HI5017 Use of Budgeting in Managing Resources of Organization Assessment Answer
This project intends to provide crucial information regarding the budgeting process which is used as a managerial tool to deal with the resources effectively. It is important for an organization to have a perfect management accounting system that can provide maximum profitability options to the company. However, the budget is one of the primary aspects of management accounting as it provides an idea regarding the total profit and expenses that are going to be incurred by the firm during the period. Apart from this, approaches that are associated with the budgeting process are also be taking to account for improving the budgeting process as well as primarily aimed at the effective planning with the budgeting need within the firm. The primary objectives of this report are to understand the concept of the budgeting process that is aligned with the management. Moreover, the discussion related to the use of the traditional budget is also being effectively taken into account to resolve the problems faced by the firm during the time.
Management accounting is an important aspect for an organization that is used by the manager to increase efficiency or provide all the vital information as well as the fact that they are essential for the growth of the firm. It is a concern with the overall presentation of the professional skills and ability to reveal the financial transaction that might assist the organization in policy formulation, planning, and controlling the business operation effectively (Songini, Gnan, and Malmi, 2013). It happens to be the primary responsibility of the management to frequently compare the accounting information with the budgeted estimation at the time of analyzing the changes. The budget tends to consists of effective coordination of financial planning that can satisfy the specific need of the organization so that they can reach its target accurately. Therefore, this project reports discussed information regarding the use of budgeting in managing the resources of an organization. Apart from this, the article has been chosen with the motive to understand the viewpoint of the scholar and different authors.
Article: “Practice Developments in Budgeting: An Overview and Research Perspective”
(A): Discussion regarding the budgeting process
In management accounting, the budget tends to be considered as a financial plan which is prepared for the definite period by the organization. It consists of planned sales, revenue, cost, expenses, and cash flow data. But it has been seen that without having proper planning in the case budget is being prepared for the firm can lead to various complications for the organization. Therefore, the role of the financial manager is to make sure that each step in the budgeting process must be aligned accurately with the targets that are set by the company for the concerned period. It has been seen that before preparing a budget, the manager needs to collect the information from various internal and external sources of the company and applied directly into the success and overall profitability (Henttu-Aho and Järvinen, 2013). The investment decision entirely relies upon the action which is done during the time of budgeting process. Perhaps, it is also a major liability of the fund managers to make decisions on the basis of past records so that future budgeting needs can easily be fulfilled. Therefore, an operational activity is required to be done by using the KPI and other specific financial tools that can provide high chances of data security as well as increase efficiency for future earnings. Although it is one of the essential aspects for different stakeholders of a company to make a plan that can best suitable for them and provide a sufficient amount of profitability in the future. Despite being various limitations, it is a crucial task for the entire team to work together by using the right kind of tools and techniques so that it can provide maximum value to the entity as always required to do so. However, the fund manager's decision for the budget is also intended to be taken into account because they are liable to take the report for the analysis of the financial position of the company. Thus, it is whereby the future profit and expenses that are decided in the context to streamline the expenses process for the firm. The budget tends to be done to keep track of the addition and on-going expenses that are incurred during that time. Here are the key steps that are required to be followed while making the budget:
Determine the goal: It is an important stage in the budgeting process to make a clear and smart goal that can assist the firm to reach its target accurately without facing any barriers. The gaols must be aligned to the individual or other stakeholder’s viewpoints so that chances of mistake could less and maximum value to them should be provided in the future.
Formulation of the budget: In the next step, the manager needs to take into account the information from different departments such as HR, Finance, production, marketing, and R&D regarding the specific requirements from the budget. These are included inefficiently into the budget and transfer it to the further procedure. Therefore, it happens to be a crucial decision for the budget manager to take into account the reviews and feedbacks of different stakeholders so that accuracy of the budget could be maintained for the longer period (De Castro and et.al., 2014).
Approval: In this particular phase, the accountant gets to approve of the budget from the department and other senior members of the organization by highlight the key limitation and benefits they are going to get in the future. The major aspects would be based on the cost and expenses which are planned for the production process.
Budget execution: After getting approval from the higher authority, it is now an essential job for the entire team to execute the budget as per the plan prepared by the managers. The comparison is based on the actual and standards data that are already being available with the manager on the basis of historical cost.
