Management Accounting Assignment Sample
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LO3 -Tools Used in Budgetary Control
Budgetary control tools are used by the business organization to control various costs within the organization and improve the profitability of the company. Budgetary control tools that are used by the organization is important to maintain the productivity of the organization and increase the profit of the company (Henttu-Aho, 2018). Major tools that are used in the budgetary control process are- Variance Analysis, Responsibility Accounting, Adjustment Funds, and Zero Base Budgeting. These are the most common budgetary contrary tools that are used by the organization to improve the budgetary process in the management of the accounting system in the company. The main role of these budgeting tools is to improve the effectiveness of the budgetary process that is used in an organization
Variance Analysis- Variance analysis is considered an effective tool to improve the effectiveness of budget planning. In the budgeting process, different departments of the company used to prepare an estimated budget for a specific period. In the variance analysis, the estimated budget is compared with the actual budget to analyse differences in the estimated budget and actual budget. This is how the accounting department can analyse the differences to develop an effective budget for the organization and reduce the errors in the budgeting process (Mack and Goretzki, 2017). The variance analysis process can improve the effectiveness of the budgetary planning of the organization.
Advantages of Variance Analysis
- The accuracy of the budgetary process can be improved.
- Variance analysis can help the accounting department to develop a competitive budget to reduce the operation cost of the company and increase the profitability of the organization.
- Various changes can be developed in the budget as per the differences between the estimated budget and the actual budget.
Disadvantages of Variance Analysis
- The differences analysed in the budget cannot be implemented immediately in the budget. Changes only can be implemented at the starting of the new budget.
- The sources that are considered in the variance analysis are not present in the financial records of the company to justify the adjustments in the budgetary process.
Responsibility Accounting- Responsibility Accounting is considered the most effective system to minimise errors in the company budget. In this process, a specific structure is used by the organization in the accounting process (Gunawan, Yadiati, Sugarman, and Et. al., 2020). Different departments are formed by the organization in the budgetary process and all responsibilities are also assigned to these departments or people. This is how all the tasks in the budgetary process can be completed with high accuracy and preciseness. This tool also can reduce the complexity of the budgetary process.
Advantages of Responsibility Accounting
- The effectiveness of the accounting process can be improved because it can provide better control over the budgetary process to get a better result with the accounting process.
- This technique can help the accounting department to make the employees aware of the cost-consciousness within the operations.
- Communication can be improved in the financial process and it can improve the budgeting process of the company.
Disadvantages of Responsibility Accounting
- This process or tool need highly skilled employees to maintain accuracy in the accounting process.
- For new implementation in the budgetary system, organization have to develop a new structure to cop up with new changes.
Adjustment Funds- Adjustment of the fund is considered the most effective technique to reduce the rigidness in the budgetary process. This is important to have some flexibility with the budgetary process to maintain the effectiveness of the budget that is prepared by the organization. This tool or technique allows the accounting department to implement changes in the budget as per the decisions of leaders or owners of the company (Maelah and Yadzid, 2018). This flexibility allows the accounting department to manage the budgeting process effectively and reduce the error in budgetary planning. This process also allows the organization to reduce the complexity of the budgetary process. This technique is effective to make sudden changes in the budget as per the changes in the business or budget planning.
Advantages of Adjustment Funds
- The adjustment funds process improve the flexibility of the budgetary process and can help the accounting department to develop an effective budget.
- This tool is most effective to make uncertain changes in the current budget according to the decisions of the leaders.
Disadvantages of Adjustment Funds
- Frequent changes in the budgets can increase the number of errors in the budgeting process and it also can reduce the effectiveness of budget in business operations.
- Frequent changes in a budget can make the budget more complex to understand.
Zero Base Budgeting- In the accounting process different processes are used to manage the budgetary process effectively. In the normal budgeting process, new budgets are continued after the previous budget. This can create major issues in the budgeting process. The adjustment made in the previous budget can remain continues in the next budget and it can increase discrepancies in the next budgets that are based on a particular budget (Maelah and Yadzid, 2018). The zero Base Budgeting technique allows the accounting department to develop a new budget with a fresh start. All the resources are mentioned at the starting of the budget to reduce the errors in the budgeting process.
Advantages of Zero Base Budgeting
- Zero base accounting process us most effective to analyse expenses in the budget.
- Better management of the expenses can be optimised by this system.
- Records management also can be improved by this tool.
Disadvantages of Zero Base Budgeting
- For the short term budgeting process this tool is effective, but for long-term business operations and budgeting planning, this tool can increase the complexity.
- This tool can promote corruption within the accounting process and affect the records of the company.
Advantages of Budgetary Control
- Budgetary control tools and processes in an organization can increase the capability of the organization to perform effective business planning.
- Better financial planning can be performed with help of the budgetary control process.
- The communication process can be improved in an accounting process that can increase the effectiveness of the budget in the company.
- A better overview of costing can be analysed in the organization and investments of the company can be improved.
- Effective coordination can be developed between different departments of the company and communicational barriers can be reduced in the budget planning in the workplace.
Disadvantages of Budgetary Control
- Inaccurate estimation also can affect the effectiveness of the budgeting process.
- The rigidity of the budgeting process can affect budget planning in the organization.
- The human factor can increase the error in the budget planning process.
- Inefficiency that is hidden in the budgeting process cannot be mitigated or analysed without proper assessment.
This is how the budgetary control process has some advantages and disadvantages in business planning and accounting management. The organization can use the budgetary control process to get better control over the costing and budgeting process.
Books and Journals
Gunawan, A., Yadiati, W., Suharman, H. and Sofia, K.P., 2020. Linkages to Budgetary Control and Budgetary Absorption Performance. International Journal of Economics and Financial Issues. 10(5). p.304.
Henttu-Aho, T., 2018. The role of rolling forecasting in budgetary control systems: reactive and proactive types of planning. Journal of management control. 29(3). pp.327-360.
Mack, S. and Goretzki, L., 2017. How management accountants exert influence on managers-a micro-level analysis of management accountants' influence tactics in budgetary control meetings. Qualitative Research in Accounting & Management.
Maelah, R. and Yadzid, N.H.N., 2018. Budgetary control, corporate culture and performance of small and medium enterprises (SMEs) in Malaysia. International Journal of Globalisation and Small Business, 10(1), pp.77-99.