Managerial accounting is a form of cost accounting in which different information is identified, measured and analysed by the managers to form strategies to achieve predetermined organisational goals. It help internal stakeholders to get exact data of how a company is performing its operational activities. Managers of an organisation can use this information to make strategic decision that may help to deal with possible problems that may occur (Demerjian and et. al., 2012). Main objective of this report is to find that how budgeting can help accountants to make accounting process effective. Organisation chosen for this report is Intellect Systems, it is a manufacturing company of electronic equipment products and currently running its business in West Perth, Australia. Topic chosen for this report is budgeting. Journals that are selected are Accounting, Auditing and accountability Journal and Journal of Management Accounting Research.
This project report consist detailed explanation of budgeting and purpose of selected two journal articles, similarities and differences in both the selected articles. Four different outcomes for the studies which will be useful for Australian accountants are also discussed under this project report.
A. Explanation of budgeting
Budgeting: Budgeting is the process of managing budgets in which different budgets of an organisation are managed by the owners, managers and accountants. It includes the plan of spending budgets. Management of a company estimates incomes and expenditures for a particular time period. It is mainly based on past data and current market trends. Information of different budgets is provided to the internal stakeholders of a business enterprise. In Intellect Systems budgeting is done to manage monetary resources that are involved in activities of different operations and departments of the organisation (Hilton and Platt, 2013). It help the mangers to control and monitor budgets of different departments to run the operations smoothly. Budgeting is very important for every kind of organisation because it help accountants and managers to analyse profitable and non profitable segments of products. It will i9ncrease productivity and profitability for the company.
A skilled accountant can help to set appropriate budgets for every activity which is going to be performed in coming year or currently running. A detailed budget include information of different incomes and expenses that may occur. Main objective of formulating budget is to assign monetary resources to the operational activities. In Intellect Systems accountants manage budgets according to the requirement of product segments. Budgeting facilitate accountants by providing them detailed information of funds that are spent by the organisation. It also leads the managers to formulate accurate budgets for each task of company (Jones and et. al., 2012). It is technique which is used by accountants and managers of different organisation to analyse that how funds are controlled and organised in different departments of the company.
Budgeting is a replacement of cash based accounting which is replaced because it is an easy way of estimating possible expenditures and uncertainty. Budgets of a company are disclosed to the internal stakeholders because they help in decision making and policy formulation and they have right to gather the insider information of the organisation. Accountants of a company are responsible to evaluate financial statements and check that informations are recorded accurately. Auditors are liable to assure that there is no misstatement of any kind of transaction in financial statements. It also help auditors to evaluate actual position of the company as budgets carry all the information of monetary resources that are going to spent on different operations.
In management accounting budgeting is also considered as an important tool to control the budgets and evaluate possible future risks. Three different planning tools are used in management accounting to estimate and forecast budgets. These tools are forecasting, contingency and scenario. It help the managers to evaluate favourable and unfavourable events that may take place in future and managers have to reserve funds to deal with the same. These tools help them to be aware of such kind of events and generate budgets according to the estimation. In Intellect Systems managers use different planning tools in budgeting and budgetary control, which direct them to identify negative or positive types of events that may affect their ability of performing activities. Management of the organisation is concerned with budgeting process and formulation of budgets (Kaplan, 2011).
Process of budgeting include different steps. First of all the managers have to gather information of different sources of incomes and expenditures, which can be collected from financial statements. Than managers have to record all the identified sources of incomes and create the list of expenses which can be monthly or yearly based. Next step is to divide expense in different categories according to their nature like fixed or variable expenditures. Now the managers adjust expenses from incomes and and it expenses are very high than they have to take a look on variable expenses and find out that where it can be reduced. Last step is to review and main budget to gain more and more profits for future period (Kravet, 2014).
Budgeting also help in accountability because with the help of budgets the observer of financial statements can get the information of how the company is using its funds in effective manner. It can also help the analyser to examine the performance level of an organisation. In accounting there is a major role of budgeting because it is a process of creating a plan of spending the monetary resources of a company. It also help to evaluate that the company is having enough funds to run the operations. There are different types of budgets that are prepared by organisations to maintain the activities for example cash budget to maintain cash activities, operating budgets to analyse operating activities, Financial budget to run financial activities smoothly, Master budget which can reflect the actual picture of financial activities of an organisation. These budgets are prepared by different organisation in order to manager their operational activities to maximise their profits and minimise the possibility of errors an financial crisis.
