Answer To: : Strategi1 SUNDERLAND BUSINESS SCHOOL Module Titlec Management Accounting Module Code: APC309...
David answered on Dec 29 2021
SOLUTION 1:
Introduction
The first part of the paper discusses about Traditional Budgeting and how now-a-days
traditional budgeting is not suitable for modern business. The essay will provide a short
introduction about traditional budgeting, how it can be effectively used, and limitations of
traditional budgeting, alternatives of traditional budgeting.
A budget is a business plan for the short term generally for one year (Atrill & McLaney,
2007, p304). It is generally shown in financial terms and it is formulated to fulfill strategic goals.
Budgeting is quite important as it helps in operational planning, evaluation of performance,
communication of goals, formulation of strategies, and control of cost which assists the
organization to attain its overall goals. But it is not fit for modern business. The terminology
“modern business” implies a business which is working in a global economy and practices all the
modern tools to survive in a highly competitive environment. In the present scenario of
information technology, it is not possible for a business to compete internationally without
continuous innovation, updated information and controlled activity. In the subject of
management accounting, budgeting is considered as a vast and significant concept. There are
different ways of budgeting. The essay will concentrate on traditional budgeting and its operation
in modern business.
Traditional Budgeting
Strategic Planning Process in a company involves budgeting. It lists down the objectives
of business, targets and decides the activities needed to accomplish these goals. It is prepared on
the basis of last year data, decisions, uncertain estimates and forecast. It is generally called as the
planning of one year which list down the targets for the business and at closing of period; such
targets are compared with actual results. The variances obtained are reported to the budgeting
team which in turn uses them as a significant piece of data for current year budgeting.
Traditional budgeting results in boundaries for operations of business and sets targets for its
employees, which motivates employees to work more and earn reward for achievement.
How traditional budgets can be effectively used?
Budget can be called as the exhaustive numerical strategy for the purchase and usage of
financial and other sources over a fixed future time period. The action requiring preparation of
budget is called as budgeting. Budgetary Control can be called as the use of budgets for
controlling the activities of organization. Budgetary control system is considered as one of the
important instrument for planning and control. The success of the organization is dependent on
how effective planning is. Process of budgeting involves comparison between budgeted figures
and actual figure. Most of the time, comparison between fixed budgeted figures and actual
budget is made without flexing it. Therefore, this results in a problem with employee of the
company. It appears that the concentration is on the dollar amount not on the volume of the
goods manufactured. For example, the manufacturing target of the company is 2,000 units with
fixed cost of $20,000 and variable cost of $60,000. It implies that the total budgeted cost is
$80,000. Now, it will be compared with the actual figures without observing the volume.
Presuming that the actual cost spent is $90,000 and the volume is 2500 units. If $90,000 is
compared with $80,000, it appears that the expense is more by $10,000, which is incorrect. Since
the actual cost should have been spent for 2,500 units is $20,000 fixed and $75,000 for variable,
therefore the flexible budget for actual volume should be $95,000. After comparing it with
$90,000, which shows that $5,000 is the savings and there does not exist overspending of
$10,000. It implies that overspending cannot be considered as negative thing.
The company should focus on comparing the actual figures with the flexible budget not
the static budget. The work to be completed in future shall also be taken into account. The
estimates shall be reviewed regularly and revised if needed, if the estimate is for lower work to
be done the budget will be lesser in amount, but if the work is in accordance to the capacity of
the company then the budget will be rational, which will not generate problem for departmental
head to work more when their budgets have been achieved, if they would have been made on
impractical estimate.
The standard cost system can also be used by the companies for the purpose of control,
they fix standard for every activity and then that standard rate is multiplied with actual activity
carried on to make comparison with actual dollar cost. For example, the standard cost to
manufacture one unit is $20 per unit and the company manufactures 5,000 units, the standard
cost estimated for actual production is $100,000, then the comparison shall be made with actual
cost incurred, it the actual cost spent is $90,000, it implies the company has saved $10,000 and if
it is $105,000, it represents extra spending of $5,000.
Limitations of Traditional Budgeting
Traditional Budgeting is always demotivated for the high cost involved and the longer
duration taken for its preparation. These two disadvantages are always considered by the modern
business firms which need a long working of financial managers and spend high cost on the
company. In addition to this, there are various other aspect on which budgeting is demotivated.
Budgeting is...