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Assessments Assignment: Budgeting As A Managers Quantitative Plan (Essay Sample)



ASSESSMENTS-GROUP ASSIGNMENT STUDENT’S NAME & ID: UNIVERSITY NAME: COURSE NAME AND CODE: INTRODUCTION Budgeting refers to a quantitative plan that is used by managers and decision makers of an organization to forecast future trends of operations. It involves preparation of estimates of future activities for instance estimates for future sales, future cash collections and disbursements. Budgeting is an important practice in organizations as it helps the management to set a plan or path way to attaining their objectives (Brealey & Myers, 2000). This assists them in laying out strategies and mobilizing resources that will help them attain their goals. Budgeting requires managers to undertake it as a process. Its effectiveness is achieved if a good budgeting process is adopted. A good budgeting process involves engaging of all those who are responsible for making sure that the budget is followed and the organization’s objectives are implemented while preparing the budget. Budgeting decisions are supposed to be motivated by organization’s mission priorities and financial accountability (Brealey & Myers, 2000). There are basically several steps that are essential in preparing a budget. It starts by setting up of realistic goals; these goals must be aligned with the company objectives. The goals should be achievable. Then a thorough analysis of the incomes and expenses is important so that the decision makers are aware of what amount estimates they are planning for. This is done through accessing and analyzing historical and actual data. After this, managers then prepare a base budget. This is followed by accessing the data and actual budget preparation. Managers or decision makers then review the budget and evaluates its conformity with their objectives. After that, budget results are posted and reported. Last stage in budgeting process involves monitoring progress and making amendments (Brealey & Myers, 2000). CRITICAL REVIEW OF JOURNAL PAPERS * The European Accounting review 2000 paper This paper criticizes the traditional budgeting process. The editors explains the demerits of using the traditional budgets while currently we have other new ways of measuring performance like the balance score card, rolling forecast and monitoring systems. The critics of the traditional budgeting system see it as an outdated method which does not conform to the current age. Nevertheless, there are advantages that are associated with this approach and abandonment may be “fatal” to some business operations. Traditional budgeting system offers the management with a framework of control. It creates a reference point in which company’s financial activities can be well coordinated. The traditional budgeting system is facing opposition from several management consultants. And also, being abandoned by major companies, offers a platform in which decentralization can proliferate well in an organization. Some big organizations like banks and other financial institutions understand the benefits of decentralization while at the same time maintain standardized operating procedures. In this case, budgeting and use of “traditional” cost centers offer managers with the liberty to run their operations provided they meet their set targets. The claim that process-based model which entails devolution of powers to the front-line people is a positive move. This will in this regard assist the front-line people who are the important members in delivering services with skills and capabilities to cope with new competitive climate, innovate their skills and share knowledge as they meet the customer’s needs (Freeman & Hobbes, 1991). The management consultants who are the main critics of this old view it as rigid and one that requires a lot of thinking. Basically this is a disadvantage since any performance evaluation tool in an organization should be simple, understandable and easy to comprehend. The complexity of this budgeting approach poses challenges especially in undertaking variance analysis which is a key management process in reviewing the performance. Organizations live in a dynamic society. Operating environments change and consequently, the organization processes structures need changes. The old budgeting system does no accommodate changes hence in cases where there are changes in organization processes; their budget would not be useful in measuring performance. Alternatively, with the proposal to adopt a rolling budget, which is viewed as a better replacement for the old budgeting style, Managers will be exposed to uncertainties, as changes are made every month or quarter. Therefore, this may pose dangers of manipulation to suit their preferred estimates and the reported figures to the shareholders may be incorrect hence misleading. The reasons behind abandonment from annual budget to rolling budget are not basically due to the ineffectiveness of the annual budget but geared towards reporting more profits. This is not a problem to do with planning and coordination hence no need to change from annual to rolling budget. In this case the protagonists of this change should focus on expansion so as to increase their market value. The proponents of annual budget see it as an important tool as it addresses the needs of both the projects and processes in an organization. This article shows that in future the budgeting system may shit to Activity based budgeting as many companies during the research showed interest in accommodating improvements in the annual budgets (Brealey & Myers, 2000). This is beneficial since more changes in the organization’s structure need to be addressed. * Elsevier, T. Libby, R.M. Lindsay/Management Accounting Research 21 (2010) 56–75 paper This paper analyses the role of budgets in management control. According to the research carried out in this paper there are arguments that problems with the budgets come from the way budgets are used others argue that budgeting processes are fundamentally flawed. It is a common belief that budgeting empowers managers with opportunities to revive their companies by laying out proper strategies that are geared towards realization of company objectives. It is the role of managers to quantify their goals and lay proper strategies on how to achieve these goals (Lilleyman, 1984). In this survey, the researcher presented control in management as the use of budgets for managerial motivation and as a standard for performance evaluation. It is quite clear that budgets are the only tool that organizations can use to evaluate the effectiveness of their strategies and understand the underlying challenges to the attainment of their goals. There are arguments that in cases where budgets do not realize effectiveness be abandoned. This argument is misleading and necessary changes and improvements should be embraced to ensure that budgets are not done away with. In evaluating the value added to organizations by budgets, it’s evident that budgets are important components of any business entity. Many of those interviewed showed positivity on the value of budgets in a business giving it a median of 70%. By following this statistics we propose that abandonment of budgeting is unnecessary since many firms are finding it not well to abandon the use of budgeting. Planning and control being core functions of managers will be ineffective without budgets and the overall management process will be at risk (Brealey & Myers, 2000). There are also some criticisms in this paper touching on the time consumed by managers preparing budgets. It is prudent for managers to analyze and evaluate the time they take, the cost implications and the potential benefits that may accrue from such activities. Planning and budgeting may take a considerable amount of time but it’s an essential aspect of management and cannot be ignore (Lilleyman, 1984). Criticizing budgets as it promotes the use of fixed performance contracts, is misleading. Based on the research carried out, data suggests that the use of fixed budgets is adopted by a small number of firms between 5-9%. Considerations are made for uncontrollable events by firms and this is made available by use of budgets to evaluate performance. The issue of adaptability of budgets with changing operating environments is seen as incorrect. Based on the sample data of this research paper many firms do not operate in an unpredictable environment and therefore budgets are not prone to becoming obsolete. To the few firms that operate in unpredictable environments, there are set mitigation adaptive factors that assist them to cope with the changing operating environments. These may include, fast tracking processes to obtain new resources and also reviewing budgets and making necessary revisions as more often than expected. In this paper, many respondents agreed to the fact that budgeting is an important tool in realizing the budgeting strategies and this is important. Budgeting aligns objectives with strategies and evaluation of the same can only be realized through a management tool, the budget. Budgeting gaming is a major threat to firms. Most of the sampled firms seem to be affected by this vice. This involves setting goals that are aimed at winning bonuses and promotions. These are unethical practices and should be avoided and make the whole process of budgeting futile since they are geared towards personal interest rather than organizational objectives. Budget gaming in affects the value addition of the whole process and erodes the usefulness of the information reported at the end of performance period. * Harvard business review by Jeremy Hope and Robin Fraser paper. This paper looks at budgeting as an unessential component in an organization. The author proposes a complete abandonment from the budgeting system because currently there are areas in which organizations have invested in that can measure perf...
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