Annual Budget Model

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Recommended: Chapter 9 choosing an activity based costing system

Introduction

Budgeting is a process in which every firm has to be involved with not only the board of director (Principle) who authorize the budget but also management team (Agent) who use it as well. In other words, budgeting need communication with every level of employee in the company in order to construct the goal or strategy of the company. Moreover, budgets are an instrument of power as well as being a reflection of power (Ashton et. al., 1995, p.289). Budgets that are not based on well-understood activities and costs are poor indicators of performance (Drury, 2005). Nowadays, at the time of information and technology the conventional budgeting is not good enough for withstand the rivalry in the global market. As Hope and Fraser, 2000 cited from Young, 2006 say the traditional performance management model cannot reflect today’s discontinuous change economy, which is why they point that annual budget model may be seen as having a number of intrinsic weaknesses and acting as a barrier to the effective implementation of alternative models for utilize in the success of strategic change. Therefore, I separate my essay into two parts. First, indicate and criticize on five inbred weaknesses of annual budget model. Second, explain ways in which the conventional budgeting process may be seen as an obstacle to accomplishment of the aims of Benchmarking, Balanced scorecard, and Activity-based models for the fulfillment of strategic change.

Discuss on inherent weakness of annual budget model

There are many weaknesses of traditional budgeting model and it has been the matter of considerable caviling. From recently research by Libby and Linsay, 2010 cited from Hansen et. al., 2003 encapsulated several discussions of budgets an...

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...vities are prepared on an incremental basis or called incremental budgeting. This means that running operations and the current budgeted allowance for existing activities are taken as the starting point for preparing the next annual budget. The base is then adjusting for changes such as changes in product mix, volumes, and price that are expected to occur during the new budget period. For example, the allowance for budgeted expenses may be based on the previous budgeted allowance plus an increase to cover higher prices caused by inflation

The major disadvantage of incremental approach is that the majority of expenditure, which is associated with the ‘base level’ of activity, remains unchanged. Therefore, the costs of non-unit level activities become fixed and past inefficiencies and waste inherent in the current way of doing things is perpetuated (Drury, 2005).

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