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AYB225 Management Accounting: Budgeting Procedure and Its Benefits

Answer:

Introduction


The key to create the strong financial plan for future is to comprehend the amount of money that a person presently plans to spend and save. Budgeting and tracking the expense can provide a person with the knowledge and control the need of getting through the numerous financial changes (Lu et al., 2015). Questions have been raised whether there is any point in creating the budget.   For most of the companies budgets carries the goals of the future. It is mainly designed to act as the coordinator or control for the organizations.

Budgeting in an organization can serve several purpose, beside planning and control it can be used to measure the performance and predicting the uncertainties surrounding future in advance. However budgets have also become cumbersome in the modern world of business because it is an extensive procedure and requires numerous steps as well as depends upon the organization participations to numerous extent.

Argument against budgeting:

Majority of the leaders understand that budgeting is the procedure that has the problems. Studies conducted by (Kengatharan, 2016) shows that 20 to 30 per cent companies believes that budget is the obsolete even prior to the beginning of the budgeting year. In virtually majority of the business, the budget is regarded as the foundation of the organization control procedure. Nevertheless, majority of the experts believe that budget is a waste of time and effort. (Rossi, 2014) criticizes budget for evaluating performance and planning for the future.

First and most notable, budget is time consuming procedure with critics have lamented that budgets adds very little amount of value in comparison to the other efforts that is put into. An argument laid down by (Anessi-Pessina et al., 2016) states that budget is adds more difficulty for the organization in adjusting to break the curves of budgets. Managers on most of the occasions have underestimated the deviations from the curves and it is observed as accidental because they usually places greater emphasis on the budget. As a result of this, companies that ar reliant on the budget may fail to adequately respond to the newer situations rather budget may act as the impediment to the required modifications.

Additionally, a criticism of budgets also include4 that it fosters myopic behaviour among the managers because they focus on their respective departments. As a result of this, it leads to dysfunctional game among the managers which results in egoistic decisions rather than looking for the best interest of the organizations as the whole. In addition to this, the critics have claimed that use of budget would only introduce an internal political game among the managers, rather than representing political surplus.

Argument for Budget:

According to the words of (Frank, 2018) budgets main objective is to plan for the future activities. Budgets are aimed in acting the best way for companies to attaining their goals. The planning purpose of the budgets is generally used for planning the purchase of materials and financial issues. Budget often contains the information regarding the amount of information that is needed that ultimately makes it possible for planning the future inflow and outflow of liquidity.

From the strategic viewpoint, the value of the budgeting procedures remains vested in the control process. On the basis of the future anticipations, the companies identifies the actions it thinks to take for attaining its goals. The actions of the company is priced into the budget based on which the management on regular basis reviews the actual expenses in light of the budget to make sure that the pre-defined actions are performed. Budgets forms the basis of the future planning as they are aimed to assure that organizations acts in the best manner to attain their objectives. In organization all the units are rather related to each other. By using the budget the units need to collaborate and compromise when it is concerned with the limited resources. Every organization has their own set of budget and when these budgets are amassed, flaws and inaccuracies are exposed.

According to the word of (Raudla & Savi, 2015) budget can be viewed as the process of discovering the cooperation and coordination. Budget is usually prepared to enable an organization to solve the conflicts. If it is noticed that an organization has different way of doing things the budgets makes the department to compromise and work altogether so that it make the entire organization budget appear complete. Budget also helps in reducing the risk of over capacity. Budgets can be viewed as the tool of reducing the over capacity risks inside the company. By facilitating the comparison from the department’s budget contributes to coordinate an organization size of production.  

As stated by (Harris et al., 2016) budgets are aimed at facilitating the allocation of resources inside the organization as it aims in securing the resources effectively and distributing the same in the departments that are vital. By ensuring adequate distribution of resources in the department budget can be viewed as the medium of control instrument. The functions of budgets acts as the performance evaluator since it helps in setting the target in comparison to the actual outcome. Furthermore, budgets are regularly viewed as the instrument of distributing responsibility. Studies conducted by (Graham et al., 2015) suggest that budget are helpful in distributing the responsibility in more important manner rather than using as the instrument of control. Additionally, the researchers have emphasized the existence of synergies among the allocation of resources and evaluation of performance by reducing the asymmetry in the information amid the subordinates. The companies can eventually increase the overall internal delegation of information.

Conclusion:

On arriving at the conclusion, it can be stated that budgets are helpful in fulfilling numerous purposes. Studies have suggested that budget cannot be treated as the waste of time instead it forms the essential tool in planning and organization. Budgets are useful in evaluation of the performance and distribution of the resources. Though some authors have criticised budgets for being very time-consuming however budgets add value from the strategic perspective regarding the future anticipations of an organization.  

References

Anessi-Pessina, E., Barbera, C., Silia, M., & Steccolini, I. (2016). Public sector budgeting in European accounting and public management journals: missing in action? A review. Account Audit Account J. https://doi. org/10.1108/AAAJ-11-2013-1532.

Frank, A. H. (2018). Budget Theory: New perspectives for a new millennium. In Handbook of Public Administration (pp. 227-247). Routledge. 

Graham, J. R., Harvey, C. R., & Puri, M. (2015). Capital allocation and delegation of decision-making authority within firms. Journal of Financial Economics, 115(3), 449-470.

Harris, E. P., Northcott, D., Elmassri, M. M., & Huikku, J. (2016). Theorising strategic investment decision-making using strong structuration theory. Accounting, Auditing & Accountability Journal, 29(7), 1177-1203.

Kengatharan, L. (2016). Capital budgeting theory and practice: a review and agenda for future research. Applied Economics and Finance, 3(2), 15-38.

Lu, E. Y., Mohr, Z., & Ho, A. T. K. (2015). Taking stock: Assessing and improving performance budgeting theory and practice. Public Performance & Management Review, 38(3), 426-458.

Raudla, R., & Savi, R. (2015). The use of performance information in cutback budgeting. Public Money & Management, 35(6), 409-416.

Rossi, M. (2014). Capital budgeting in Europe: confronting theory with practice. International Journal of Managerial and Financial Accounting, 6(4), 341-356.

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