Oversight: The final stage is much more crucial because if the information mentioned in the budget is not implemented accordingly the chances of failure might be increased which will be quite harmful to the future growth and dependability of the company. However, in the case of any mistake or changes required during the implementation phase, the budget will again have to go through the entire first phase of the planning.
(b): Evaluation of the budgeting process that is aligned to the organization goals
From the above-mentioned article, it has been seen that one of the practitioners tends to express certain concerns regarding the use of budgeting for planning and organization performance evaluation. The practitioners argue that the budget always impedes the valuation of organization resources in the best suitable purpose as well as encourages the decision-making ability of the firm (Bargate, 2012). Budget is always considered as a necessary aspect for the firm that can highlight the impact of the plan, define the resources as well as to attain these plans by providing the right direction to the issues. In any business planning, budgets are always considered as key management a tool which is used for the planning, controlling, and monitoring the financial system of the organization. It tends to estimate the income and expenses for the chosen period of time. It has been identified that the resource is already being taken into consideration at the time of processing the budgeting process within the given article.
From the viewpoint of Heinle, Ross, and Saouma, (2014), it can be said that there are certain scholars who are focused on analyzing the particular accounting relationship with the management system of the financial transaction. Budgeting is generally determined as centered on the valuable allocation of the limited resources which are available to the organization to acquire the strategic priorities and future goals. Further, it has been related to the intimate relationship among the planning as well as budgeting constraints that must be taken into account during the time of reach to the pre-determined objective of the organization. The article demonstrates the practitioner's concern with the budgets by highlighting the two practices development; one is related to advocating the improvement in the budgeting process and the other one based on abandoning it. However, these development shows practitioners primary concern with the budgeting issues which was scholarly literature has been widely ignored while planning rather than more focus on traditional implication.
In the viewpoint of Rossi, (2014), it has been shown the level of concern associated with the budgeting rules which are suggested it’s potential for regulating the scholarly examined during the process. The reviews of certain criticism associated with the budgets in practices are taken into account for the further improvements in the budgeting process. However, the two important practices have been developed in the research perspective as well as suggested that it might be relevant to the researchers. It has been determined that the essential to be managing the budgeting plan to reach the desired results is primarily focused for the manager within an organization. Therefore, the services intend to provide vital opportunities to the practitioners which are often used to manage the resources effectively in the future budgeting procedure. Thus, it is vital to have a minimum number of operations that can create an efficient administration of the budgeting requirements that can assist in the overall production level. It will guide the financial managers to maintain transparency in the budgeting process so that the chances of mistake could be less in the future.
(c): Top-down and bottom-up budgeting process
In the context to manage the budget, the management tends to use different approaches that can assist the practitioner during the preparation of the budgets. In this procedure two of the most important methods such as top-down and bottom-up budgeting are considered more reliable for the overall management of the future budgeting needs. These two methods can help the organization to increase the accuracy and accountability of the budgeting process. A top-down approach is a situation in which a senior level of decision-maker or other executive members used to make the strategic decision regarding future estimation. It consists of various costs, expenses, total debt, and assets positions that are applied for the period. This particular method is disseminated as per the regulation to the minimum level in the organization structure that is having a greater influence on the performance of the firm.
According to Sopanah, (2012), the accounting manager used to develop an individual operation by considering the detailed budget needs within the available constraints. However, it happened to provide a valuable guideline to the administration of an organization to align the resources to each department so that every member of the group has the right to take advantage of the ongoing budgets. It can also provide maximum opportunities to the lower level departments in terms of taking orders as per the planned budgeted estimation. On the other hand, the bottom-up methods are related to problems that are faced by the lower departments can easily be communicated to the higher level. The plan should be systematically followed so that it can increase the confidence among the people that they are also a vital part of the organization's decision-making team. Moreover, it tends to be a crucial part of the budgeting phases because in case the budgets are not made as per the requirements of the lower departments than the chances of a negative return could be quite high. It would help the administration to maintain efficient management of the predicated budget that could give the right direction to the employees to maintain the accuracy of its work. Further, it will also deliver great responsibility to the senior managers to take the respective concern of the low-level division so that they can remain motivated while performing its job within an organization.
