1.1 Executive Summary This report reviews the company’s current incremental budgeting system, explores the beyond budgeting approach and looks at the alternative flexible methods available. In Summary, although the managing director could continue to use the incremental system, it is recommended that an ‘Activity Based Costing’ strategy is adopted. Although the current incremental method is simple and easy to understand, it has many drawbacks making it unsuitable for today’s economic environment. 1.2 Objectives Taking into consideration the current economic climate, to investigate how beneficial a beyond budgeting approach would be, in regards to flexibility and financial control of the business. To also explore the possibility of adopting an Activity Based Costing system and the benefits it would bring to the company. Lastly, after reviewing the benefits and shortcomings of all three methods of budgeting, determine which method is the most suitable for the managing director. 1.3 Background to budgeting The process of budgeting is one of the most important management tools available to a business, particularly in today’s current economic climate. It serves three major purposes; coordinating activities and tasks, motivating employees and allows for forecasting of future developments and events in order to prepare for the future of the business effectively (Weber, 2005). 2.1 Incremental Budgeting According to M.M Ibrahim and R.A Proctor (1992), “the incremental
Budget management analysis is used by mangers as a tool and helps determine that all resources available are being used efficiently. The budgets are determined yearly and are based upon the previous year’s budget and variances. This paper will discuss specific strategies to manage budgets within forecast, compare five to seven expense results with budget expectations, describe possible reasons for variances, give strategies to keep results aligned with expectations, recommend three benchmarking techniques, and identify those that might improve budget accuracy, and justify the choices made.
Budget preparation is a process with designated groups and individuals having defined responsibilities. According to Irene S. Rubin “ The public budget process mediates between organizations and individuals who want different things and determines who gets what out of the budget.”1The Government set up an annual budget that includes people perspectives, opinions , accountability and than determine how the budget will get divided based on protected interests. Moreover, Public budgeting determines how government spend money, provide necessary resources , and limit government expenditures to prevent overspending.
This research paper is a brief discussion of budget management analysis. Budgeting is the key to financial management, and is the key to translates an organization goals or plan into money. Budgeting is a rough estimate of how much a company will need to get their work done, and provides the basis for evaluating performance, a source of motivation, coordinating business activities, a tool for management communication and instructions to employees. Without a budget an organization would be like a driver, driving blinded without instructions or any sense of direction, that’s how important a budget is to every organization and individual likewise (Clark, 2005).
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.
Budgeting is the systematic method of allocating financial, physical, and human resources to achieve an organization’s strategic goals. Budgets are utilized by for-profit and non-profit organizations to monitor the progress towards the goals, assist in the control of spending, and help predict cash flow for the organization.
In conclusion, every major company in the world uses budgeting and there is a good reason for that. It is an important component of financial success. Budgeting makes easier to achieve financial goals. It keeps track of all expenses and help to avoid crisis. It also helps companies to control their growth and provide them with realistic idea where business is going.
Most entities and organization create budgets as a guide for controlling its spending, prediction of profit, and it expenditure as they progress toward a set goal. Budget involves pulling resources together to achieve a specific goal. According to Gapenski (2006), budgeting is an offshoot in a planning process. A basic managerial accounting tool use in holding planning and control functions together is referred to as set of budgets (p. 255). One major setback manager or budget developer encounter is trying to design a future, a process that cannot be created with the precision just right. This article highlights some financial management
Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.
The 20’s century saw the use of budget involve due to a change in the environment. Indeed the control of output used to be obtained by the dissemination of tasks and so traditional budgets were very much highlighted, with a significant top-down influence. As an example of the importance of budget in the 1970’s IBM had about 3,000 people involved in their budgetary process. During the same period, the oil crisis brought concerns about rising in costs and led to the introduction of zero-based budgeting (ZBB), which can lower cost by avoiding blanket increases or decreases to a prior period’s budget. The increase in business uncertainties was in discrepancy with the stifling effect of fixed plans, promoting the use of rolling budgets. The 1990’s saw the growing influence of shareholders and steered the focus on a budget that included a wider view of organisation results, answering the investment community for quarterly updates on results and expectations (Bill Ryan, 2005). Budgets then started being used as a communication tool between the financial community and the organisation, allowing the corporation to be integrated in the capital market. Moreover companies started using flexible budgets rather than static budgets as nowadays various levels of activities can be observed in most organisations. The use of flexible budgets then enables firms to be consistent with their new environment and the market.
Activity –based budgeting as a method of budgeting based on activity framework, using cost driver data in the budget setting and variance feedback processes. ABB focuses on activities rather than functions. As regards the stages
Cost and management accounting is an integral element in preparation of an entity’s financial reports. Cost accounting consists of various branches, including; job and process costing, absorption costing, traditional costing and activity based costing. An efficient costing system allows managers and other users of financial reports to make decisions to better the company, in reducing and streamlining costs, to improve overall profits. The way in which managers achieve this can be a rigorous and time consuming task, however, if a costing system can be perfected, productivity and general cost reduction can be achieved and an overall more efficient operation of the business will ensue. This essay will critically discuss factors in which a business consider in deciding on a costing system to implement and operate when establishing a costing system. In this article I will describe the different methods of costing, explain why I believe activity based costing is the most efficient method, and provide a real world example to support my claim.
The keen competition requires companies to consider the cost variable. But traditional budgeting method separates the cost into variable and fixed, put the emphasis on the variable cost and consider the fixed cost implacable.
Organization and Design of an Effective Budget Function by R. Gregory Michel was published in 2002 by the Government Finance Officers Association (GFOA). This book is available to purchase separately or as part of a series known as the GFOA’s Budgeting Series, which is comprised of a total of seven books. Of these seven books, R. Gregory Michel is the author of three: Cost Analysis and Activity-Based Costing for Government, Organization and Design of an Effective Budget Function, and Decision Tools for Budgetary Analysis. R. Gregory Michel is a Manager in the GFOA Research and Consulting Center. While all of these titles are important from a budgetary standpoint our focus in on the title Organization and Design of an Effective Budget Function.
A perspective of traditional budgetary system has rapidly changed during recent years. As the traditional budgeting system has been found in both private and public sector organisation, it may be seen that it is crucial component of business since it may be more relevant to the current business environment. In addition, primary budgetary system already has overcome current business challenges and been facing an increase of competitive in business context. However, there are still some exist potential risks to cover current business challenges to set as a business accounting model to increase business financial value as a whole, since traditional budgetary system has purely focused on accounting not on managerial accounting in a real business issues and problems. There is a need to broaden its boundaries and focus on the issues involved in planning, designing and processing systems of managing performance. Due to rapid change of business challenges and issues that organisations need to face to, not only numerous public but also private sector organisations have been striving to increase the value of finance to cause a better outcome to its organisations. This essay will analyse how traditional budgetary system has got through in business sector during recent years and will go on how contemporary budgeting system would operate of managing performance.
This project seeks to bring out the budgeting and budgetary control practices of UT financial institution, Koforidua, and how they can make sure their budgeting practices are done in such a way as to incur minimal or less cost for the organization