Budgeting is an important function that is required to be undertaken in almost every type of organisation whether it is private or public, small or large sized, profit or non-profit entity etc. A budget can be simply defined as the statement containing estimations of revenues and expenses that are going to occur in future. The process of budgeting involves number of activities undertaken to prepare the final budgetary statement. A budget is comprehensive plan that covers the quantitative information related to the business of the entity for which it is prepared and acts as an important tool for the decision making for the subsequent periods.
As a part of budgeting function a series of steps are undertaken by the individuals who are involved in such function. These steps include collection of information from various sources. The information that is required to formulate budgets can be gathered from internal as well as external business environment of the entity for which such budgeting process is carried. The main sources of information that is required to prepare budgets are the trends that have followed in the business in the near past and the predictions for the future. The past trends includes the growth rates experienced by the business, the demand structures etc. and the future anticipations based on the economic conditions such as inflations, competitive position in the market and various other opportunities and threats that are available to the business. Once all the information that is necessary for the creation of budgets is gathered, the next step covers setting the targeted goals and objectives for the business. A budget can be prepared to achieve short term and long term goals of the business as well. Then it involves the step of identifying the key activities or units which are critical for the achievement of goals and targets of the business. When all those activities are identified, the next step that is performed as a part of budgeting process is the resource allocation where the economic and other resources that are required to achieve the organisational success are assigned to different departments or activities. Budgeting process also involves the continuous monitoring of performance of all the departments so as to determine whether all the activities of the business are undertaken in accordance with the budgeted plans. The final step of budgeting process is to evaluate the actual performance of the business with the targeted results and it involves the variance analysis.
Budgeting function is not only used and implemented by the business units but also individuals makes use of budget in their normal routine life to manage their funds in the most effective manner by avoiding excessive wastage of their value resources. Moreover, the governmental units use different types of budgets to manage and utilise the public funds. In the corporate world, the budgets are prepared to determine the future profitability of the business and to gauge the actual business performance against the standards or benchmarks set in the budgetary plans. Typically, a budget covers the desired targets and goals of the business. The budgeting function not only covers the performance measurement but also it helps the business managers to identify the areas where significant attention is to be given to achieve the desirable results.
In every business organisation there are two critical resources which require adequate management for the smooth functioning of its operations. These resources are: time and money. The effective as well as efficient use of these two important resources demands proper planning. However, mere planning function in an organisation does not serve the purpose of effective resource allocation and utilisation. Rather, control function is also necessary to achieve the purpose. Budget acts as the vital tool for the effective deployment of scare and valuable resources of the business. It enables the managers of the business to formulate the required strategies and policies by proving the necessary managerial information that forms strong base for the appropriate and effective decision making.
One of the key function of budgeting process is the performance evaluation as budgetary reports allows the managers to determine the variations in the actual and desirable results and also to identify the root causes of such variations so that any loopholes in the business process could be fixed on time and the individual as well as overall performance of the business can be improved.
There are various areas for which budgets are required to be prepared for the sound functioning of business. Such areas are: sales, purchases, direct material, direct labour, overheads, operating expenses, cash and so on. Budgeting thus facilitates effective financial and non-financial planning of the business. The function of budgeting supports the formulations of financial plans for the upcoming year which covers the budgeted results that are to be achieved. Budgeting function also helps in promoting coordination among different business departments and units as budgets are prepared to achieve the overall goals of the business. By clearly defining the ultimate responsibility of each business unit or department, the budgeting function enables the managers and employees to work in the manner that they achieve the common goals of the business. Further, budgets are prepared on the basis of past trends and future predictions it enables the managers to identify the key business areas which are required to be critically managed in order to achieve the basic and prime objectives of the business. In this way budgeting function promotes the appropriate allocation of important and scare resources of the business. Also, when budgets are created, it becomes easy for the top management to supervise the line level managers and employees of the organisation. The budgets provide clear guidance and directions in which they must function in order to achieve the expected results. Also, the budgeting function helps in avoiding the excessive usage or wastage of valuable and scare resources of business by allocating them among various activities and departments on the most reasonable basis.
