Almost every enterprise, regardless of size, complexity or sector, relies heavily on budgets and budgetary systems to achieve strategic goals and budgets have various roles in an organisation from a management accounting perspective view (Raghunandan M, Ramgulam N & Mohammed K, 2012). Some organisation will use budget with “stretch” to motivate and increase their performance in sales; or by using a more “realistic” budget for planning to increase expected sales. However, most of the companies use the same document for both purposes. Large companies tend to use budgets mostly for control and smaller entrepreneurial companies use them primarily as planning tools (Barrett & Fraser, 1977). Therefore, organisations are able to use budget to control …show more content…
This is because budgeting process fosters coordination, cooperation and communication among the various business units (Raghunandan M, Ramgulam N & Mohammed K, 2012). It promotes dialogue and understanding by linking various departments together thus ensuring that attainment of overall objectives. Budgets can also act as an instrument to remind everyone of the agreed targets and to measure progress to date. If the employees monitor the small amounts of customer 's account, they have the authority to write off and they will be more aware of the impact budgeting process has on the department. Therefore, by asking the whole team for ideas to increase company’s efficiency, it will come out with a better budgeting decision of getting a lower cost that will lead to higher motivation to improve employees’ work …show more content…
The process of creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term. This is because when a company creates budgets on their annual basis, they need to obey the limit of how much money can be spent on certain operations and try not to exceed the budget. Budgets are usually used to count the company’s expenditure to ensure that capitals are not wasted on unessential or unimportant items or the company does not overpay for economic resources used in the business. Therefore, by limiting the amount of capital that are able to be spent by the business may require owners and managers of the organisation to find new vendors or suppliers to acquire new business inputs, save money and meet budget limits.
By having budgeting, managers are able to review company 's profitability. It will be difficult for large companies to keep track of the department where they earn a lot of money from, so companies need to have properly structured budget to point out which department of the company is producing most money. This allows managers to decide which one to use and which part should be dropped to make investment and expand in others. Therefore, large companies need to review their profits annually so that they can decide to have new investments in assets or to expand their
Capital Budgeting encourages managers to accurately manage and control their capital expenditure. By providing powerful reporting and analysis, managers can take control of their budgets.
Budgetary control is a tool used by the management of the company for both planning and controlling. Planning is crucial in this case, which has to consider all strength and weakness so that company can achieve its success as per the plan. In case of Ferguson & Son manufacturing company the budgeted values are compared directly with the actual values. The company has the practice to make comparison with the fixed budgeted values with the actual budgets without any flexibility that is there is no consideration about the current scenario. As mentioned earlier, a planning process involves an in-depth analysis about all the circumstances so that the company can achieve them. In this case, the inflexibility present in the fixed budget added more trouble to the employee’s of the company. This behavior resulted in employees to consider that the company is concerned only about money and not about the quantity of goods that were produced by them. Generally, inflexible budget add more pressure to the employees as the company will be concerned only about the profitability at any point.
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Portfolio Theory is a way of budgeting that entails organizing budget activities into portfolios and comparing portfolios with each other in order to maximize utility. By creating portfolios, budget activities are not simply evaluated on their own merits, but also by how they interact with each other. A weighted average of expected returns provides the overall return of the portfolio, while examining the covariance of the activities in the portfolio shows the overall variance or risk that the portfolio has. By understanding the constraints and following particular rules, you can arrive at the best possible portfolio which will determine the best possible budget (Khan, 2002).
There are some valid examples from literatures as to why budgets are may be unnecessary tool in a company. The problem with budgets is that the managers may be rewarded when the planned budgets are achieved. This system may lead a poor quality of budgets, because the managers would most probably only focus on achieving the target and will try to set lower goals. Jensen (2003, p.381) stated that people is getting rewards for lying in the budget-based system; as a matter of fact, the reality is that in most organizations would use budget system that rewards people for ruining important information and punishes anyone who does something that give benefit the organization. This type of activity is certainly unhealthy and completely misused the budgeting system. Other than that, if a company have a fixed-performance contract, may lead the managers into fear that if they do not spend any left overs in the budgets by the end of the year, their funding in upcoming years will be cut down (Gary, 2003). Based on Hackett survey, it showed that between 60 per cent and 90 per cent from the top 2000 global companies implement this type of contract. Hence, these practices are not that practical and may drag down the company’s performance. As stated by Welch (2005 cited in Libby and Lindsay, 2010, p.56) that budgets may conceal any opportunities and stunt growth of the
Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget.
Traditional Budgeting is still a very popular technique and is widely used by the organizations across the globe.(Dugdale & Lyne, 2006).Environment is changing and hence the budgets should promote the innovations and keeping key employee need rather than restricting them (Daum, 2002).
Every government entity has a primary goal, which is to be as efficient and effective as possible while expending the smallest amount of resources. In addition, the resources expended cannot be more than the resources received as revenues. The budgeting process is a tool that assists government entities in being both efficient and effective. Before a budget can be adequately prepared, you must first understand the budgeting concept and secondly be knowledgeable of budget types.
One of the most important steps in the capital budgeting cycle is working out if the benefits of investing large capital sums outweigh the costs of these investments. The range of methods that business organisations use can be categorised in one of two ways: traditional methods and discounted cash flow techniques.
In order for a budget to be considered useful, it needs to be used as a comparison tool when the business results start rolling off the computer. This is referred to as budget vs actual variance analysis. By comparing a line item budget to actual line item results, managers can learn a lot about their business. This will enable them to make key adjustments and business decisions that
A personal budget and is a way for individuals to show and analyze spending habits, save money and develop a plan. Set up guidelines and goals to reduce over spending to be successful saving money. Decide what is necessary and what is nonessential to survival and personal growth. Achieve good credit as a habit, which will save or lower interest rates on purchases. To budget payments to stay below net income is essential.
Capital budgeting is one of the primary activities of a company. Most of the company uses capital budgeting for decision making process of selecting and evaluating long-term investment. The company have to make a right decision with respect to investment in fixed asset such as purchasing of new equipment and delivery vehicles, constructing additions to buildings and many more. The decision must be right because of the project involve huge amount of cash outflow and it is committed for many years.
The national budget is the main instrument through which governments collect resources from the economy, in a sufficient and appropriate manner; and allocate and use those resources responsively, efficiently and effectively (Todorovic & Djordjevic, 2009). The work of public budget has increased extremely more complicated, abstruse and worrying (Hou, 2006, p.730).
This is a budgeting process that requires managers to prepare budgets each period from ground zero for all the operations. Each period budget can feed off previous approved period budget. Under this method every activity must be justified and cost explained that generates revenue for a company. All costs are justified each time a budget is completed.
Capital budgeting is a process that analyzes and ranks the proposed projects in order to