The Advantages and Disadvantages of Budgeting as a System of Organisational Control
A budget is a short-term financial plan of income and expenses expected over a certain period of time (usually one year) used to achieve a businesses objective. Budgeting can be useful for exercising control over a business because of its nature as a representation of a plan. Control is generally viewed as making events conform to a plan. As a budget is represented as a plan, allowing events to conform to it seems to be an obvious way to try and control the business.
One of the main reasons why plans fail is because they are simply unachievable in the first place. In order to achieve and implement control over an organisation, the reasons why something did not go according to plan must be discovered. Furthermore it is essential for budgets in the future to consist of achievable targets and should be adaptable to unpredictable changes.
As most businesses primary target is to maximise the returns for their shareholders, it is fair to assume that the most important budget target to meet is the profit target. This essay will therefore focus on the benefits and drawbacks of using budgeting as a system of organisational control in terms of how well it enhances or impedes the generation of profit.
In order to answer this question, one must firstly look at the reasons why budgets are used as a form of organisational control in the first place. The role of a budget is to put long-term plans into exercise for the immediate future. Being used as a plan it enables managers to analyse the difference between planned and actual outcomes and with this information carry out the precise procedures to correct any negative variances to steer...
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...ime efficient as it means they will not have to search through general-purpose documents that are not specifically aimed at them. Finally it is essential to take positive action on reports that reveal adverse variances so they do not occur in future.
One must also recognise how using a system of budgetary control can be limited. For example unrealistic standards that are set are arguably useless and can have an adverse effect on performance. The assessment of a manager’s performance and their variance calculation could also be negative due to factors that are outside their control. This limitation however, can be overcome by differentiating controllable factors to ones that are not. Some also argue that creating a clear distinction between the responsibility of various managers may be difficult and this may eliminate one of the effective uses if budgetary control.
I attended the Saturday Lab 1 session discussing the Denison Specialty Hospital case study. In our session, we had a through discussion into the different budget terminology. I learned about the difference between accrual and cash accounting methods, which is based on the timing of when the revenue and expenses are recognized. I also learned about responsibility centers as an organizational unit under the supervision of a manager, who is responsible for its activities and results. In addition, the manager is accountable for the budget of the department that they head. Therefore, a centralized form of management in developing the budget because it makes easier to because the information for the department budget is located
Preston, AM. Cooper, DJ. Coombs, RW (1992) ‘Fabricating budgets: A study of the production of management budgeting in the NHS’, Accounting, Organisations and Society Vol 17, No 6 pp 561-93
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.
Top-down budgeting is the preferred method of budgeting for government agencies and many organizations (Ljungham). The methodology of top-down budgeting is described as “dominated by top members of the executive branch and the legislative branch” (Williams & Calabrese, 2011, 178). The methodology entrusts top members to make annual budgeting decisions for their organizations. In many instances, top members also use this time to set annual program or department goals and targets. Top members make these decisions without solicitation of input from bottom levels of an organization. This can result in operational and logistical constraints in the lower levels of an organization when plans are implemented (Williams & Calabrese, 2011). Additionally, it can serve as a source of frustration for staff when uninformed budgeting decisions create consequences. This is particularly true when staff is tasked with making things work in the aftermath of budgeting decisions, despite having clear or attainable goals and budgets. Like all budgeting methodologies, there are benefits and difficulties.
Since there is criticism towards traditional budgeting, the different approach to the traditional budget has gained its momentum. Over the years, traditional budgeting lost its relevance with the modern business world, and it no longer satisfies the needs of the managers. With new budgetary systems alternatives, it will suit better for the need of the modern business.
The use of budgets in the healthcare sector have several benefits and serve several purposes. For example, budgets set the performance agenda for the year ahead through estimation of revenues and expenditures (Byrne, 2007). Additionally, a budget allows a health care organization (HCO) to provide a forecast of income and expenditure or profitability, can be used as a tool for decision making, and as a means to monitor business performance (Leo Issac, n.d.). Forecasting allows HCOs to predict whether a profit will be made or not (Leo Issac, n.d.). Moreover, budgets aid in decision making or determining if a potential expenditure has been planned for or not (Leo Issac, n.d.). Lastly, budgeting allows HCOs to
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.
Rationales for preparing zero based budgeting- to control cost in the organization zero-based budgeting is the most efficient way (Wilkinson, 2013).
Zero-based budgeting carries many advantages. An important advantage of zero-based budgeting is it will cause a manager or department head to be more cognoscente of their financial requirements of their department. This will eliminate un...
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.
While traditional budgets can be useful in assisting managers with internal control, they are not typically as useful as a policy or decision making tool. Line-item budgets assure elected and administrative officials that money is being spent only for approved purposes, but they do not show what is being accomplished with the money. (Government of Alberta, 3) Additional drawbacks to line-item budgets involve the promotion of indolence, due to the minor modifications made to budget planning each year. Line-item budgeting can result in ineffective and costly actions because management is not allowed the flexibility to address changing situations. (Virginia Society of Certified Public Accountants, 7) Many government programs are often forced to use funding, or lose funding at the end of a program year; these restrictive processes have the potential to invite micromanagement and impede the fulfillment of program objectives. (Government of Alberta, 3) In comparison, performance budgeting has more of a policymaking orientation it links plans, measures, and budgets and it pushes administrators and policymakers to contemplate the big picture. (Brewer, 23) Performance budgeting provides useful information about the impact of budget decisions on people and gives departments increased budgetary flexibility. Additionally, performance budgeting allows for ongoing monitoring and strengthens legislative decision making and oversight.
As we had learned in our class of Administration of Financial Resources (PAD 343.02) budget can be understood as a collection of documents that describes what had been accomplished as a result of expenditure, it also describes the current situation of a government with respect to revenues and previews expenditure, and it is used for submission from the Executive branch to the Legislative branch for appropriation or approval. In other words, a budget is a “systematic plan which indicates where the money will come from, how much will be spent, and what it will be spent for. A budget is a fiscal plan for a given period of time.” and I have to add to this that there is a variety of budget formats. Even though this is a very complex explanation
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).
4. A budget is a plan of action: A budget is a plan because it concerns actions to be taken rather than a passive acceptance of future trends. Planning is the establishment of objectives and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve the objectives. Like all plans, budgets seldom turn out to be totally correct predictions of the future. Conditions may change during the budget period, which renders the budget to be inaccurate. Even so, budget is useful in guiding the actions of
Budget is becoming more and more important in the company and organization nowadays, the enterprise can get the benefits when adopted the budget. Budget is a good way to execute the strategic plan of the company. However, set the budget is not enough, the enterprise need to use the budgetary control to make the budget plan running effectively