Planning and control are two considerable activities of management in any kind of organization that has as its aim; the profit maximisation. Budgets consider being the main tool for the process of planning and control. The first part of the essay focuses on the definition of the term budget system and the budgetary process. Also, it states the stages of the budgeting process and their necessity in an organization. The second part will discuss the effectiveness of budgetary control in unpredictable and dynamic environments of different companies. The discussion will provide some examples based on the use of budgetary control, with some of their positive effects. Then, the third part of the essay, will evaluate how the planning-based system may fail to succeed in an organisation. The fourth part of the essay will present some potential solutions on how competitive companies can use their budgets, so as to limit the failure of their planning-based systems. Finally, the last part of the essay will be based on real examples of organisations like Ryanair and Primark in order to analyse the way that they use their budget control.
Budgets have to be successful managed in any profitable organisation worldwide. When a correct budget is generated, it means that expenditures do not over exceed the total available amount of money hold by the company and it creates a great motivation for managers to achieve their goals. Defining budget, it is a particular plan that is expressed in quantitative terms. It also determines the acquirement and the use of the financial and other operating resources in an organisation in a specific period of time (Seal et al, 2009, pg434). The period might be divided into quarterly or monthly budgets. Any procedure ...
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[1] Noreen, Eric W., Brewer Peter C., et al., Managerial Accounting for Managers, Second Edition, McGraw-Hill/Irwin, New York, NY, 2011.
Donal E. Kieso, Wegandt J. Jerry, Warfield D. Terry. (2012). Intermediate Accounting. Hoboken, NJ: Wiley.
Romney, Marshal, and Paul Steinbart. Accounting Information Systmes. 10th ed. Upper Saddle River: Pearson Education, 2006. 193-195.
Accounting Theory: Conceptual Issues in a Political and Economic Environment (6th edition ed.). South Western College Pub.
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.
Budgets has been widely used by a lot of organizations since it was first introduced, because it can helps managers to properly plan and control the business’s resources. Successful control mechanisms as Schick believes are the essential to budgetary development (Gray, Jenkins, and Segsworth, 2002, p.11). However, recently the use of budgets to control organizations has been the subject to criticise and debate (Hansen et al., 2003 cited in Libby and Lindsay, 2010). In this era that full of unpredictable environments has make it even harder for a business to achieve the targets set in the budgets. In fact, European surveys also reported that there has been a growing dissatisfaction among organizations about their budgeting system (Neely et al.,
Hoggett, J., Edwards, L., Medlin, J. (2008). Accounting, 6th Edition. John Wiley & Sons Australia Limited.
Marshall, D. H., McManus, W. W, & Viele, D. (2002). Accounting: What the Numbers Mean. 5th ed. San Francisco: Irwin/McGraw-Hill.
Dutta, Sunil, and Stefan Reichelstein. Accrual Accounting for Performance Evaluation. Research Paper Series 1886 (2005): 1-35. Print.
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.
Garrison, R. H., Noreen, E. W., & Brewer, P. c. (2010). Managerial Accounting. New York: McGraw Hill/Irwin.
Quantitative plans are called budgets. Budgets are prepared to impose cost controls on the activities of an organization (Chenhall, 1986).Budgets are then used to evaluate the performance of the management and budget itself is considered as a standard to evaluate the performance Solomon, 1956). The purpose of the budget is also to implement the strategy of the organization and communicate it to the employees of the organization Rickards (2006). The change in the external environment has led to the change in the budgeting approaches from the initial cash based budgets to the zerio based budgets (Bovaird, 2007).
Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0. Retrieved from: https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=137
Marshall, D., McManus, W., & Viele, D. (2004). Accounting: What the numbers mean. [University of Phoenix Custom Edition e-text]. New York, NY: McGraw-Hill Companies.
It requires an adequate and sound organizational structure, that is, there must be a definite assignment of responsibility for each function of the enterprise. Budgeting compels all the members of management, from the top to bottom to participate in the establishment of goals and plans. Budgeting compels departmental managers to make plans in harmony with the other departments and of the entire enterprise. Budgeting helps the management to put down in figures what is necessary for a satisfactory performance. Budgeting helps the management to plan for the most economical use of labor, material and capital. Budgeting tends to remove the cloud of uncertainty that exists in many organizations, especially among lower levels of management, relative to basic policies and objectives. Budgeting promotes an understanding among members of management of their co-workers' problems. Budgeting force management to give adequate attention to the effects of general business conditions. Budgeting aids in obtaining bank credit as banks commonly require a projection of future operations and cash flows to support