motivation factor Budgeting is as a result of planning that is essential for the organization. Most organizations have set their long-term and short-term goals. These goals cannot be achieved through proper planning of every step the organization intends to take. A few short-term goals may be set and should be in line with the long-term goal. Short terms budgeting ensures that the organization is on the right track and works into achieving those objectives (Aranda, Arellano, and Davila, 2014). Just like most planning processes, budgeting helps to ensure priority is maintained, and resources are effectively used. It helps to maintain control in the organization. The workforce, the resources, time and organizational activities need to be maintained on track. Budgeting allocates resources to each activity and gives timeline that should be used to achieve certain objectives. The budget produced by the central management is made up of combined small budgets from the specific units. This means that for the final budget to be successful the managers in the small units must be successful in whatever they are doing. It also means that the budget can be used to measure the performance of the organization. For example, some of the organizations in Australia have been using the traditional budgeting. The traditional budgeting requires the budgeting panel first to consider the previous financial budget and improve it. Communication is essential across departments and employees so as to maintain coordination and teamwork. Coordination and teamwork are necessary for the organization to achieve the a common goal. This is mainly used in organizations that use specialization of work where people do their specified jobs and must coordinate. Budgeting set targets that should be achieved within the specified time. This helps offers extrinsic motivation where the employees will work hard to achieve certain levels that have been set by the budget. 1.6. Conclusion The budgeting process has been defined as one of the most effective managerial tools that is being used by the management to achieve its goals. For the organizational budgeting to be successful, the budgeting panel needs to plan properly, and ensure that the plan is properly implemented across the organization. Most Australian organizations have been found to be using traditional budgeting that is highly criticized due some of its faults. However, the study has suggested a few alternatives types of budgeting that can be used by most organizations either as a combination or alone. Budget plays a great role in the role management and running of the organizations. References Aranda, C., Arellano, J., & Davila, A. (2014). Ratcheting and the role of relative target setting. The Accounting Review, 89(4), 1197-1226. Baiocchi, G., Braathen, E., Teixeira, A. C., Bonapartism, L. A., Budgeting, P., Anjaria, J. S., ... & Exclusion, P. (2013). Transformation institutionalized? Making sense of participatory democracy in the Lula era. Democratization in the Global South: The Importance of Transformative Politics. 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