All organizations operate in under scarce resources that are constrained by time and money. These situations require organizational managers to make decisions on how to use resources to maximize returns. Management accounting concepts are important guidelines that inform decision on how to manage an organization costs. Management accounting involves identification, measurement, analysis, interpretation, and communication to managers to inform decisions for achieving organizational goals. This enables the management in planning for the future, making informed decisions for the organization, and evaluating if their plans and decisions are effective (Endenich, 2014). Management accounting is different to financial accounting as it involves internal communication of financial information while financial accounting is designed to communicate with external financial information users of an organization (Delaney, & Guilding, 2010). Therefore, management accounting is essential tool for controlling and coordinating organization activities towards a specified goal or goals. The following report discusses budgeting concept of management accounting by reviewing relevant literature. This involves analysis and comparison of two studies that have researched on the management accounting concept of budgeting. The report will also involve outlining specific lessons or outcomes that can be learned from the two studies findings and how they are important for management accountants in Australians companies.
Budgeting is one of the most important concepts of management accounting. It is a process that includes numbering of all activities that are contained in a budget. Budgeting is a process that creates a quantitative plan to be used for deciding activities that will be done in an organization for a future period of time. Budgeting involves plans and controls for using scarce resources (Wa-Mbaleka, 2015). Having a plan is not sufficient for an organization to be effective and effective and requires controls that ensure plans are well implemented to achieve set objectives (Sandalgaard, Bukh, & Carsten, 2011). The budgeting process details how management plans to acquire and utilize resources to achieve maximum return. Therefore budgeting is an essential process for internal management of an organization’s resources to earn predetermined returns or achieve a set objective.
Budgeting has direct impact to how an organization achieves its objectives. The budgeting concepts of management accounting have six basic roles in enhancing management of an organization. First, budgeting enables an organization to plan for annual operations. The managers are able to break down long-term plans to practical activities that they can keep track. This translates future plans into manageable steps (Covaleski et al., 2008). Budgeting enables coordination in an organization. The process of budgeting brings different departments of organization activity together and ensures they run towards achieving a common goal. The budgeting process communicates details of the organizational plan to managers. Budgeting outlines what each manager needs to do in achieving their departmental objectives that enhance the attainment of the overall organizational goals (Kerler et al., 2015). Budgeting motivate managers towards achieving organizational goals. Managers get informed of the outcomes broken down in periods of weekly, daily, quarterly and monthly that keep them and the staff focused on achieving targets. Budgeting controls activities that enhance efficiency in utilization of resources and effectiveness of achieving the organizational goals. Decisions on what to do or use are outlined that are used as standards for operations in the activities undertaken (Mah’d, Al-Khadash, Idris, & Ramadan, 2013). Budgeting is also used at the end of a financial year to evaluate managers’ performance (Ionescu, 2014). The actual performance is compared against the predetermined performance that establishes how well each manager performed in a specific period of time. Therefore, budgeting is an important concept of management accounting and outlines how activities will be done and expected outcomes.
The following study on budgeting was done by Deborah Delaney and Chris Guilding. The study examined budgetary roles in organizations that have sponsorship management and also identified factors that affect budgetary roles in making investments decisions (Delaney, & Guilding, 2011). The study involved analysis of qualitative data and survey of organizations that have sponsorship agendas in Australia. Sponsorship context refer to a situation where on party provides resources and get direct association in exchange to an event or activity and this association is used by the organization sponsored to achieve its objectives (Delaney, & Guilding, 2010). The sponsorship expenditure presents a management context that has a high propensity and manifest relative importance to budgetary roles as compared to other contexts of management. Sponsorship can therefore be viewed as investment that has predetermined returns. The study contributed to the budgeting research literature through provision of quantitative and qualitative evidence on important budgetary roles in management of organizations with sponsorship relationship.
The study set out to explore several research questions that could be used to explain the budgetary roles and factors affecting budgetary roles for organizations in a sponsorship context. Firstly, the study set out to understand if organizations that pursue defer-type strategy were more attached to important budgetary roles when deciding on sponsorship investments decisions. The second set out research question is if organizations that operate in uncertain areas or environments are more attached to important budgetary role when deciding on sponsorship investments decisions. The third set out exploratory research question was if large organizations are more attached to important budgetary roles when deciding on sponsorship investment decisions. The fourth set exploration question was organizations that are more risky are attached to important budgetary roles when deciding on sponsorship investment decisions. Lastly, the study set out if sponsors who place lots of emphasis on trust when making sponsorship arrangement are attached less to important budgetary roles decision making process of a sponsorship investment.
