MODULE CODE: LCBB5002
MANAGEMENT ACCOUNTING
STUDENT NAME:
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Table of Contents
Introduction ..................................................................................................................................... 3
Part A .............................................................................................................................................. 3
Part B .............................................................................................................................................. 8
Conclusion .................................................................................................................................... 10
Reference List ............................................................................................................................... 11
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Introduction
When companies transition into the era of technology, real-time decision making and
planning are increasingly required to maintain profitability. Budgeting plays an important role in
management accounting as it helps to convert the medium-term plans into short terms plans and
goals. Thus, it helps the managers to take advantage of short-term opportunities. The following
report includes the meaning of budgeting along with its types. It also includes how budgeting helps
in decision making for managers. It also involves merits and demerits of Budgeting styles.
Moreover, it describes the impact of changing environments on various budgeting styles. And at
last, the report discusses the advantages and disadvantages of participatory budgeting and its
consequences for the success of the business.
Part A
What is Budgeting?
Budgeting is a method by which future profits and expenses are calculated to simplify the
spending operation. Budgeting is undertaken to keep track of the costs and sales (Anessi-Pessina
et al, 2016). This acts as a tool for managing and regulating a company’s finances.
What types of Budgeting do we have?
The company has four main types of Budgeting which are as follows:
Incremental Budgeting
Incremental budgeting compares the actual estimation from last year and deducts a proportion
for next year's budget.
Activity-based budgeting
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Activity-based budgeting is a budgeting method which uses top down approach that decides
the amount of inputs needed to sustain the business goals or outputs (Koliesnichenko, 2019).
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Value proposition budgeting
Value proposition budgeting is simply a way of thinking to ensure that almost everything found
in the budget adds value to the organization.
Budgeting on zero basis
Zero-based budgeting represents the idea that all corporate budgets are unfavourable and
must be placed together from zero, as among the most commonly adopted ways of budgeting.
Flexible budget
A flexible budget is one that can be modified on the basis of a change in the expectations used
during the planning stages of the management to develop the budget.
Fixed Budget
A Fixed budget stays the same even though there are major variations from the assumptions being
made in the planning phase.
Budgeting is an important component of every business's growth. Through budgeting, a
company makes decisions about how to start moving forward. Budgeting should be performed by
people or departments, depending on the organization’s scale and character. A budget is the
cornerstone of every successful business strategy by estimating the finances, prioritizing programs,
and allocating resources to various outlets (Zor et al.2019).
How does it help managers in decision making?
Further budgeting helps managers in making decisions in the following ways:
Available funds: Budgeting helps in determining the available fund. It means Budgeting reflects
the current financial position of the business and thus where the funds are used and how much
funds are available for development and growth.
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Projects: Budgeting helps in making short term and medium-term goals that determine the ability
of the company. Sometimes Budgeting may disclose some areas in which spending money is
waste. Thus, the business can cut those areas for spending and can make long term projects.
Operational: Here operational means the day to day operational expenses that the company is
incurring (Prabowo et al.2017). Budgeting helps to determine the operational expenses as it is the
most important for the company to meet its daily expenses in order to survive in the market.
Funding: For certain companies, cash management can be a major challenge, to such a degree that
it may cause problems for firms who do all the rest correctly. Every company needs different ways
to finance its expenses both regular and irregular. Thus, Budgeting is important, as it will help the
company to discover the right ways to finance its project (Syzonenko, 2019).
Which is the most suitable for changing environments like that of Softconic; flexible or Static
and why?
A flexible budget is one that can be modified on the basis of a change in the expectations
used during the planning stages of the management to develop the budget. Whereas, a static budget
stays the same even though there are major variations from the assumptions being made in the
planning phase. Thus, for changing the environment, the most suitable budget for soft conic is
Flexible budget as it allows the company to modify or change its budget as per the need of the
environment (Weigel and Hiebl, 2018). Also, it is easy to adapt changes taking place in the
environment if the company adopts the Flexible Budget.
Most of the IT companies are facing financial problem in this corona pandemic as they
need to get developed at each and every moment which need more funds to adopt latest technology
for the IT companies but due to this pandemic, it is very difficult for them to get any financial
resources.
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Are there any real-world examples of IT companies that you can apply to this scenario?
Some of the real examples of IT Company which faces financial problem due to this pandemic are
Infosys, “Talvasoft software development” and many other companies.
The pros and cons of Budgeting are as follows:
Advantages
● Increases the possibility that business priorities and expectations will be reached
● Helps to identify the strengths and weaknesses the organization can focus on
● Real issues could be predicted and prevented by possible corrective action
● Motivates the organization’s for forward-looking process
● Clear management and comprehension of staff roles and priorities
● Linking to personal goals will boost workplace productivity
● Better management of operations and the various parts of the business
Disadvantages
● Employees can be demotivated if the goals that have been set were very difficult or very
ey to succeed, whether they are held liable for anything beyond their ability or may not
agree with the goals
● Planning is often viewed as needless hard activity and thus gets a low priority
● Lack of coordination among departments or groups which could lead to conflicting
operational plans
● The workers typically strive to meet the goal, not to surpass it
● Less flexibility
● Variance analyses and studies are delivered too late for managers to get any impact
● Meeting one goal, while other relevant measures get worse
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Short-term decisions rely on whether money can be better used in the near term. Thus the
appropriate costing strategy is important if a business wants to optimize earnings. Budgeting also
focuses on short term goals to achieve as includes estimating the expenses and income of 1 year.
