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Contents

Abstract

Introduction.

Assignment Question 1.

Assignment Question 2.

Assignment Question 3.

Assignment Question 4.

Assignment Question 5.

Conclusion

References.

Abstract on Managerial Accounting

For any organization to grow and succeed in their operations it is critical to do effective budgeting. Budgeting not only allows for efficient management of the funds, but it also allows for the external stakeholders like the lenders, regulators. shareholders, etc. to evaluate the progress of the company. Internally, budgeting process helps in evaluation of the performance of different departments by benchmarking their estimation to the actual revenue realization for the previous fiscal year. The overall necessity of the budgeting activity is to provide the different stakeholders with the relevant information that they need to take the required decisions with respect to the targets and other revenue related data.

Introduction to Managerial Accounting 

The following report is an attempt to better understand the budgeting process in more detail. This report has been written after evaluating several existing high quality journal articles. After reviewing various articles which deal with different aspect of budgeting, the journal article that has been selected for critical evaluation is ‘What Determines the Use of Capital Budgeting Methods? Evidence from Swedish Listed Companies.’ This article was published in Journal of Finance and Economics in 2014 (Daunfeldt and Hartwig, 2014). The authors, Sven-Olov Daunfeldt and Fredrik Hartwig have critically analyzed several Swedish companies and understood the budgeting processes with a special attention on Capital Budgeting that they follow. This article also proves to be a good starting point for understanding the budgeting processes that are followed in several companies across several leading nations like the US, Germany, Sweden, Netherlands, etc. Since this paper provides a good understanding of budgeting aspects of different countries, this paper has been selected for critical evaluation. Also, the references of this paper also prove to be a good recommendation for the different articles that have been analysed for writing the report (Pillai and Sopchockchai, 2016).

Managerial Accounting - Question 1

Budgeting is a critical activity for organizations. Some companies have a separate team dedicated for doing budgeting. While many companies have this as a for or a six monthly activity there are several companies which continue this activity for their entire year. These are usually large organizations, widespread in terms of departments, region presence, multiple product and brands, etc. Irrespective whether the company is small, medium or large and whether the company has presence in one region, product, etc. budgeting is something that the management takes very seriously (Daunfeldt and Hartwig, 2014 ; Botner, 2018). The process followed in case of budgetary alignment is as follows:

  • Revenue Estimation- this is an activity conducted to understand, with respect to the actual revenue realized by the organization to benchmark its performance. The benchmarking is done by comparing the target with the actual revenue realized. This also acts as a good stating point, since this estimation will give a good unit level view to the entire organization’s revenue performance.
  • Revenue Forecast- once the current year’s revenue has been estimated based on the actuals and the projections then a forecast of the revenue is done. This is based on the growth plans that the company has and the different departments that are impacted due to these organizational directions. Once the forecasting of the revenue is done then it is easy to understand what is the actual budgetary alignment that is needed.
  • Budgetary Process- the companies have different options like top down and bottom up to initiate the budgetary process. In case of top down the senior leadership finalizes the budgets of each business lines and the business line heads then uses that budget to finalize the budget of different teams and departments as part of that business line. In case of bottom up approach, the different teams and departments are required to provide with their estimates in terms of the budgetary needs. This is then collated at the business line level and then the head of that business line post validation with individual team owner presents the required budget of his business to the senior leadership. Either ways, any company has to choose between one of these 2 processes to better understand what is the alignment that needs to be done internally.
  • Budget Call- once the process has been finalized, a budget call happens in which the management provides with an overline of what is required from individual units, managers of managers, head of different departments, etc. This is the case of bottom up approach, however, in case of top down approach the senior leadership along with the finance team have this budgetary call with the respective business heads to tell them about the probable budget that is being planned for their business in comparison with what was provided to them the previous year.
  • Budget Formulation Task- once the budget call has been done and the recommendations on the overall goals has been agreed upon, the budget formulation task happens. In this, the different managers of managers reflect on their previous goals and plan for the future and create an approximate budget for the same.
  • Budget Review- once a tentative budget has been formulated there is a budgetary review meeting that happens. As part of this each team and the department has to defend their budget and the reasons that they feel for asking for the required budget. This activity happens both at the internal team level and at the business line level. As part of the review there are several recommendations that are provided, and the team has to work on those recommendations to provide a revised budget.
  • Budget Adoption- once the review has been conducted, then each business line has to wait to receive an approval of the legislative or the governing body of that organization. Usually this involves getting an approval from the CEO, Board of directors, etc. This is more of a compliance process and there are less chances of revisions in this, however, in case the Board has difference of opinion with respect to the budget allocation for a specific department then that specific line item is again sent for review.
  • Finalization- once the approval from the governing council is received, then the budget is finalized for that fiscal year and each business heads receive the processes from the finance team for funds allocation.

