BUDGETING – A NECESSARY EVIL: AN ANALYSIS OF BUDGETARY CONTROL USING DIFFERENT THEORETICAL PERSPECTIVES
Despite being ubiquitous, the traditional budgetary control process and its end product (budgets) have been widely criticised in extant management control literature. Prior to the 1990’s concerns about budgeting were raised by academics and the concerns were mostly about ways of improving budgetary systems- Better budgeting (Argyris 1952). Now the criticisms are led by management consultants with an interest to persuade companies to change their management models by moving beyond the budgets (Hope & Fraser 1999, Wallender 1999). The criticisms of budgetary control system, which include: wasting of managements’ time, encouraging dysfunctional
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This perspective is based contingency theory which emphasises that there is no one best way to undertake an activity. The optimal course of action in any given situation is instead contingent (dependent) on existing factors. This perspective therefore contends that management control should match the circumstances in which it operates. Budgeting and budgets have been criticised to have failed in this regard. The contingency criticism against budgeting started in 1970’s when Agyris argued that new developments in organisations required a new form of budget variance analysis. Hope and Fraser (1991, 2003) have taken the argument to further. They claim that budgeting should be abolished on the premise that it incapable of meeting the demand of the current competitive environment in which organisations operate. Their claim is based on the assertion that the traditional budgetary system is based on a top-down command structure of controllability which was only appropriate for business in the 1970s where volume, scale and cost were stressed. Firms now operate in a competitive environment where innovation, quality and customer service are the defining factors. Front managers are therefore expected to be constantly creating and responding to new opportunities for business. However, they are restricted to react to changing circumstances because they normally have to wait for a fiscal year before plans are reconciled to the …show more content…
Budgetary control system is criticised to encourage dysfunctional behaviour under management control perspective. Under contingency perspective, it is criticised to be inappropriate to meet the demands of the current competitive environment. It is also criticised to cost too much of managements’ time and incapable of identifying the root of problems under cybernetic perspective. Similarly, managers are criticised to have been indoctrinated with the principles of budgeting under the organisational behaviour perspective. Most of these criticisms are constructed under the assumption that budgetary control system is strictly still based the principles of controllability and functionality. Budgetary control system has evolved from being at the centre of management control system to being part of a wider control system. Organisations now do not reward and penalise people only based on their ability to meet budgetary targets but also consider other external events. Most organisations now encourage team working with members being selected for several departments. Regardless of the perspective used, it can be seen that the traditional budgetary control process is problematic, however the current system when budgetary control systems are used in a wider management control system caters for most of the criticisms. The call for budgets to be totally abandoned is
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
Federal spending is necessary for the economy and is essential to the accomplishment of national goals and advancement. This is why a budget is needed, however, there is no actual process mentioned in the Constitution that explains how Congress should do this. The Constitution states:
In early May, the 2016-17 federal budget was released, outlining the government’s proposed plans for revenue and expenditure as well as the fiscal policies that will be initiated in the following financial year. Currently, Australia is experiencing a deficit of $39.9 billion, however the government plans to reduce the deficit to $37.1 billion by 2017 by implementing the plans listed in the federal budget, which will cause the economy to become more efficient and grow faster in the long term. The budget also outlines the government's concern on certain issues and the areas of the economy that needs improvement. Disagreements over the federal budget have raised arguments for and against the governments proposed plans. The main areas that have
Today, many leaders of industrialized or developed countries claim to hold to one of the most basic Keynesian principles; that a country should only run deficits in troubling economic times and at all other times try to maintain a balanced budget (Keynes 1997). This paper will explore whether or not this basic principle is truly being upheld by examining a cross-section of countries during both times of “normal economic times” and “troubled economic times”. Since The Great Recession of 2008 there have been renewed calls within developed countries for austerity in the face of crippling debt and sluggish global economic growth, in defiance of regular Keynesian economics (Ivanovitch 2013). This paper will compare the deficits and/or surpluses in various developed countries during both “troubling economic times” and “normal economic times” to see if the basic Keynesian principle of only running deficits in troubling economic times holds true.
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.,
Corning’s resource allocation process shows another ill fated effort towards an organized and objective budgeting and planning process. The inefficiencies and disorganized implementation of the plan that resulted plague company performance. The underlying problem of inadequate communication dissemination of Corning has led the managers, workers and committees to focus on different goals. The Resource Committee and Business Committee through the splitting of a previously larger group, which was believed to be slowing down innovation due to conflicts of interest between two subgroups (cost reduction and innovation). However, by just splitting the two groups, nothing was effectively put into place to arbitrate the issue, and once again the resource committee (known for having only accountants) focused mainly on cost reduction while the business plan focused on which projects had innovative ideas.
Government spending has become a hot topic of debate after economic recession of 2008 but it’s still a controversy among the economists. Some economists favor role of government in the economy for balance of economic shocks, whereas others consider that government generate shocks and instability in economy. Keynes was first who introduced government involvement in economy after the recession of 1930. Theories of Keynes regarding the government spending have again taken attention in the financial crisis of 2008 in America, which has spread all over the world through trade openness. This financial crisis has decreased the economic growth and employment rate in whole world especially in the developed countries. Thus some economist suggests that
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.
The sole purpose of needing a balanced national budget is to establish a budget for the country so that all government funding is equally distributed. Because the government gets money from taxes and fees, and spends it on things like national defense, infrastructure, grants for research, education, and the arts, and social programs such as social security and Medicare.
As many budget cuts occur on the governmental level for myriad of reasons, public education can begin to suffer. As this has started to happen with the trillions of dollars of debt accrued by the United States Government many schools have had to cut non-academic classes from their curriculum to correct for the lack of funds. Some of the classes cut due to these funding cuts are vocational classes such as home economics, cooking, wood/metal shop classes, drivers education, and other such trade education. This lack of vocational education is leading to less rounded citizens coming out of public education. I do not personally believe that funding cuts to public education is ever necessary, if anything we should add funds to public schools as an investment in the future of the country by raising the literacy and overall competency of the average citizen. Of all the ways to solve this problem I decided that vocational school or vocational course integration are the best solutions. Though I lean toward vocational course integration I will address the pros and cons of both approaches to this issue.
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.
In this era of high competition, traditional budgeting approaches doesn’t encourage innovation among the employees instead are focused on reduction in costs.(Player, 2003).
In conclusion, profit planning is a crucial aspect of managerial accounting. Hopefully I have helped to show the importance in composing a company’s budget, the different types of budgets that may be implemented, and also how essential it is for managers to enforce and utilize them. Businesses need profit planning so that the maximum amount of profit may be generated. This is true for all forms of business whether it be for a product or service, manufacturing or retail. Without an accurate budget and diligent managers to monitor it, your company may be missing out on potential profit and growth
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
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).