Thus, we can link Budget with short term decisions in some cases when the goal of the company
is to meet in short time period.
Part B
What types of budgeting systems do we have?
The company has a Participative Budgeting System.
What is Participative budgeting?
Participative Budgeting is a budgeting process in which the employees of lower-level management
are also involved in the budgeting process (Ostaev et al.2019). It gives importance to the people
who are at lower level management in order to give them equal importance in the organization.
Participatory budgeting sometimes aims to develop more actual budgets because it is best
for lower-level employees to inform their managers when people intend to distribute funds. When
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a company carries out participatory budgeting it discloses the senior management’s faith over its
employees (Makrygiannakis. and Jack, 2016). Thus, it creates a sense of ownership among the
employees which motivates them in working and helps to achieve the company objectives.
How does it support decision making in changing environments?
As in Participatory budgeting, the lower-level employees are also involved thus it is easy to follow
the changes occurring in the environment and thus it helps the managers in taking a decision in
changing environment as the lower level people are also involved in each and every step of
budgeting and know the importance of effect of change in the environment (Cescon, Costantini,
and Grassetti, 2019).
Critical analysis entails considering both pros and cons of an argument
The pros and cons of Participatory Budgeting are as follows:
Advantages
Information transfer in upward: The exchange of knowledge from departmental-level
employees to upper management is among the advantages of participative budgeting. It motivates
and improves the faith of the subordinates as they are getting a chance to discuss their own
viewpoints in front of their managers on some organizational problems.
Motivates employees: When employees are involved in the budget preparation process they
continue to control a majority of the budgeting time. This gives them a sense of belonging,
provided that senior management takes their thoughts into account.
Target interaction: The interaction of the target is applicable between the goals of the individual
and the ultimate objectives of the company. To create a budget that is practical for the business,
managers and workers must follow the same directions to achieve the organization's common goal
(Pilipczuk, 2019).
Disadvantages
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Consumes more time: A participatory budget's most significant disadvantage is that it takes a lot
more time than a simple budget. Because budget preparation begins from the bottom of the
organization up to the top, there might be too much interference that might conflict with the process
(Weiskirchner-Merten, 2019).
Manipulating budget: Manipulating the budget is another limitation of this Budgeting process
(Alsharari, 2019). Employees can estimate more amount the costs and/or estimate less amount of
projected revenues to their advantage as a way to strengthen the budget.
Conclusion
So budgetary management is an essential method for any company to set a budget for
activities to come. It lets organizations allow better use and management of their resources. Thus,
the efficiency of the budgetary regulation depends on the predicted supply and quality. Soft conic
needs to adopt the dynamic budgeting style in order to survive in the changing environment as in
the case of Corona Pandemic. It needs to be ready for such type of situations. Budgeting is the
main element for the success of the organization as it helps to determine the operational expenses
of the organization which is necessary to survive in the market. Further, the report concludes that
the Company’s need to adopt a participatory budgeting method as it helps to achieve the goal of
the organization effectively and efficiently by giving more importance to the people of lower-level
management.
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Reference List
Alsharari, N.M., 2019. Accounting changes and beyond budgeting principles (BBP) in the public
sector. International Journal of Public Sector Management.
Anessi-Pessina, E., Barbera, C., Sicilia, M. and Steccolini, I., 2016. Public sector budgeting: a
European review of accounting and public management journals. Accounting, Auditing &
Accountability Journal.
Cescon, F., Costantini, A. and Grassetti, L., 2019. Strategic choices and strategic management
accounting in large manufacturing firms. Journal of Management and Governance, 23(3), pp.605636.
Koliesnichenko, A., 2019. Relation issue between budgeting and management accounting
(Doctoral dissertation, Baltija Publishing, Latvia).
Makrygiannakis, G. and Jack, L., 2016. Understanding management accounting change using
strong structuration frameworks. Accounting, auditing & accountability journal.
Ostaev, G.Y., Gogolev, I.M., Kondratiev, D.V., Markovina, E.V., Mironova, M.V., Kravchenko,
N.A. and Aleksandrova, E.V., 2019. Strategic budgeting in the accounting and management
system of agricultural enterprises. Indo American Journal of Pharmaceutical Sciences, 6(4),
pp.8180-8186.
Pilipczuk, O., 2020. Toward Cognitive Management Accounting. Sustainability, 12(12), p.5108.
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Prabowo, T.J.W., Leung, P. and Guthrie, J., 2017. REFORMS IN PUBLIC SECTOR
ACCOUNTING AND BUDGETING IN INDONESIA (2003-2015): CONFUSIONS IN
IMPLEMENTATION. Journal of Public Budgeting, Accounting & Financial Management, 29(1).
Syzonenko, O., 2019. Participatory budgeting as an effective tool for sustainable development of
communities.
Weigel, C. and Hiebl, M.R., 2018. Beyond budgeting: review and research agenda. Journal of
Accounting & Organizational Change.
Weiskirchner-Merten, K., 2019. Interdependence, participation, and coordination in the budgeting
process. Business Research, pp.1-28.
Zor, U., Linder, S. and Endenich, C., 2019. CEO characteristics and budgeting practices in
emerging market SMEs. Journal of Small Business Management, 57(2), pp.658-678.
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