Assess the role of budgeting in helping managers make optimal decisions within a constantly changing environment
As businesses move into the technology age, there is an ever more need for real time decision making and planning to sustain competitiveness. Budgeting plays a vital role in converting medium term plans into short term plans thereby supporting managements’ decision to capitalise on the short term opportunities. This essay critically assessed the benefits and demerits of various budgeting styles, identifying the critical links between budgeting and short-term decision making. Further, a critical assessement of the impact of changing environments on various budgeting styles is made, before evaluating the merits and demerits of participatory budgeting and implication on business performance.
LCBB5002 Management Accounting Case Study: The Role of Budgeting in Helping Managers Make Optimal Decisions
Key Learning Outcomes
- Critically assess the benefits and demerits of various budgeting styles.
- Identify critical links between budgeting and short-term decision-making.
- Critically assess the impact of changing environments on various budgeting styles.
- Evaluate the merits and demerits of participatory budgeting and its implication on business performance.
Regardless of their size, industry and complexity, enterprises heavily rely on budgets and budgetary systems in order to achieve their strategic goals. Budgeting is very important as it helps companies identify their goals, allocate responsibilities for the achievement of these goals, and consequently execute them (Shah 2007; Raghunandan et al 2012). In fact, it is considered one of the most successful and useful management accounting methods and if properly implemented firms can reap major rewards.
Today’s business environment has become more volatile most especially because of a fast-changing technological environment characterized by constant innovations. This has made it essential for managers to incorporate budgeting systems in their strategic objectives in order to survive in the highly competitive environment (Kovaleva et al 2013). As noted by Horngren et al (2016), budgeting is essential in shifting planning, to the forefront of an organization’s management while limiting spending. In fact, the authors noted that the most successful and well-organized organizations have made budgeting an essential part of their strategic formulation and execution (Horngren et al 2016).
What is budgeting?
Shin and Siegel (2005) defined budgeting as a formal way of expressing an organization’s goals, plans and objectives which cover all operational details for a given period of time. Bocharov (2013) posited that budgeting symbolizes an organization’s systems which involve the results of the planning processes, accounting, control and analysis of cost indicators of its activities while Horngren et al (2016) simply define it as a 'process of formulating an organization’s plans'. The different types of budgeting as noted by Shin and Siegel (2005) and Hornsgren et al (2016) include; the master budget, operating, financial, cash, static (fixed), flexible, capital expenditure, program, incremental, add-on, supplement, bracket, target and continuous (rolling) budgets.
In the budgeting process, most organizations tend to focus on pricing, technological trends, manpower, new product innovation, production scheduling, resources, raw material cycles, inventory levels, turnover rate, financing needs, product or service obsolescence, reliability of input data, industry/ market stability, seasonality, advertising, and marketing. But they ignore politics, the economy, change consumer tastes and needs, market share, and competition, though they are also vital in today’s volatile business environment (Shin and Siegel 2005).
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