B. Explanation of purpose of both the selected journal articles
Purpose of accounting, auditing and accountability journal: Main purpose of this article is to analyse that how budgeting can facilitate the work of an accountant and an auditor. Budgeting help the accountant to analyse that where and why the organisation is utilising resources. In pas decades output based budgeting has been shifted and it has replaced the cash based budgeting as it is more advantageous for the organisations. It can also help to evaluate non financial performance of an organisation. Accountants of Intellect Systems use budgeting to promote greater efficiency, accountability and transparency. Public sector companies in Australia has adopted accrual basis accounting first and than private sector companies has followed them. It has not provided the estimated level of success hence the government has implemented some changes in budgeting in Australia in year 2000 (Accounting, Auditing and Accountability Journals, 2018).
Another purpose of this article is to evaluate the impact of budgeting in private and public sector companies. It has helped the accountants to analyse actual and accurate performance and position of the company which is based on output based budgeting. When the organisation have adopted the concept of output based budgeting in the place of cash based budgeting, it has resulted in the meaningful performance modifications. Increased performance based data is required to analyse proper improvements. Accountants of organisations have responded this data in a circular process of on going modifications. In Intellect Systems, budgeting is required to make better decisions about resource allocation according to the requirement of product segments. Budgeting helps the accountants to evaluate extremely financially centred information which is described in budgets (Weygandt, Kimmel and Kieso, 2015).
Other purposes of this journal article is to determine the use and benefits of budgeting for a company like Intellect Systems. In year 2001 Australian government was very concerned about the decreasing profits of public sector companies and than it has been observed that companies have introduces output based budgeting to reduce losses. In earlier years there is not a large impact of budgeting but it has resulted positively in long term and benefited companies. It helped the accountants to identify the weaknesses in recording system and make modifications in the same to remove inefficiencies. It has resulted in enhanced performance of the organisations.
There are different uses on budgeting in an organisation but the main use, is to plan future which is based on past data and current trends. Budgets are based on past year's information which help the owner of a business to estimate future expenses and record all the activities that may take place in future. Accountants and auditors in Intellect Systems analyse budgets to pass their judgement on how company is working and what is the performance level of the running business. Budgets are the summary of the expenses and incomes that a company is earning (Needles, Powers and Crosson, 2013).
The concept of budgeting is helping the accountants of Intellect Systems to fulfil needs and achieve goals of the organisation. As main function of budgeting is to control and monitor budgets of a company, so it help to monitor budgets before spending money to any activity or expenses. It helps to achieve the goal of increased profitability and productivity because it helps to assign budgets to the departments according to the need and requirements. Budgeting is a tool that can lead the organisation toward success by reducing its extra expenses and other waste. The higher level of performance can be achieved with the help of budgeting by optimum utilisation and control of monetary resources.
There are two different questions that may be asked from the accountants and auditors of Intellect Systems. First question is that, how budgeting help to achieve organisational goals? And another question is that, do budgeting is compulsory for the companies?
Purpose of Journal for management accounting research: The main purpose of this report is to analyse the use of budgeting in management accounting. Another purpose is to determine the benefits of budgeting process for an organisation.
Budgeting is technique which is used by organisations to determine funds available in the organisation, and form plans to spend these funds to perform different activities. From last few decades the companies in Australia are dealing with different types of problems like financial problems, low profits, increased expenses. Organisation was facing these problems because of traditional budgeting technique and to resolve all the issues the organisation has adopted output based budgeting (Journals of Management Accounting Research, 2018). This adoption has benefited the organisations and helped them to overcome the problems. The modern budgeting concept has enhanced the performance level of organisations and also increased their profitability by providing them ways to control unnecessary expenses. Australian Government has also declared that the organisations who are using traditional budgeting method have to implement output based budgeting method within their organisation.
Management accounting is system in which managers formulate different types of reports to record insider information which is provided to the internal stakeholders. In these reports the main report is budget report that reflects all the resources that are involved in various operational activities of an organisation. For organisation it is not compulsory to formulate these reports but reports are generated to analyse that how organisations are performing and what will be the outcome of such activities. Budgeting is implemented by the organisations to resolve their different types of issues like sudden expenses and increased losses by maintaining monetary resources in an effective manner.
