Using concepts like flexible budgeting and participative budgeting, discuss why it is important for a company to use budgeting techniques. What type of managerial problems can be caused by the use of budgets?
Post by classmate 1
Budget is defined as a plan expressed in quantitative/monetary terms for a specific period of time, usually one year period (Anthony, Hawkins & Merchant, 2011). This is the way companies plan their expenditures with the end goal of obtaining a profit and use responsibility centers/departments/cost centers to help structure such budgets. Even nonprofit organizations prepare budgets as they serve as an aid in making and coordinating short-range plans, communicating plans to the different departmental managers, a way to motivate managers in achieving their goals and controlling ongoing activities and expenses. It also serves as a “ basis for evaluating and educating the performance of responsibility centers and their managers”. (Anthony, Hawkins & Merchant, 2011).
In a typical company you will find a master budget which comprises several items such as the operating budget, cash budget and capital expenditure budget. The operating budget includes revenues, expenses, changes in inventory and working capital items for all the planned operations in the upcoming year. The cash budget provides information with regard to the predicted cash that will be used in that year and the sources. A capital expenditure budget will show any changes in property, plant and equipment already planned for.
Many companies use flexible budgeting to prepare for different activities planned for the year, revenues and expenses. These get modified during the year to reflect actual sales, any changes in cost of production and changes in business operating conditions. This flexibility often allows owners and managers to adapt to the changes forthcoming. On the other hand, predictive budgeting can result in a bit of a mess for managers if not handled correctly as this type of budgeting involves a larger number of employees who are not all top-level managers. This is because given the amount of people involved, it can take longer to create a budget and there might be cost associated that can potentially be higher than having the top level managers handle the creation of budgets for the company. A company may also run into a situation where those same employees participating or originating the budget are also the same ones who perform a job that will be compared to what’s included in the budget. This can cause participants to create a conservative budget but with extra expense padding so that they are “reasonably assured of achieving what they predict in the budget”. (Braggs, 2020, para.4) Especially with employees who are paid bonuses based on their performance against the budget. In this case, a manager will need to review those budgets carefully as they can easily detect when budgets are being padded and can make adjustments as needed.
Of course, overall budgeting can be time consuming, inaccurate at times since it is based on assumptions and results may vary depending on the changes outside of one’s control. There’s also the possibility of someone trying to game the system by engaging in unethical behavior or committing fraud. Managers may not agree with expense allocations being set by the budget where certain amounts of overhead costs need to be allocated to various departments and they are not allowed to use the services provided outside the company that can actually be cost savings.
Anthony, R. N., Hawkins, D. F., & Merchant, K. A. (2011). Accounting: Text and cases 13th edition. New York: McGrawHill/Irwin
Braggs, S. ( May, 2020) Participative Budgeting. Accounting Tools. Retrieved from:https://www.accountingtools.com/articles/what-is-participative-budgeting.html(Links to an external site.)
Woodruff, J. (March, 2019) The Advantages of a Flexible Budget. Retrieved from: https://smallbusiness.chron.com/advantages-flexible-budget-57105.html
Post by classmate 2
A budget to a business is fundamental for creating a roadmap to success. Budgets drive the various departments of an organization to track revenue, expenses as well as performance. There are varying styles to a budget but the end goal is to drive direction, responsibility, and allocate resources. In its simplistic form, a budget is a “to do “list. Budgets do not come without there challenges.
Two concepts that exist are flexible budgeting and participative budgets. Flexible budgets “adjusts or flexes with change in volume or activity”, Averkamp, H. (n.d.).The flexible budget “is more sophisticated and useful than a static budget” Averkamp, H. (n.d.) On the other hand, participative budgets are different than budgets that are implemented by upper management. Participative budgets incorporate lower level management to assist in budget preparation. I think this is important because lower level manager have a real “feel” of what is going on in the field. Also, this benefits the entire organization because if the team contributes to the budget, then you have a “buy in” of the budget from the bottom up. I feel the participative budget is beneficial to the organization.
Many years ago, I was involved in the sales budget of an organization and as a contributing manager I got my first taste of issues that exist with budgetary policy. I liked the participative nature of being fully involved in the budget. What I noticed was that sales staff knew what the budgeted sales was for their territory and if their bonus was tied to their budget along with their annual review, I noticed that they would just try to exceed their budget by as little as possible. This creates one of many issues I noticed with budgets and how employees may try to manipulate budgets.
A budget is based on assumptions and assumptions can be wrong. This can produce negative results with different departments blaming each other and thus creates dissention in the organization. As mentioned above, many individuals learn how to manipulate or “game” the budget system and this creates deception within an organization.
Another important issue with budgets is they are quantitative in nature when they should be qualitative as well. Budgets end goal is profit and customers could care less about an organization’s profit. I feel budgets are necessary and create a strategy but they are not without their weak points.
Anthony, R., Hawkins, D. Merchant, K. (2011) Accounting: Text and Cases. New York: McGraw-Hill Irwin
Averkamp, H. (N.D.), What is a flexible budget Retrieved From:
https://www.accountingcoach.com/blog/flexible-budget(Links to an external site.)
Bragg,S. (2018 March 2), Problems Caused By Budgeting Retrieved From: