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Budgeting And Its Factors

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INTRODUCTION

Managerial accounting is a form of cost accounting in which different information is identified, measured, and analyzed by the managers to form strategies to achieve predetermined organizational goals. It helps internal stakeholders to get exact data on how a company is performing its operational activities. Managers of an organization can use this information to make strategic decisions that may help to deal with possible problems that may occur (Demerjian and et. al., 2012). The main objective of this report is to find out how budgeting can help accountants to make the accounting process effective. The organization chosen for this report is Intellect Systems, it is a manufacturing company of electronic equipment products and is currently running its business in West Perth, Australia. The topic chosen for this report is budgeting. The journals that were selected were Accounting, Auditing and Accountability Journal, and Journal of Management Accounting Research.

This project report consist detailed explanation of budgeting and the purpose of the selected two journal articles, and the similarities and differences in both the selected articles. Four different outcomes for the studies that will be useful for Australian accountants are also discussed in this project report.

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MAIN BODY

A. Explanation of budgeting

Budgeting: Budgeting is the process of managing budgets in which different budgets of an organization 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 on 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 organization (Hilton and Platt, 2013). It helps the managers to control and monitor the budgets of different departments to run the operations smoothly. Budgeting is very important for every kind of organization because it helps accountants and managers analyze profitable and non-profitable segments of products. It will increase productivity and profitability for the company

A skilled accountant can help to set appropriate budgets for every activity that is going to be performed in the coming year or currently running. A detailed budget includes information on different incomes and expenses that may occur. The main objective of formulating a budget is to assign monetary resources to the operational activities. In Intellect Systems accountants manage budgets according to the requirements of product segments. Budgeting facilitates accountants by providing them with detailed information on funds that are spent by the organization. It also leads the managers to formulate accurate budgets for each task of the company (Jones and et. al., 2012). It is a technique that is used by accountants and managers of different organizations to analyze how funds are controlled and organized in different departments of the company.

Budgeting is a replacement for cash-based accounting which is replaced because it is an easy way of estimating possible expenditures and uncertainty. The budgets of a company are disclosed to the internal stakeholders because they help in decision-making and policy formulation and they have the right to gather the insider information of the organisation. Accountants of a company are responsible for evaluating financial statements and checking that information is recorded accurately. Auditors are liable to ensure that there is no misstatement of any kind of transaction in financial statements. It also helps auditors to evaluate the actual position of the company as budgets carry all the information of monetary resources that are going to be 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 helps the managers to evaluate favorable and unfavourable events that may take place in the future and managers have to reserve funds to deal with the same. These tools help them to be aware of such kinds 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 to perform activities. Management of the organization is concerned with the budgeting process and formulation of budgets (Kaplan, 2011).

The process of budgeting includes different steps. First of all the managers have to gather information on different sources of income and expenditures, which can be collected from financial statements. Then managers have to record all the identified sources of income and create a list of expenses which can be monthly or yearly based. The next step is to divide expenses into different categories according to their nature like fixed or variable expenditures. Now the managers adjust expenses from incomes and if expenses are very high then they have to take a look at variable expenses and find out where they can be reduced. The last step is to review and main budget to gain more and more profits for future periods (Kravet, 2014).

Budgeting also helps in accountability because, with the help of budgets, the observer of financial statements can get information on how the company is using its funds in effective manner. It can also help the analyzer to examine the performance level of an organization. Accounting, there is a major role in budgeting because it is a process of creating a plan for spending the monetary resources of a company. It also helps to evaluate whether the company has enough funds to run the operations. There are different types of budgets that are prepared by organizations to maintain activities for example cash budgets to maintain cash activities, operating budgets to analyze operating activities, Financial budgets to run financial activities smoothly, and Master budgets which can reflect the actual picture of financial activities of an organization. These budgets are prepared by different organizations in order to manage their operational activities to maximise their profits and minimise the possibility of errors in a financial crisis.

