HI5017- Managerial Accounting Assignment Sample

Introduction

Management accounting plays an important role in the decision making process of the management of any organization. Unlike the financial books accounting, the focus of which is mainly onto the financial transactions of the organization to the outsiders basically, management accounting on the other hand is primarily concentrated on the internal decision making of the organization. In this report, the analyst is going to develop an understanding of the objective and utilization of the management accounting systems, and its importance and significance in aiding the managers in making the analysed and informed decisions. Also, analyst is going to discuss about the use and importance of budgets in the management processes of the organization. Budgeting is basically an integral part of the managerial policies as planning and controlling. The analyst has been provided with a journal article in this report, through which analyst has answered several questions by analysing it.

Discussing the purposes of the budgeting process

Organizations in general have more than one objective or purpose for developing the budgets. In this particular part of the report, the analyst is going to discuss and analyse the purposes of the process relating to the budgeting which are as follows:

  • Putting the strategy relating to the business into the operations

Generally, a portion or a part of the budget is fixed for some of the regular expenses of the organization while the remainder of it is more flexible and not rigid and can serve to advance or enhance the mission, vision, values and believes of the organization. Also the budget must respond to the unique service and physical traits or characteristics (Tanwar).

  • Providing the incentives

Financial year end budget practices can potentially serve as a disincentive or an incentive for the good management of the budget. They could allow an unit in order to retain some of the part of the unused finances or funds to provide an incentive for the rational utilization of the resources but it also carries an amount of uncertainty with it.

  • Providing the means of the communication

Decisions of framing a budget indicate the values and intentions to the internal as well as external constituents. For the organizations in general, the proposals relating to the budget are basically a mean in order to convey the priorities to the governing boards of the organization. Also a budget in general also demonstrates the accountability to a diverse variety of the constituencies.

  • Allocating the resources

While talking with a practical point of view, allocating the resources may be the most crucial purpose and objective of the budget. It is a fact that there are often more amount of good ideas for how to pursue the priorities than there are the resources in actual with which to pursue them (Jiambalvo, 2019). Deliberations of the budget can lead to the allocation of the new funds and finances, the reallocation of the existing funds and finances, or the diversifications in the practices, policies and the priorities either.

  • Assigning the controls

Another objective or purpose of framing a budget is assigning the controls. As similar to everything, it also comes with a variety of several advantages and disadvantages. There are benefits and drawbacks of both the centralized as well as decentralized models of control. A centralized approach is generally more probable to make sure the congruence between the organizational priorities and budgetary decision making process. Generally, centralized controls call for the decisions in relation to the budget to be made at the organizational level. While on the other hand decentralized controls call for the decisions in relation to the budget to be made at the departmental level of the organization.

Whether the budgeting process satisfies the purpose of planning, controlling and evaluating performance

The basic scarce resources to all the organizations and the individuals are time and money. However, the efficient and productive utilization of all these resources needs planning. With planning, controls also plays an important role in ensuring that plans are actually carried out and this is the time when budget is what that comes into the picture. Budget plays an important role of a tool that the managers of the organization utilize to plan and control the utilization of the scarce resources. A budget is basically a plan that showcases the objectives of the organization and how the management of the particular organization intends to acquire and utilize the resources in order to attain and accomplish those particular objectives.

The financial budget assists and helps Romanian small and medium enterprises utilize many types of the budgets. This particular journal analyses the master budget that comprised of a planned operating as well as the financial budget. The work of planned budget is to plan the future revenues and outcomes in a projected income statement of the organization. The financial budget of the Romanian small and medium enterprises helps the management to plan the financing of the assets and the outcomes in a particular projected balance sheet of the company (Dan Dacian Cuzdrioreana).

The process of budgeting basically comprise of the planning for the future profitability of the organization as earning a reasonable amount of return on the resources utilized is a primary objective of the organizations. Romanian small and medium enterprises must formulate some methods in order to deal with the risk that is associated with the future. An organization that does no planning at all whatsoever chooses to deal with the future and can react to the transactions from future and events only as they occur in the future. Majority of the business organizations, however, formulate an action frame they will going to take provided the foreseeable future events that may occur in the future period.

Romanian small and medium enterprises utilize the budget to compare with the actual in order to analyse and evaluate the performance of an individual. For example, in order to produce a computer at IBM the standard costs would going to be a budgeted figure. This particular figure can be then compared with the actual and genuine cost that is spend on producing the computers to assist and help analysing the performance of the managers of the production of computer and the employee staff members who produce or manufacture the computers (Olesen, 2015).