In Intellect Systems, managers follow the concept of budgeting to examine how company is using the resources. Budgeting also help to identify the difficulties in the funds utilisation system (Ward, 2012). Budgets are used to forecast incomes and expenditures for a specific time period. The process of budgeting help the organisation to determine that how monetary resources the company is making and spending. Budgets are very important for a company to plan and forecast possible events. Organisations conduct budgeting to determine cost effective and efficient strategies that may help to maximise profits. It help the organisations to make economic judgement as well as strategic decision making. It direct managers to make long term and short term plan that aids to implement policies even if it is costly and time consuming. Budgeting increase level of consciousness of costs and skilfulness of activities performed to achieve predetermined goals and motives. The main function of budgeting is to plan and control. Planning includes the formulation of plans to spend money and controlling process includes to reduce excess expenses (Noreen, Brewer and Garrison, 2014).
Budgeting process consist many budgets that are classified according to the requirement of different departments of an organisation. These budgets are formed by managers to evaluate that how to utilise available monetary resources in effective manner. Some of the budgets are concerned with investments and forecasting of productivity and performance of an organisation. It also help to measure the success of a business. Profits of an organisations are managed by the owner or managers by adopting appropriate budgeting technique that may provide information of available resources and the required areas where the budgets can be utilised. In management accounting managers use planning tools to estimate possible events that may take place and affect the operations. These tools are used by the company to prevent these types of uncertainties by estimating the same. It will result in increased profitability and performance level. Setting short term and long term objectives, specific programs and than managers express the same in budgets.
Budgets are mainly used to forecast financial statements that express managerial plans and include all the steps of operational activities. The main base of budget is cash budget in which all the cash receipts and payments are recorded by the managers of an organisation (Saadi Halbouni and Kamal Hassan, 2012).
There are two different questions that may be asked to the managers of an organisation. First question is that, do budgeting facilitate the management accounting process? Another question is that, how budgeting can lead managers in forecasting?
C. Similarities and differences in two studies
Accounting, Auditing and Accountability
Accounting, auditing and accountability are three different function in which accounting informations are recorded, analysed, observed, determined and formulated in different books by different persons like, accountants and auditors.
In management accounting different accounting information is recorded in various management accounting reports for example costs for products are recorded in cost accounting reports, analysed performance of business and individuals are recorded in performance reports and outstanding amount of clients are recorded in account receivable reports.
Purpose of accounting is to record accurate information of business in books, purpose of auditing is to analyse transparency of recorded information and check relevancy of information, accountability is the process of observing the information which is recoded in the books.
Purpose of management accounting g is to record relevant and accurate information in the books and than control, analyse, observe and check the recorded information to examine the performance of the company.
Accounting, Auditing and Accountability
Use of budgeting
In accounting, auditing and accountability budgeting is used to evaluate actual performance of a company and to analyse that how effectively organisation is using it resources that are available.
In management accounting budgeting is used to forecast possible future events whether they are favourable or unfavourable. It also help the managers to make strategic decision to deal with different problems like unplanned and unnecessary expenses.
Accounting, auditing and accountability is very important and compulsory for the organisations as it help the external stakeholders like government, suppliers and customers to analyse position and financial strength of the company.
Management accounting is not compulsory for the organisations because it is done for internal stakeholders to determine that how strategies and policies that are implemented by managers are responding to the goals like maximisation of profits and minimisation of losses and risks.
D. Specific outcome from above studies
Outcomes from accounting, auditing and accountability journal:
Effective reporting: Effective reporting can be done with the help of budgeting in which all the accurate incomes and expenses that are involved in activities of organisation can be recorded and help accountant to easily analyse the same (Songini, Gnan and Malmi, 2013).
Increased performance: Budgeting can help an organisation to increase the level of current performance by proper maintenance of every transaction. Budgeting is a process in which all the future incomes and expenses are estimated so that managers can plan for the same in advance to enhance organisational performance.
Outcomes from Journal for management accounting research :
Prediction of future events: Accountants can predict future expense with the help of budgeting, because it help to get the information of possible future events that may occur and also help to reserve resources for the events.
Planning tools: Different planning tools like scenario, forecasting and contingency can help accountants to respond financial crisis that may take place effectively and plan the ways in which company can deal with such issues to increase profits and reduce risks (Wall and Greiling, 2011).
Managerial accounting is the process of analysing, controlling, monitoring and recording accounting information in reports so that internal stakeholders of an organisation can get the information of how operations are performed by the company. Budgeting is a technique which is used in managerial accounting to forecast possible future expenses and incomes. It also forecast favourable and unfavourable events that may take place in future and affect operational activities negatively. Accountants of an organisation is suggested to follow the concept of budgeting to make the reporting system effective, predict future events, enhance performance level.
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