B. Explanation of the purpose of both the selected journal articles

Purpose of accounting, auditing, and accountability journal: The main purpose of this article is to analyze how budgeting can facilitate the work of an accountant and an auditor. Budgeting helps the accountant to analyse where and why the organization is utilising resources. In past decades output-based budgeting has been shifted and it has replaced cash-based budgeting as it is more advantageous for organisations. It can also help to evaluate the non-financial performance of an organisation. Accountants of  Intellect Systems use budgeting to promote greater efficiency, accountability, and transparency. Public sector companies in Australia have adopted accrual basis accounting first and then private sector companies have followed them. It has not provided the estimated level of success hence the government has implemented some changes in budgeting in Australia in the 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 the actual and accurate performance and position of the company which is based on output-based budgeting. When the organisation has adopted the concept of output-based budgeting in place of cash-based budgeting, it has resulted in meaningful performance modifications. Increased performance-based data is required to analyse proper improvements. Accountants of organisations have responded to this data in a circular process of ongoing modifications. In Intellect Systems, budgeting is required to make better decisions about resource allocation according to the requirements of product segments. Budgeting helps the accountants to evaluate extremely financially centered information which is described in budgets (Weygandt, Kimmel and Kieso, 2015).

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Another purpose of this journal article is to determine the use and benefits of budgeting for a company like  Intellect Systems. In the year 2001 Australian government was very concerned about the decreasing profits of public sector companies and then it has been observed that companies have introduced output-based budgeting to reduce losses. In earlier years there was not a large impact of budgeting but it has resulted positively in the long term and benefited companies. It helped the accountants to identify the weaknesses in the recording system and make modifications in the same to remove inefficiencies. It has resulted in enhanced performance of the organisations.

There are different uses for budgeting in an organisation but the main use is to plan the future which is based on past data and current trends. Budgets are based on past year's information which helps the owner of a business to estimate future expenses and record all the activities that may take place in the future. Accountants and auditors in  Intellect Systems analyse budgets to pass their judgment on how the 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 helps the accountants of Intellect Systems to fulfill needs and achieve the goals of the organisation. As main function of budgeting is to control and monitor the budgets of a company, so it helps to monitor budgets before spending money on 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 needs and requirements. Budgeting is a tool that can lead the organisation toward success by reducing its extra expenses and other waste. A 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. The first question is how budgeting helps to achieve organisational goals. Another question is that, do budgeting is compulsory for companies.

Purpose of Journal for Management Accounting Research: The main purpose of this report is to analyze the use of budgeting in management accounting. Another purpose is to determine the benefits of the budgeting process for an organisation.

Budgeting is a technique that is used by organisations to determine funds available in the organization, and form plans to spend these funds to perform different activities. In the last few decades, companies in Australia have been dealing with different types of problems like financial problems, low profits, and increased expenses. Organisation were facing these problems because of traditional budgeting techniques and to resolve all the issues the organisation has adopted output-based budgeting (Journals of Management Accounting Research, 2018). This adoption has benefited the organizations 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 with ways to control unnecessary expenses. Australian Government has also declared that organisations that are using traditional budgeting methods have to implement output-based budgeting methods within their organisation.

Management accounting is a system in which managers formulate different types of reports to record insider information that is provided to internal stakeholders. In these reports, the main report is a 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 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 the company is using the resources. Budgeting also helps to identify the difficulties in the fund's utilisation system (Ward, 2012). Budgets are used to forecast incomes and expenditures for a specific time period. The process of budgeting helps the organisation to determine how much 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 helps the organisations to make an economic judgment as well as strategic decision-making. It directs managers to make a long-term and short-term plan that aids in implementing policies even if it is costly and time-consuming. Budgeting increases the level of consciousness of costs and skillfulness 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 the controlling process includes reducing excess expenses (Noreen, Brewer, and Garrison, 2014).

The budgeting process consists of many budgets that are classified according to the requirements of different departments of an organisation. These budgets are formed by managers to evaluate 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 helps to measure the success of a business. Profits of an organisations are managed by the owner or managers by adopting appropriate budgeting techniques 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 levels. Setting short-term and long-term objectives, and specific programs, and then 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 the budget is the cash budget in which all the cash receipts and payments are recorded by the managers of an organization (Saadi Halbouni and Kamal Hassan, 2012).

There are two different questions that may be asked of the managers of an organization. The first question is, does budgeting facilitate the management accounting process? Another question is how budgeting can lead managers in forecasting.

C. Similarities and differences in two studies

Similarities:

Basis

Accounting, Auditing, and Accountability

Management Accounting

Recording

Accounting, auditing, and accountability are three different functions in which accounting information is recorded, analyzed, 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, analyzed performance of business and individuals are recorded in performance reports, and outstanding amounts of clients are recorded in account receivable reports.