Shen and Wu, (2012), argue that these two major budgeting approaches have provided huge responsibility to the accountant while preparing the budget for the firm. Similarly, it can increase the chances of profitability and overall growth of the firm in the future. It intends to be determined as a little costly operation that could assist the finance manager for the estimated profitability. It can further recommend making an efficient decision by taking into account the overall growth of the firm. However, it can also help the organization deal with the implication that is associated with the budgeting process as well as enhance the profitability position of the company. Thus, it tends to be aligned with the more relevant aspects in this current market situation, so it can provide sufficient gain to the firm in the coming time.
(d): Critical analysis of the traditional budgeting approaches
In the viewpoint of Yang and Yang, (2016), the budget tends to be operating since the earlier times of the financial accounting system. In the past, the manager uses to plan the budget by using the traditional methods which is a little economical as well as a more time-consuming process. Because the entry of transactions is done manually, thus the chances of mistake are also quite high. Due to this, the entire managements tend to face various challenges regarding the total profit and costs application. However, traditional budgets are prepared by taking into account the financial information of previous years to prepare the budget for the current year. It happens to be quite a long process as financial information is being checked and analyzed one-by-one. Although it is used to make an estimation for the future revenues and expenses that are going to be incurred by the firm within an accounting period.
According to Diamond, (2013), due to rapid development in the technology and financial trends, the management has decided to make use of the more advanced budgeting system that can help the accountant to prepared a more relevant budget for the company. As per the given article, it has been seen that the practitioner within Europe as well as the US recently have been proposed two distinct approaches that can help in addressing the shortcoming of traditional budgeting practices. However, a more recent survey tends to provide more reliable information regarding the Finnish firm that has 25% retain its traditional budgeting system. Apart from this,
61% are active in the up-gradation phase, and 14 % are either abandoning. It has been suggested that traditional budgets tend to control the combined planning and overall performance analysis of the lead to both inefficient planning and dysfunctional behavior. In the words of the BB group, they have suggested either a radical transformation in the traditional budget as per the basis of performance analysis so that negative implications can be avoided completely
(e): Recommendation for budgeting
Throughout the entire article analysis, it has been determined that the budgets are one of the key aspects for the Finnish firm in order to manage its budgeting needs effectively. After taking into account the various problems related to the budgeting process, it has been decided to recommend certain key options that can help the management to reach its pre-determined objectives smartly. From the analysis of the ABB group, it has been planning to focus more on the performance by sharing a common belief that traditional budgeting should be fundamentally mismatched as per the current market trends. It can lead to creating a negative impact on the firm overall profitability; therefore it should be replaced with the advance budgeting system such as ZBB, Activity-based budgeting, expense related budget, and other important budgets (Becker, 2014). The use of the ABB method, entirely aimed at generating a budget by using an activity-based model of the organization. Once these activities, as well as resource consumption needs, are fulfilled effectively that chances of getting more accurate growth and success could also be enhanced in the future. Apart from this, the firm needs to prove a high set of tool for balancing the total capacity of the budgeting system. With regard to this, adjustments should be made on the demand or transforming amount of the resources that are applicable to the organization which could also adjust by either the additional resource expenditure rate. Moreover, these insights used to determine an efficient product, process, or decision-making to provide maximum support to the organization's future goals. In the end, ABC budgeting should be reinforced as a horizontal as well as process views of the firm overall orientation. This model intends to provide maximum facilities to the integration of budgets along with the other managements a plan which is based on the cause-effect relationship. Thus, it happens to be the primary responsibility of the project managers to take into account the key aspects of the budgets that can assist the firm to acquire maximum growth and profitability by using the advanced budgeting techniques. It can also guide the firm to reach its target by taking into account the productivity margin as a base for the future years.
From the above project report, it has been concluded that the management of the accounting system is considered one of the major aspects of the organization. Therefore, it is important for the financial manager to have proper knowledge of the budgeting process and methods that can provide maximum opportunities to reach the long-term business objective. In this process, the top-down and bottom-up approaches are also essential for the effective processing of budgets. Therefore, the replacement of the old budgeting method can lead to increase in maximum chances of better future profitability for the company.