The study found that sponsorship relationship (expenditure) influenced budgetary roles to organizations. The sponsorship budget provided basis for performance evaluation for manager or departments. Secondly, the sponsorship budget facilitated communication of a plan to managers of the sponsored organizations. Thirdly, the sponsorship budget facilitated coordination of activities in the organization. The fourth finding of the study was that sponsorship budget provided discipline for planning organizational activities and forecasting environmental factors that can influence results in a financial year. The study also found that sponsorship budgets controlled and motivated managers for amount spent and value for money of sponsorship expenditure respectively. In terms of factors influencing budgetary roles, the study found that strategy, risks, perceived environmental uncertainty, trust and size of the organization influenced budgetary roles in sponsorship context.
The study concluded that authorization of sponsorship expenditure outlines the major sponsorship organization budgetary roles. The budgetary roles important in sponsorship context are planning, motivation, and forecasting. The study also concluded that risk and trust significantly affect the importance of sponsorship context budgetary roles.
The following study was done by Niels Sandalgaard and Christian Nielsen whose purpose was to investigate usage of budget targets in evaluating performance for small and medium size enterprises (SMEs) (Sandalgaard, & Nielsen, 2018). The study was done from a contingency perspective. The paper undertook survey among SMEs of production companies in Denmark. The study defines SMEs as organizations that have between 20 to 5000 employees.
The study overall question was the relevance of budgets in performance evaluation for SMEs. The role of budgeting among small organization setting had little emphasis as a management accounting control tool. The study research question was emphasizing budgets for SMEs for performance evaluation have influence on their performance. This research question was a result of less usage of budgeting by SMEs as compared to large organizations that relies on budgeting for management practices. Generally, small organization tends to use informal management practices which are different to large organization. The study research question led to the following hypothesis; first, the study hypothesized that there exist a positive relationship between organizational size and budget emphasis for small and medium sized enterprises. Secondly, the study hypothesized that a positive relationship exists between perceived environmental uncertainty and budget emphasis among SMEs. Thirdly, the study hypothesized that there exist a positive relationship between SMEs decentralization and their budget emphasis. The fourth hypothesis was that there is a positive relationship between SMEs degree of interdependence and budget emphasis. The firth hypothesis for the study was that there exist a positive relationship between SMEs degree of budget emphasis and its performance.
The study found that SMEs’ budget emphasis is related to decentralization, size, and interdependence. The study also found that there is a positive relationship between degree of budgeting emphasis and performance. The finding implicate that SMEs should consider emphasizing budget for performance evaluations. The Study concludes that the benefits of budgeting outweighs it disadvantages and therefore SMEs should emphasis on budgeting behold planning and be used for evaluating performance (Sandalgaard, & Nielsen, 2018).
Both the first and second studies use contingency perspective that shapes the study findings. First, both studies found there is relationship between budgeting and performance of an organization. The study on examination of budgeting roles in sponsorship context found that budgeting enable an organization to plan activities and forecast that involve determination of activities and allocation of resources. This is similar to the study on emphasis of budget to SMEs as budgeting enables small and medium sized enterprises to implement activities that enhance attainment of predetermined organizational performance and there exist a positive relationship between budgeting and performance. On the case of performance, both studies’ findings are similar on the role of budgeting in performance evaluation. The study on budgetary roles on sponsorship context found that budgeting is important for evaluating managers or departmental performance. The actual performance is compared or evaluated against the budgeted performance. This is similar to the study on budget emphasis in SMEs where the authors found that budget emphasis form a basis for evaluating an organization performance in a specified period of time. Another similarity in the studies findings is that budgeting is related to size of the organization, budget, and investment. The study on examination of budgetary roles in sponsorship context found that the degree of authorization of the sponsorship expenditure is related to size. The study also found that large organizations attach more importance to budgetary roles. Large organizations are complex and managers need to handle quantities of information hence need for a detailed budgetary plan. This finding is similar to the study of budget emphasis in SMEs where the size of an organization determines relationships and control. The study found that the size of an organization is related to degree of formalization and hence budgeting is an important tool for formalized control and planning. The small size organization has less usage of a budget and the need increases with the increase in the size of the organization. Lastly, there is a similarity in the both studies on budgeting and perceived environmental uncertainty. The study on budgetary role in sponsorship management context found that the importance of budgeting increase in highly uncertain environments. Managers require a lot of information to accurately predict the environment and enhance consistency in performance. This finding is similar to budget emphasis in SMEs study found that though increased perceived environmental uncertainty make budgeting evaluation less useful, the importance of budgeting in these environment enable an organization to meet targets and maintain control.