Purpose

The purpose of accounting is to record accurate information about business in books, the purpose of auditing is to analyze the transparency of recorded information and check the relevancy of information, and accountability is the process of observing the information that is recorded in the books.

The purpose of management accounting g is to record relevant and accurate information in the books and then control, analyze, observe, and check the recorded information to examine the performance of the company.

Differences:

Basis

Accounting, Auditing, and Accountability

Management Accounting

Use of budgeting

In accounting, auditing, and accountability budgeting is used to evaluate the actual performance of a company and to analyze how effectively an organization is using it resources that are available.

In management accounting budgeting is used to forecast possible future events whether they are favorable or unfavorable. It also helps the managers to make strategic decisions to deal with different problems like unplanned and unnecessary expenses.

Compulsory

Accounting, auditing, and accountability are very important and compulsory for organizations as they help external stakeholders like the government, suppliers, and customers to analyze the position and financial strength of the company.

Management accounting is not compulsory for organizations because it is done for internal stakeholders to determine how strategies and policies that are implemented by managers are responding to the goals like maximization of profits and minimization of losses and risks.

D. Specific outcome from the 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 the activities of organization can be recorded and help accountants to easily analyze the same (Songini, Gnan and Malmi, 2013).

Increased performance: Budgeting can help an organization increase the level of current performance through 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 organizational performance.

Outcomes from the Journal for Management Accounting Research:

Prediction of future events: Accountants can predict future expenses with the help of budgeting because it helps to get information on possible future events that may occur and also helps to reserve resources for the events.

Planning tools: Different planning tools like scenario, forecasting, and contingency can help accountants respond to financial crises that may take place effectively and plan the ways in which a company can deal with such issues to increase profits and reduce risks (Wall and Greiling, 2011).

CONCLUSION

Managerial accounting is the process of analyzing, controlling, monitoring, and recording accounting information in reports so that internal stakeholders of an organization can get information on how operations are performed by the company.  Budgeting is a technique that is used in managerial accounting to forecast possible future expenses and incomes. It also forecasts favorable and unfavorable events that may take place in the future and affect operational activities negatively. Accountants of an organization are suggested to follow the concept of budgeting to make the reporting system effective, predict future events, and enhance performance levels.

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REFERENCES

  • Demerjian, P. R., and et. al., 2012. Managerial ability and earnings quality. The Accounting Review. 88(2). pp.463-498.
  • Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
  • Jones, T., and et. al., 2012. Strategic managerial accounting: hospitality, tourism & events applications. Goodfellow Publishers Limited.
  • Kaplan, R. S., 2011. Accounting scholarship that advances professional knowledge and practice.    The Accounting Review. 86(2). pp.367-383.
  • Kravet, T. D., 2014. Accounting conservatism and managerial risk-taking: Corporate acquisitions. Journal of Accounting and Economics. 57(2). pp.218-240.
  • Needles, B. E., Powers, M. and Crosson, S. V., 2013. Principles of accounting. Cengage Learning.
  • Noreen, E. W., Brewer, P. C. and Garrison, R. H., 2014. Managerial accounting for managers. New York: McGraw-Hill/Irwin.
  • Saadi Halbouni, S. and Kamal Hassan, M., 2012. The domination of financial accounting on managerial accounting information: An empirical investigation in the UAE. International Journal of Commerce and Management. 22(4). pp.306-327.
  • Songini, L., Gnan, L. and Malmi, T., 2013. The role and impact of accounting in family business. Journal of Family Business Strategy. 4(2). pp.71-83.
  • Wall, F. and Greiling, D., 2011. Accounting information for managerial decision-making in shareholder management versus stakeholder management. Review of Managerial Science. 5(2-3). pp.91-135.
  • Ward, K., 2012. Strategic management accounting. Routledge.
  • Weygandt, J. J., Kimmel, P. D. and Kieso, D. E., 2015. Financial & managerial accounting. John Wiley & Sons.
  • Online
  • Accounting, Auditing, and Accountability Journals. 2018. [Online]. Available through:
    <https://search.proquest.com/business/docview/217543938/EE55C0E09EA8420APQ/13?accountid=30552>
  • Journals of Management Accounting Research. 2018. [Online]. Available through:
    <https://search.proquest.com/business/docview/211515450/C5E6EF6CFC0D49E4PQ/5?accountid=30552>
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