The planning process of Romanian small and medium enterprises that results in a formal budget basically provides a chance or an opportunity for the variety of the levels of the management to think and then commit the future plans to the writing. Moreover,  a particular and adequate budget enables and permits the management to follow the principle of management by the exception through devoting the attention and focus to the results and the outcomes that deviate considerably from the levels that were already planned by the management of the Romanian small and medium enterprises (Kelly, 2015). And because of all these reasons, it is very important that the budget shows and reflects the expected outcomes.

Management of the Romanian small and medium enterprises should frequently compare the data relating to the accounting with the projections acquired from the budget at the time of the budget period and analyse any kind of differences. However, it is very important to understand that Budgeting in not a proper substitute for the good management in an organization. Rather, a budget is a significant tool of the controls of the management of an organization. The management basically makes the decision while preparing the budget that enables them to serve a plan of action for the future events.

Budgets are also considered as qualitative plans for the future events. However, they are generally based on the experiences from the past adjusted for the expectations of the future. Hence, the accounting data that is related from the past play a significant and vital role while preparing the budget for Romanian small and medium enterprises. It is a matter of fact that the budget and the accounting data are closely associated to each other. The details and the information of the budget must go in compliance with the ledger accounts of the organization. In turn, the designing and the framing of the accounting systems must be done in order to provide the suitable and appropriate details for the budget planning, financial statements, and the interim financial accounts in order to facilitate the operational control of the organizations (Weigel and Hiebl, 2018).

Identifying and explaining the practice adopted by the organisations discussed in the selected journal

After analysing the whole journal it has been evaluated that top down budgeting has been adopted by the Romanian small and medium enterprises in their management accounting practices. Top down budgeting basically refers to the method of budgeting in which the senior management frames and prepares a high-level budget for the organization. The senior management of the enterprises makes the budget on the basis of their objectives and then passes it on to the diverse managers for the process of implementation.

In some general scenarios, the managers of the organization may put forward the suggestions for the preparations and framing of the budget. It is completely the discretion of the management whether to utilize their contribution to the process of budgeting or not. After creating and framing the budget, the management of the organization makes the specific and particular allocations to the diverse departments, which must then frame their own set of budgets on the basis of their allocations and the objectives relating to the budget.

 

Image showing Top-Down budgeting process

Meaning of Top-Down budgeting

Top-Down budgeting process in the Romanian small and medium enterprises initiates with the meeting of the senior management to come up with the objective or purposes for the whole year. They discuss and set the high-level targets for the organization in terms of its expenses, sales and its revenues. At the time of formulating or computing all these figures, the management takes into the account the contribution of each of the department of the Romanian small and medium enterprises in the revenues from the previous year’s financial report (Anon, 2015). Generally, the managers of the department and the lower level staff do not get involves in the meetings but may sometimes put forward the suggestions for the consideration. After the completion of the framing and preparation of the targets by the management of the company, the objectives of the company are then being passed on the finance department of the organization.

During the top down budgeting, the Romanian small and medium enterprises management considers the experiences from the past and the conditions from the current market. They generally utilize the budget from the previous year and the financial statement as a benchmark for making all the allocations to the functions and the departments.

Critically evaluating the comment that ‘traditional budgeting practices are constraint on creativity, and the time and energy spent on budget formulation is better spent elsewhere’

The statement that says ‘Traditional budgeting practices are constraint on creativity, and the time and energy spent on budget formulation is better spent elsewhere’ is true to the core. The time consumption rate and management resources consumption of the traditional budgeting is quite excessive (Asogwa and Etim, 2017). Still only a minor percentage of the clients or organizations think the time spent on it is worth a while. The main reason the traditional budgeting takes too much of the time is the utilization of the spread sheets in it. Even though majority of the organizations utilize spread sheets, it comprises of several inherent shortcomings and deficiencies such as issues relating to the version control and it is prone to the errors relating to the data entry.

Failure in motivating the desirable and wanted behaviours

The traditional form of budgeting system fails to motivate the people in order to act in the interest of their organization like Romanian small and medium enterprises as it strengthens the vertical control and the bureaucracy, which as in turn make the people, feel more like undervalued. It also encourages the unprofessional and gaming attitudes in the cost centres of budget management. In addition to this, instead of enabling the sharing and transferring of the knowledge, it reinforces the barriers relating to the departments.

Low change responsiveness

Majority of the businesses have a yearly cycle of budgeting, and this yearly concentration often makes the budget obsolete soon after its creation. Reviews are generally not executed and conducted continuously enough to take the change in to the consideration as it happened in the case of the Romanian small and medium enterprises (Yvanovich, 2012). Additionally, it is almost impossible for the majority of the organizations to analyse and evaluate the data relating to their budget in the real time scenario. The meaning of which is that the budget reviews often take longer than what is required, which also defeats the objective and whole and soul purpose of the diversification adaptation.