Managerial Accounting - Question 2

Daunfeldt and Hartwig in their journal article reviews different companies with respect to their choice of different capital budgeting methods adopted. The paper only touches upon the company performance evaluation aspect of the budgetary process. For other points to be discussed, that is budgeting processes satisfying the purpose of planning and controlling, other articles were reviewed. From the literature analysis conducted below is the summary of the findings for each of the following:

Since the budgeting activity involves the top management of any organization it invariably works towards the planning task as well. As part of the Budget Call, as stated earlier, the senior leadership and the management has to list down the goals that it needs to be achieved as part of the fiscal year. This provides with each business lines with an overall opportunity to understand what is needed from them and how to plan for the growth which is expected from their department. This planning essentially is on the lines of increase in the revenue or sales from a particular product line, percentage of share of market, quantity of the products manufactured, quality of the products manufactured, etc. As an example, a glass bottle manufacturer while going budgeting will have to consider the improvements that can be brought in with respect to the number of default products. In case the there is a high number of defects which are found in the final products because of which it leads to them not passing the quality check, then the company may need to plan the changes that it needs to bring in with respect to manufacturing processes. This may be in terms of bringing in newer technology, updating the existing machinery, hiring more resources, etc. All these processes will have a budgetary impact and as a result the budgetary process has a major impact on the overall planning process (Daunfeldt and Hartwig, 2014 ; Fritsch, 2019).

With respect to controlling, the budgetary processes ensures that it limits the extra spend by various departments on resources that they may do away with. The budgetary processes helps in critical valuation of the spend that has happened with respect to the previous fiscal year and align it with respect to the budget that was allocated. The control measures happens when a particular team is using more resources that what it has been allocated for or it is consuming the resources that it has been allocated; however, the desired results are not being delivered. For example, in case of the above listed example, post conducting an analysis on the reasons why there is a higher defect ratio, it is understood that that the company has hired a lot of inexperienced resources, due to budgetary constraint of the previous fiscal year and as a result these people do not have a complete hands on experience and therefore, they are making mistakes on the job. In this scenario, as apart of the budgetary process, the senior leadership will have to allocate more budget that has to go on either hiring experienced resources or trainings of the existing resources. This is done after doing a cost to benefit analysis of the loss that the company is facing with respect to production of default bottles (Daunfeldt and Hartwig, 2014 ; Jacobs, 2012).

In terms of performance evaluation, as stated earlier, the authors Daunfeldt and Hartwig feel that budgetary processes help benchmark a company’s existing performance with its targeted growth requirement. The budgetary process according to the authors help understand the financial distress that is there on different teams and as a result they are being short handed where delivering the required result is concerned. The example hat the authors have evaluated is that of the involvement of different teams and business lines in the budget process allows for an increase in the overall sense of ownership between different teams. This allows the managers to maximizing the performance aspect of the team (Daunfeldt and Hartwig, 2014 ; Kramer and Hartmann, 2014).

Managerial Accounting - Question 3

The analysis of different Swedish companies as shown in the research paper shows that there is a direct correlation between the budgetary process that is selected with respect to the proxy for growth that is evaluated. Whether a top down approach is chosen, or a bottom up approach is decided the companies will have more or less a similar budget that they had estimated if the process described earlier is followed properly. However, in case of bottom up approach as understood from different literature analysis, it is understood that there is an increase in the performance as demonstrated by different managers. This increase in performance is attributed to a higher NPV score, decrease in negative interactions or faults in the process follow criteria, and increase in the sensitivity that the people have towards their company or business line. The employees feel more involved to be part of something more than the day to day operations activity. There is also a higher sense of productivity that is shown by these members. While comparing it with respect to top down approach in which the management allocates the budget based on the Budget Call and the Budget Formulation activity that they have done, there is a substantial decrease in the employee sentiment and morale component. This is because they feel there is no involvement of them in other tasks and they have no understanding or sense of what the senior leadership is planning (Daunfeldt and Hartwig, 2014 ; Lokman, Cotter and Mula, 2012).

Based on the literature analysis conducted for different Swedish companies, it was found out that there is an increase in the usage of bottom up approach for budgetary companies in the medium sized companies whereas in the small scale companies it is usually top down approach, due to lower funds availability and the leadership being involved in the operations activity as well. However, in case of large companies the analysis resulted that there is not major change, companies that are following a specific type of approach continue to do the same, irrespective of the benefits that the other approach provides them. this is because of implementing a change in a large organization involves training of multiple team which can cause sort of the seamless budgeting process to have possible disruption. Unless the process followed by a large organization is archaic, they do not make a lot of changes to the system. The process has to be socially acceptable to the larger team to ensure that there are lesser changes that happen to the process (Daunfeldt and Hartwig, 2014 ; Lokman, Cotter and Mula, 2012).

Managerial Accounting - Question 4

The budgeting practices involves a lot of critical analysis, each aspect of it is prone to human errors. Companies usually spend a lot of time and resources in effectively analysis each aspect of the budget to ensure that there is very little margin left for error. There are several reviews done where the budget is reviewed from different aspects to understand possibility of error in the budget and rectify it. It is a time consuming and a challenging task, however, with the advent of next generation tools and technologies, this may not necessarily have to be the case. These tools have the capability of automating several aspects of the overall budgetary process and as a result the amount of manual effort which is spent of these budgetary processes may be reduced substantially. The tools also allow for on demand reporting, real time dashboarding, etc. The basic need for these tools is to substantially reduce the amount of time and energy that is spent on the budget planning and forecasting activity, the analysis of different financial reports, allocation of budget for all in-flight and other one-time projects, etc.