The studies have differences in findings mainly because of the context differences. First, the budgetary roles in sponsorship management study findings differ with budget emphasis in SMEs study finding that trust influence the importance of budgeting. The budgetary roles in sponsorship management study found that the degree of trust influence budget sponsorship investment decisions making. This is contrarily to budget emphasis for SMEs that found it interdependency level that influence budgeting. Increase in interdependency increases variation in results and therefore need for a budget to improve and maintain consistency of results. The other difference in the studies is that budgetary roles in sponsorship management context found that budgeting was important for motivating managers which was not part of budget emphasis for SMEs study findings. Lastly, the budget emphasis for SMEs did not factor degree of risks as important factor for budgeting while the budgetary roles for sponsorship management found degree of risks to have significance influence on budgeting.
From the studies, there are several lessons or outcomes that management accountants can use in their practice. The studies involve a management topic on budgeting that is an important aspect for managing an organization activities and informing managers’ decisions. The following are specific lessons learned in the studies;
First, budgeting is equally important to small and medium sized as it is for large organizations. According to budget emphasis for SMEs, budgeting is important in all sized business for planning and controlling activities. SMEs are characterized by informal management practices that lead to varying performance from one financial year to another (Berland, Curtis, & Sponem, 2018). This causes variance between the SMEs actual performance and its objectives. Budgeting is an important management account tool for enabling a small and medium sized business to translate their organizational goals into activities and allocate resource optimally to achieve them and reduce performance variance (Sandalgaard, 2012). Budgeting also enable SMEs to grow in size, get decentralized and become interdependence while being consistent in performance. This outcome therefore requires all management accountants in Australia who work for SMEs to adopt budgeting as a management accounting tool for formalizing activities. This will improve the organizations performance and enhance their growth.
The second lesson is application of budgeting for performance evaluation for SMEs. According to budgets emphasis for SMEs study, most small and medium sized enterprises only use budget for planning and controlling. These organizations view variance between actual and budgeted performance as not appropriate to be used to evaluate their performance (Asogwa, & Etim, 2017). This leads to SMEs using planning and set of targets to evaluate preferences which lead to even higher variances when evaluating performance. Management accountants in SMEs should adopt budgeting as a tool of evaluating performance because it sets more realistic goals, outline activities, and allocate resources for the activities. Budgeting are the most appropriate methods of evaluating the effectiveness and efficiencies of an organization performance. This means that budgets are easy to compare between actual and what was projected and then evaluate how close or far the actual performance is to the predetermined performance.
The third outcome from the studies is that sponsorship expenditure is main determinant of budgetary roles. The authorization of sponsorship expenditure should be used to create organizational budgets. Sponsorship management context require the organization to match it budget with the sponsors goals and budget when making investment goals (Özer, & Yilmaz, 2011). According to budgetary roles for sponsorship management context, sponsorship expenditure should outline the organization goals, activities, and allocation of resources. Management accountants should therefore align organization budget with the sponsorship expenditure to ensure they achieve sponsorship predetermined goals.
Another specific outcome from the studies is the importance of planning, motivation, and forecasting in sponsorship management budgetary roles. The sponsorship management budgetary roles shape the plan, forecast and motivation of the organization. The plan has to reflect the sponsorship management goals that are then broken down into activities in the organization. The forecast has to be detailed for accuracy to enhance the consistency of the organization performance. The goals and determined activities that are broken down into days, weekly, monthly, or yearly keep the staff and managers motivated (Wongjinda, Ussahawanitichakit, & Janjarasjit, 2015). The management accountant should appreciate the role of sponsorship management budgetary roles in enhancing organizational plan, forecast and motivation. This will make it easy for accountant to prepare budgets in sponsorship management context.