Disconnection from the strategic plan

As the majority of the management of the organizations are so much obsessed with hitting the facts and figures accurate, they generally miss the strategic objective of the budgeting which is the strategic planning. The processes of the traditional budgeting generally concentrates on the reduction of the cost rather than on the creation of the value, which means initiatives relating to the strategy are unjustly lower in the priorities (Wienhold, 2015).

Role of budget in planning and controlling

Effective and efficient budgeting system can assist the management in performing their important and significant functions relating to the management. However, it is a matter of fact that improperly and inadequately conceived procedures of budgeting, can be very irritating.

Planning

Planning is basically done with an intention to see the future outcome being done adequately or we can say that it is basically future oriented. It basically signifies that what the management of the organization wants to do in the future time. Management generally has some particular variable that it can control or monitor. Some of these variables include the plant and equipment, financial resources, product, human resources and methods relating to the production. Planning basically comprised of making the projections and forecasts in regard of the external environment of the organizations like Romanian small and medium enterprises, which is obviously not in control or in hands to control. Management of the organizations cannot manipulate the variables relating to the external environment, it must also confine its plans to the factors that are in under control (Grossi, et. Al., 2016). Hence a plan incorporates what the management has in mind to do with its controllable variables. Some of the organizations such as the Romanian small and medium enterprises develop the strategic and the plans with a long time validity generally covering 5 or more years in it. While other confine the formalized horizon of planning to just one year.

Controlling

It basically comprises of monitoring the implementation and execution of the plan and taking the necessary corrective actions as required. The process of controlling is obviously continuous as it is quite impossible to predict and forecast the impact as well as the timing of the factors relating to the external environment or the effects of the actions that are well planned and coordinated. Controls are basically based on the utilization of the feedback in relation to the activity being controlled and monitored. All the control systems of the Romanian small and medium enterprises must have some kind of the mechanism for the feedback. The management of the organizations control and monitor the operation through getting the feedback from many kind of sources. To the some part, the management directly observe and see that what is happening in the organization (Kalling, et. Al., 2007). Moreover to this, they depends on the verbal as well as written form of reports, which they basically receive daily, in 7 days, in a month, in a year, irregularly, or sometimes on demand either. Utilizing this feedback, the necessary and the corrective actions can be taken in against anytime when required.

The reason because the budgets are generally a financial statement of the planning, they are also associated to the system of controls. After setting up of the budget, the accounting system basically provides the information and data for the management to monitor the actual and genuine performance of the financial accounts of the organization. In order to identify any kind of significant or vital diversification, the actual or genuine performance of the statement is being compared to the budgeted plan of the organization. The diversification and the deviation may indicate a requirement of the corrective and required actions if any factors under the control of the management can be altered in order to achieve and attain the desired outcome or result.

 

 

References

Anon., 2015. Top-Down Budgeting. [Online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/top-down-budgeting/ [Accessed 06 May 2020].

Asogwa, I.E. and Etim, O.E., 2017. Traditional Budgeting in Today's Business Environment. Journal of Applied Finance and Banking7(3), p.111.

Dan Dacian Cuzdrioreana, n.d. The Use of Management Accounting Practices by Romanian Small and Medium-Sized Enterprises: A Field Study. Accounting and Management Information Systems, 16(02), pp.292-312.

Grossi, G., Reichard, C. and Ruggiero, P., 2016. Appropriateness and use of performance information in the budgeting process: Some experiences from German and Italian municipalities. Public Performance & Management Review39(3), pp.581-606.

Jiambalvo, J., 2019. Managerial accounting. John Wiley & Sons.

Kalling, K.C.&.T., 2007. Reasons behind contemporary use of budgets. 1, p.8.

Kelly, J.M., 2015. Performance budgeting for state and local government. Me sharpe.

Olesen, A., 2015. The Case for Moving Beyond Traditional Budgeting. Beyond Budgeting Institute.

Tanwar, M., n.d. http://www.yourarticlelibrary.com/accounting/budgeting-accounting/budgeting-meaning-purpose-process-and-principles/71709. [Online] Available at: http://www.yourarticlelibrary.com/accounting/budgeting-accounting/budgeting-meaning-purpose-process-and-principles/71709 [Accessed 05 May 2020].

Weigel, C. and Hiebl, M.R., 2018. Beyond budgeting: review and research agenda. Journal of Accounting & Organizational Change.

Wienhold, M., 2015. Better Budgeting methods: a comparative effect analysis on traditional budgeting problems (Doctoral dissertation).

Yvanovich, R., 2012. Advantages and Disadvantages of Traditional Budgeting Approach. [Online] Available at: https://blog.trginternational.com/bid/162036/traditional-budgeting-approach-advantages-and-disadvantages [Accessed 05 May 2020].

 

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