| Management Accounting - Budgeting methodologies |
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| Wednesday, 26 March 2008 13:59 | ||||||||
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Page 1 of 11 It has been asserted that "managers pad their budgets out of fear that senior management will arbitrarily slash their submitted budgets and because of the managers' own concerns about uncertainties in the competitive environment." - Critically discuss the budgeting process in the current dynamic environment. Management Accounting Assignment - 17/20 Budgets are management tools that have traditionally been a key element of business control systems. Increasingly complaints are levelled that they are too unwieldy for the needs of today’s dynamic environment (Kaplan & Norton, 1992; Hope & Fraser, 2001; Daum et al, 2005; Libby & Lindsay, 2007). Among many perceived flaws in the process, the propensity for managers to pad budgets due to concerns over uncertainties in today’s competitive environment and fears of budget cuts are often cited as issues (Libby & Lindsay, 2007; Cokins, 2006, Dunk, 1995; Schiff & Lewin, 1970). As a result, new budgeting methods and management systems are being developed which attempt to address these failings but in so doing, they are raising questions as to whether there are better ways to plan, control and evaluate performance. The traditional financial budget is generally considered to be an integral part of the business process. It provides a framework for planning and resource allocation, control and performance evaluation (Schiff & Lewin, 1970). Companies use the budget to summarise plans for the coming year on the basis of financial statements. It offers a platform for measuring managerial performance and applying controls to ensure that strategy and objectives are realised (Daum et al, 2005). One of the major benefits of providing financial targets and objectives is simplicity of measurement, which means targets and incentives can be specific, measurable, achievable, realistic and time-based. Also, it helps encourage employees to focus on financial aspects, arguably a core goal of most companies.The budget is a prediction of future performance and is compared with actual performance. Managers are evaluated on the basis of the variance between projected and actual figures. Using variance analysis allows managers to see shortfalls and opportunities, make decisions to meet objectives and uncover why the variance occurred (Mak & Roush, 1996). These reasons are diverse, but they include poor forecasting, changing market conditions, purchasing or provisioning choices. Additionally, managerial performance, including supervision, correct utilisation of systems, machinery and tools and good teambuilding and employee relations can affect variance (Institute of Management & Administration, Inc. , 2003). A manager’s performance is thus measured on whether the controllable aspect of the variance is favourable or adverse, offering a way for senior management to simply evaluate performance.
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