Conclusion
Organizations operate under scare resources that require planning and control of time and money to achieve their objectives. Budgeting is a process of determining number of activities and making quantitative plans to be used for deciding activities that will be done in an organization for a future period of time. Budgeting have a role of planning activities, coordinating activities, controlling, coordinating, communicating and motivating managers and staff to achieve organizational goals. Budgeting is also important for evaluating department or managers’ performance within a specific period of time. According to budgetary roles for sponsorship context and budget emphasis or SMEs, budgeting has a central role in influencing organization performance. The studies are useful lessons to management accountants in Australia to appreciate and adopt budgeting in all sized organizations, apply budgeting for performance evaluation in SMEs, need to align sponsorship management budgetary roles with the organizational activities and the importance of planning, forecasting, and motivating managers in a sponsorship management context.
References
Asogwa, I.E. & Etim, O.E. 2017, “Traditional Budgeting in Today’s Business Environment”, Journal of Applied Finance and Banking, vol. 7, no. 3, pp. 111-120.
Berland, N., Curtis, E. & Sponem, S. 2018, “Exposing organizational tensions with a non-traditional budgeting system”, Journal of Applied Accounting Research, vol. 19, no. 1, pp. 122-140.
Covaleski, M.A., Evans,John H., I.,II, Luft, J.L. & Shields, M.D. 2008, “Budgeting Research: Three Theoretical Perspectives and Criteria for Selective Integration”, Journal of Management Accounting Research, vol. 15, pp. 3-49.
Delaney, D. & Guilding, C. 2011, “An Examination of Budgetary Roles in the Context of Sponsorship Management: A Contingency Perspective”, Journal of Applied Management Accounting Research, vol. 9, no. 2, pp. 21-42.
Delaney, D. & Guilding, C. 2010, “In search of management accounting in the sponsorship decision-making process“, Accounting, Accountability & Performance, vol. 16, no. 1, pp. 25-49.
Endenich, C. 2014, “Economic crisis as a driver of management accounting change”, Journal of Applied Accounting Research, vol. 15, no. 1, pp. 123-149.
Ionescu, A.M. 2014, “The Role Of The Budgetary System In Achieving Enterprise Performance”, Manager, , no. 19, pp. 98-108.
Kerler,William A., I.,II, Allport, C.D. & Fleming, A.S. 2015, “Impact of Extreme Decisions and Extreme Probabilities on Attribute Framing Effects”, Journal of Applied Management Accounting Research, vol. 13, no. 1, pp. 63-80.
Mah’d, O., Al-Khadash, H., Idris, M. & Ramadan, A. 2013, “The Impact of Budgetary Participation on Managerial Performance: Evidence from Jordanian University Executives”, Journal of Applied Finance and Banking, vol. 3, no. 3, pp. 133-156.
Özer, G. & Yilmaz, E. 2011, “Effects of Procedural Justice Perception, Budgetary Control Effectiveness and Ethical Work Climate on Propensity to Create Budgetary Slack”, Business and Economics Research Journal, vol. 2, no. 4, pp. 1-18.
Sandalgaard, N. & Nielsen, C. 2018, “Budget emphasis in small and medium-sized enterprises: evidence from Denmark”, Journal of Applied Accounting Research, vol. 19, no. 3, pp. 351-364.
Sandalgaard, N. 2012, “Uncertainty and budgets: an empirical investigation”, Baltic Journal of Management, vol. 7, no. 4, pp. 397-415.
Sandalgaard, N., Bukh, P.N. & Carsten, S.P. 2011, “The interaction between motivational disposition and participative budgeting”, Journal of HRCA : Human Resource Costing & Accounting, vol. 15, no. 1, pp. 7-23.
Smith, B. & Bempah, O. 2017, “Determinants of sound budgeting and financial management practices at the decentralised level of public administration”, OECD Journal on Budgeting, vol. 16, no. 2, pp. 109-128.
Wa-Mbaleka, G. 2015, Budget participation and job performance in a non-profit organization: The mediating role of organizational identification, Trident University International.
Wongjinda, C., Ussahawanitichakit, P. & Janjarasjit, S. 2015, “Investigating The Relationship Between Managerial Accounting Control Orientation And Organizational Outcomes: A Conceptual Framework”, Allied Academies International Conference.Academy of Accounting and Financial Studies.Proceedings, vol. 20, no. 2, pp. 205-217.
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