And in most cases leadership team is involved in this process and these are people whose time is relatively more critical when compare with other stakeholders. Thus, it is important to bring in some lever of creativity in the budget planning activity. The budget planning activity also requires inputs from different tools like CRM, ERP, etc. and thus having a tool that can integrate with these and other tools is important as that brings a lever of ease of doing the process with it. It may be possible that these tools which come at a cost of about $ 10 + per user per month, may not be of much use in case of small organizations where the processes are not well defined, and the company is always in need to manage the cash outflow. It is thus, understandable that in their case they may follow the old manual method of budgeting however, the benefit in case of medium and large organizations is evident. They should ensure that they are leveraging everything at their disposal to ensure that only the desired amount of effort is being spent on the budgeting activity (Daunfeldt and Hartwig, 2014 ; Nussle, 2012).

Managerial Accounting - Question 5

Both planning and control are an important aspect that can be derived from the budgeting processes. It is critical that a company has the best source of information that is made available to them to ensure that they are taking decisions which help them in all aspects. And whether it is budgeting or any other process, the company should leverage to ensure that they are aligning their planning and control management activities properly. Having said that, even though budgeting helps in overall planning and control activity, based on the critical literature analysis conducted, budgeting should not be used to conduct the planning and control processes. The reason is simple, budget planning is a different activity altogether. Even though the advantages of doing budgeting, helps in strategy and growth planning and managing the extra expenditure, these are separate tasks that should be done individually. These activities may coincide with the budget planning activity. For example, a company may decide to strategically enter a new product line and as a result decide to allocate respective budget for that unit, however, the reverse may not be true. The planning and the budgeting are both separate activities that need to go hand in hand with inputs of one being leveraged for the other (Daunfeldt and Hartwig, 2014 ; Pillai and Sopchockchai, 2016).

Similarly, in case of control management, budgeting helps in doing a financial spend analysis. This analysis may provide the leadership with the information that a particular business unit is not delivering the targets even though they have consumed the allocated budget. The control measures would then be brought into place. However, the budgetary planning will only provide with a financial analysis, it will not help in deriving of the reasons why a particular business line has spent more and was not able to deliver. That becomes a separate task altogether, and as stated earlier the budget planning activity can be leveraged to do the control management. However, to get the maximum benefit of the control management process it is not advisable to just leverage the findings of the budgetary process and on the contrary conduct a separate process to understand the reasons and create a mitigation strategy for the same (Daunfeldt and Hartwig, 2014 ; Pillai and Sopchockchai, 2016).

Conclusion on Managerial Accounting

The following report is an attempt to further understand the budgeting process. This report has been written after conducting a thorough of the existing literature available. Care has been given to ensure that the journal articles that have been reviewed have been written post 2010. Even for articles that were published before 2010, the latest version has been considered for evaluation. The report has considered journal article that has budgetary planning process for several Swedish companies. The report has also ensured that there have been no statements made by the author and everything that has been written as part of the report has been derived from one of the multiple journals that have been reviewed.

References for Managerial Accounting

Altundemir, M. And Goksu, G., 2017. Performance-Based Budgeting on Strategic Planning: The Case Study in Turkish Higher Education System. New Trends and Issues Proceedings on Humanities and Social Sciences, 3(3), pp.263-270.

Botner, S., 2018. The Use of Budgeting/Management Tools by State Governments. Public Administration Review, 45(5), p.616.

Daunfeldt, S. and Hartwig, F., 2014. What Determines the Use of Capital Budgeting Methods? Evidence from Swedish Listed Companies. Journal of Finance and Economics, 2(4), pp.101-112.

Fritsch, M., 2019. Top-Down oder Bottom-Up?/Top-Down or Bottom-Up?. Jahrbücher für Nationalökonomie und Statistik, 210(5-6).

Jacobs, J., 2012. Budgeting and Budgetary Control. SSRN Electronic Journal,.

Kramer, S. And Hartmann, F., 2014. How Top-down and Bottom-up Budgeting Affect Budget Slack and Performance through Social and Economic Exchange. Abacus, 50(3), pp.314-340.

Lokman, N., Cotter, J. And Mula, J., 2012. Corporate governance quality, incentive factors and voluntary corporate governance disclosures in annual reports of malaysian publicly listed companies. Corporate Ownership and Control, 10(1).

Nussle, J., 2012. Perspectives on Budget Process Reform. Public Budgeting & Finance, 32(3), pp.57-60.

Pillai, V. And Sopchockchai, O., 2016. Budgeting, Financing, and Planning in Thailand: Study of a Trichotomous Process. Public Budgeting & Finance, 6(4), pp.34-42.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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