Budgeting has historically played an important role in most organisations and their system of managerial control. Budget is a plan of action used as a tool for making choice on what activities carried on in the future and how they must be carried on in the organisation. Organisations both small and large make use of budget as an important managerial tool. A number of issues has been raised against budgetary practice, key among the issues against budgetary practice are;
Budgetary consumes a lot of managerial time which could have been channelled to other important organisational issues and that makes budgetary a costly process and the benefits may not be worth the cost.
Budget inhibits firms from adapting to changes in a timely manner due to their fixed nature.
Budgeting process is disconnected with strategy thereby putting it out of kilter the competitive demands facing firms.
The use of budget as a fixed performance contract leads to unreliable performance evaluation and promotes budget gaming.
(Libby T. and Lindsay R. (2010))
Q.1b
Budget has recently become a subject of criticism and has been deemed ineffective thus a thing of the past. According to Hansen et al. (2003) there are two groups in the critique of budgeting. One advocate group is calling for an improvement in the budgetary practice and the primary problems with budgeting. The other group also is calling for total disqualification of budgeting.
The areas of concern that practitioners want improvement in budgeting are that
Budget must incorporate a bottom-up orientation and gather more information from front-line managers.
Rolling forecast must be used.
Strategic planning must be better aligning with strategy.
A less detailed budget must be prepared and update them regularly using ongoing forecast.
The group of practitioners calling for total disqualification of the budgeting sites the following reasons.
Preparing budget is time consuming and the benefits there of is not worth the cost.
Managers can manipulate budgets and this provides an incentive for wrong behaviour by managers.
Budgets luck the flexibility for constantly changing of the business environment.
Budgetary reporting is not meaningful to front-line managers.
Budgeting eliminates the drive for constant improvement.
Budget is not aligned with strategy.
Libby T and Lindsay R (2010) revealed that budget in the past was criticised typically by academics and were often exaggerated as compared to current budgetary practice. They outlined three points that must be considered.
The overwhelming thrust of academic research into budgeting has been in the areas of participative budgeting and reliance on budgetary targets for performance evaluation (Hansen et al. 2003).
Hope and Fraser presented their argument as a universal prescription and it seems difficult to accept that so many organisations would continue to use budgeting foe control purposes.
Hope and Fraser might have placed too much emphasis on assertion that budgeting systems are inherently antithetical to successful adaptation in certain or unpredictable environment.
Q1c
Effective budgeting systems help managers perform better in the discharge of their duties. Improperly executed budgeting process can be frustrating and may sometimes demotivate managers. Budgets are prepared at various levels within the organisation.
Budgeting plays an important role in the strategic management process. Corporate mission and objectives are set by top management and to make this a reality; a well-executed budgeting system is needed to translate the mission and objectives of the organisation into the activities of the organisation. Management are able to develop alternatives and make informed choices which will help the organisation achieve its objectives.
When corporate objectives are set, there should be a framework within which the activities of the organisation must fall. Budgeting plays an important role as performance standards in an organisation. Budgets tell both managers and employees what to do and how to do it. Budget may state the quality level that products must be and the wastage level that the organisation expects.
At the end of budgetary period it is a norm that projected figures are compared to actual performance to assesses the organisation in tis past activities. Budget as a managerial tool help to evaluate, monitor and control and make adjustments where needed in the organisations activities to help meet specific targets.
Budgeting help managers in managing and controlling the activities of that they are responsible. After performance evaluation, managers can ascertain which cost fall within normalcy and which cost or activities do not fall within normalcy and the needed corrective measures taken to ensure improvement in the system. Investigating the reasons for the deviations by managers would help identify the inefficiencies that led to the deviations. When the deviations are known appropriate corrective measures are taken to rectify the situation.
If an organisation is to function well, there must be channels of communication that will make known to all individuals the plans and policies of the organisation. A well-executed budgeting system has a function of disseminating information to managers responsible for which activities in the organisation. In the budget preparation information are able to pass on from one department to the other easily and information flow from bottom to top management is enhanced.
Q 2a.
The framework by Burns and Scapens (2006) framework is focused on internal institutions within an organisation and how they impact on the processes of change in the organisational system. Burns and Scapens (2006) outlined that change is a continuous process which shows the relationship between actions, rules and routines and the underlying taken-for-granted.
The Burns and Scapen framework provide useful fundamentals for studying management accounting change in the practice of management accounting. The framework has been used to study the stability and resistance to the changing process. The focus of the framework is institutions within the organisation by giving less attention to external organisation.
The framework depicts a direct relationship between rules and routines and the day-to-day actions in and organisation. Fundamental to the Burns and Scapens framework is the view that practices of management accounting are part of an organisational rules and routines, which allow members of an organisation to make sense of their actions and that of others. The framework outlined that institutions are slow to change, thus the day-to-day actions, rules and routines may be quite slow to institutionalize.
2b
Trust is an important issue which has a significant effect in the process of management accounting change. The relevance of trust in individual organisation and societies is a highly discussed and debated issue in society. Trust has become a major subject of discussion due to the recent breakdown in financial systems; bankruptcy in the economies and corporate scandals, luck of trust in the system brings disunity in the organisational system.
Power is considered one of the actors of shaping management accounting practices. Rules and routines can easily be influenced by the amount of authority that one wields to effect changes in the system or resist changes in the system. People are normally paced in certain positions to pursue the interest of those who put them in those positions. These people are very instrumental because they can resist when they see that the actions and routines are not in the interest of those who employ them.
Agency in regard to institutional change is concerned with how organisational actors recognise the need for change in the rules and routines and the underlying taken-for ‘ granted. The agents are individuals and groups who can mobilise wider institutional logics and meanings to create an awareness of institutional contradictions and thereby define a new organisation reality that will help other organisational actors to recognise the need for institutional change.
2c
Technological advancement would be one of the challenges to management accounting. Keeping up to the rapidly advancement in the world of technology would be a major challenge to management accountants because they must always make sure the organisation is current in the kind of technology it applies to serve the internal need of the organisation in order to take advantage of the market. Organisations must be up-to-date with current and future technologies that would help them develop reports accurately and timely to enhance decision making.
Organisations have to be aware of the global economic trends to help reduce the impact of any unexpected shocks that the global economy might bring. Organisation must consider the whole world as potential market only where only the strong can survive. Management accounting must ensure the organisation has the current technology to take advantage of the global market. Management accounting in the future must provide information that would help the organisation tap into the global market.
Management accounting in the future must focuses on providing information that would add value to customers by adapting to changing environment. Management accounting must provide information that offer alternatives to give customers quick service and quality products. Value chain analysis, TQM and other techniques can be used to deal with these demands.
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