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Role of Management Accounting in Budget Preparation

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Introduction to Management Accounting

Management accounting is a kind of process which is used by the manager in order to identify and interpret the information. Through this, the firm will be able to make effective decisions that will be beneficial in achieving its financial goals (Parker, 2012). Accountants prepare a report in a timely manner so that day-to-day operations can be accomplished in a more effective manner. The present report is based on Rolls-Royce holdings which perform their operations in the manufacturing sector. In this context, the report explains the steps which are necessary in order to prepare the master budget. Further, it focuses on some side effects that arise due to the imposition of budget.

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Master budget

An organization prepare a master budget so that they can improve their financial position in the market as compared to other competitors. Through this, Rolls-Royce holdings will be able to control their income level and overall expenses. This kind of budget is based on some elements such as profits, cost and revenues (Renz, 2016). This can be prepared on the basis of monthly or quarterly so that at the end of the financial year the target can be achieved.

The master budget is the combination of operational as well as financial budget. This is an effective tool which can help the enterprise in providing direction to the different staff members of the company. Through these, the overall spending level can be controlled by the firm and that will lead them towards success. Some steps are involved in preparing an effective budget:

In the first step, a budget committee is formed so that they can prepare an effective budget. In this, the manager has to make the plan as per the specified goals so that their overall financial performance can be improved.

Identify the factors: At this stage, different factors should be identified that may affect the budget of Rolls-Royce holdings. These factors are like employee salary, expenses and so on.

Sales budget: This kind of budget can be prepared so that expected sales can be forecasted (Fullerton, Kennedy and Widener, 2013). Through this, they will be able to enhance their productivity level and achieve their financial goals. On the basis of this, future sales can be forecasted which helps them in accomplishing the specified plan.

Production budget: This budget has to be prepared by the manager of Rolls-Royce Holdings so that the overall inventory level can be maintained and the demand of the customers can be fulfilled. In this, they have to perform manufacturing operations so that quality products can be developed at flexible prices.

Direct material: This type of budget shows the materials which are required in order to manufacture the goods. When production is performed with the budgeted cost then their overall goals can be achieved. So, through this good quality services can be developed which is helpful for the firm.

Direct labour budget: In this, the manager has to hire the employees at the right time in order to avoid the recruitment of unskilled staff members (Qian, Burritt and Monroe, 2011). So, in this manner overall recruitment process can be improved which helps them enhance productivity.

Factory overhead budget: This type of budget includes some costs except direct material and labour costs. Through this, the manufacturing industry will be able to perform its overall operations in a more effective manner.

Selling and administrative expenses budget: This type of budget is related to the non-manufacturing expenses of the firm. So, by using this the manager can set the proper guidelines for selling the goods and administer the different activities in a more successful manner.

Income statement: At this stage, the income statement is prepared by the company so that operating income can be estimated in a more effective manner. This kind of statement also gives a vision to the company of how they can perform their future goals in an effective manner.

Cash budget: By preparing a cash budget, the overall activities of the firm can be performed in a more successful manner. On the basis of this, an enterprise will be able to ensure that they have sufficient cash to carry out the different operations (Fullerton, Kennedy and Widener, 2013). The manager of Rolls-Royce Holdings will be able to plan their different activities or operations.

Budgeted balance sheet: This is the last step of the master budget as through this companies will be able to know about their financial position at the end of the financial period.

So, all these different steps play an important role in preparing the master budget. There are many budgets that come under this so that the company's overall performance can be improved and that will lead towards their high revenues or profitability. The other budgets can help Rolls-Royce Holdings in performing their operations or activities effectively.

The functional budget of the organisation can be checked with the help of cross-verification of the information which has been provided in the master budget (Renz, 2016). The advantages of a master budget are as follows.

  • The functional budget of the company is available in one report only.
  • The overall estimate of the profit of organisation is given by this master budget.

The master budget is highly helpful for the top management. The main reason behind this is that it provides meaningful information which is available in capsule form.
The disadvantages of a master budget are as follows which have to be considered by the managers while making any budget.

  • It de-motivates the employees if the budget is prepared according to their expectations.
  • The results which have been determined by the organisation are sometimes not reliable, so it might become a problem for the employees as well as the business entity.
  • The manager has regularly revised the budget plan. So it becomes difficult for the organisation to constantly update the budget plan.

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Budgets are not accurate they are always made on the basis of assumptions. If the business environment in which the activities of Rolls Royce are functioning changed then it will lead to changes in budgets as the cost and revenues of the company will be changed. If there is be downswing in economic conditions than it will directly affect the economy in which activities are running. The budgets are prepared at the end of fiscal years and remaining years there are no strategies planned for budgets. If there are changes in the market after the budgets are formed then there are no systems designed so that review can be taken of the situation thus changes can be made accordingly.

This situation places the company in a disaster position. Budgets required more timing in plans and procedures where the business environment required changes (Kotas, 2014). Less timing is needed if the plans and procedures are already defined in Rolls Royce, employees are aware of the budgets and the company is using effective software for the preparation of budgets. The work of business can be more if there are changes in business environment and thus budgets are to be designed according which the desired changes. If the outcomes of the budgets are not easily achieved by the cited company then they can blame any department within the organisation for not achieving the desired results. Budgets are focused only on numeric values and thus they are considered only the qualitative aspects of business and thus it lays emphasis on achieving profitability for organisations.

Consequences that arise from the imposition of budget

While implementing the budget by senior management there are some unwanted side effects which can be faced by the company and their members. For example, budgeting has a behavioural implication in encouraging employees. It will impact the performance of staff in order to fulfil organization objectives. If senior management has set unrealistic targets, then it will lead to de-motivation. Top authorities have to set their targets in an appropriate manner. If these targets are set low, then budgetary slack will occur. Budget can also lead to inflexibility if managers do not support decisions taken by the senior management.

As the manager of budget they are charging high amounts from the customers in terms of providing services and products (Parker, 2012). The budget manager of Roll-Royce is expecting to collect a range of information so that they can implement a proper budget plan. Sometimes senior management are making a budget for their own benefit which will directly impact the performance of employees. The results of the organization cannot be measured accurately by the managers because budgets are prepared on the estimate of approximately. The employees think that at the time of preparation of the budget, it is a time-consuming process so indirectly it wastes the time of the organization as well as resources also. While making the budget, sometimes it cannot fulfil the expectations of the organization. So the managers are blaming the budget. For this, an efficient budget program is required so that one person fully understands the essentials of budgeting.

CONCLUSION

From the above analysis, it can be summarised that an enterprise can achieve its goals and objectives by implementing the budget. The firm can achieve success through different types of cash budget, income statement, production and so on. The overall financial position of the manufacturing firm can be enhanced. There are some consequences that can be faced by the senior managers after implementing the master budget.

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