Though, it can be said that the process of budgeting plays an important role in an organisational success. However, with it benefits, the budgetary system suffer from certain limitations which are discussed further. Firstly, the budgets are not always capable of offering accurate information that is necessary for the decision making. Since budgets are prepared on the basis of assumptions, anticipations and past trends there are higher chances of production of unrealistic information for the future periods. Secondly, budgetary system creates rigidity in the organisation as its employees lose the flexibility of their functions. Once the budgetary plans are prepared and circulated among the employees, they have to function in accordance with such plans. In situations that keep on changing, it becomes difficult for the managers to cope with them since budgets cannot be altered in between the period. There is generally no room to incorporate the impact of changes that occurs in the business environment which is quite dynamic in nature. Further, when the cost of preparation of budgets exceeds the benefits that are expected to be derived from such budgets, the budgeting process fails to render its significance. It generally involves considerable amount of time and cost to prepare budgets for the organisation and if such budget do not offer the expected benefits, the cost and time spent on such creation does not get justified. Moreover, when the top management prepares the budgets and circulates the budgetary outcomes to the employees of the organisation, the employees are supposed to work only in accordance with the budgets and they are not allowed to bring up any innovative or unique ideas to achieve the organisational objectives. In such situations, the employees feel demotivated and restricted as they do find themselves to be a contributing factor to the organisation success.
In order to understand the concept of budgeting, the study of two journals in the field of budgeting has been undertaken. The first journal research article relates to the study of effects of the incentives that are based on budgets, on the budgetary behaviours of the organisational managers and their subordinates. To study the said impact, one of the fortune 250 manufacturing companies has been chosen as the subject company. However, the research journal has not specified the name of the subject company for the confidentiality purpose. Another study is related to the development of operational budgeted for an organisation that is non-profit entity in nature.
The article discusses about certain terminologies relating to the budgeting process. These terms are: participative budgeting, budgeting bias, budgetary slacks etc. Budgetary slack is the creation of those budgets that are conveniently achievable in regards to the best forecast. Budgeting bias is the difference that is created deliberately between the forecast of the budgetary actor about the subsequent periods and the budget periods that are submitted to the management. When budget based incentives are introduced, the subordinates creates slack in their targets in the areas of sales volume with the motive of earning more compensation as a result of new incentive plans. Participatory budgeting is the budgeting in which employees of the company are allowed to participate in the budget preparation (Walker & Johnson, 1999).
The main purpose of the study is to understand the behavioural changes of the organisational personnel on the basis of budgets. The selection of real world company for the purpose of research has made things practically evident.
The present research study is carried to understand as to how the common cost that is incurred by the non-profit organisation is allocated to the different programs or units that generates revenues. To understand such allocation, the organisation named as Extened Family is Selected under the research study. The company operates through three main programs i.e. the counselling programme, education program and the residential program. The findings of the research suggest that the costs that are individually incurred under each program is directly allocable to such department. However, as a part of operating a non-profit organisation, there are various costs that are incurred commonly by the organisation and hence they are to be allocated among all the departments or programs on an appropriate basis (Mammano & Tyson, 2008). There can be various bases to allocate the common cost of the organisation to the different units such as the rent can be allocated on the basis of space occupied by each of the department.
The purpose of the second study is to understand as to how operational budgets are prepared for the non-profit organisations. The operational budgets are those budgets that are prepared taking into account the overall operations of the business.
Background of the companies
Purpose of the studies
Conclusion:
From the study of above two researches that have been carried in the context of one of the major aspect of management accounting it can be said that budgeting function is the most important aspect of financial planning of the business and hence it must be undertaken with due care and diligence. It provides the management and other employees of the company necessary information so as to take informed decisions in the favour of organisational success and growth.
References:
Mammano, K.A. and Tyson, T.N., 2008. Developing an operating budget for Extended Family, Inc.: A not-for-profit human service organization. Issues in Accounting Education Teaching Notes, 23(1), pp.48-69.
Walker, K.B. and Johnson, E.N., 1999. The effects of a budget-based incentive compensation scheme on the budgeting behavior of managers and subordinates. Journal of Management Accounting Research, 11, pp.1-28.
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