In order to achieve their goals and objectives most companies make use of a budgeting technique. According to the Chartered Institute of Management Accountants (CIMA) budget is “a quantitative expression of a plan for a defined period of time”. Usually budgets are expressed in financial terms and prepared for one year.
Depending on the nature and business of the company, different types of budgets, such as incremental, zero-base budgeting (ZBB) or activity-based budgeting (ABB), can be adopted. However, usually the budget setting will commence with preparing the limiting-factor budget which will frequently be the sales budget with other budgets, such as production, direct labour and cash budgets, being prepared subsequently. After coordinated revisions these are added to a master-budget consisting of a balance sheet, profit and loss account and a cash-flow statement.
Despite the fact, that budgeting process has been often criticized because of its rigidity, short-term focus and bureaucratic and time consuming nature, it still provides many benefits to the company if implemented correctly. In fact, participants from the Better Budgeting forum came to conclusion that budgeting has been evolving and changing to better meet the requirements of today’s highly competitive and very dynamic environment.
At a glance
- Discusses participation studies by Vroom, Brownell, Mia and Subramaniam
- Examines Abdel-Kader and Luther’s study of UK food and drink companies
- 19 sources in the bibliography
Table of Contents
1. INTRODUCTION
2. ADVANTAGES OF BUDGETING
2.1. PLANNING
2.2. COORDINATION
2.3. CONTROL
2.4. PERFORMANCE EVALUATION
2.5. COMMUNICATION
2.6. MOTIVATION
2.7. AUTHORISATION AND DELEGATION
3. BUDGETING IMPACT ON EMPLOYEES
3.1. TYPE OF BUDGET
3.2. INVOLVEMENT IN BUDGET DECISIONS
3.3. TARGET SETTING AND EVALUATION
4. CONCLUSION
Objectives and Topics
This work examines the advantages of budgeting and considers how the choice and use of budgets can affect employees. It explores how budgeting supports organisational management and how participation, target setting and evaluation influence managers’ behaviour and motivation.
- Budgeting as a tool for planning, coordination and control
- Performance evaluation, communication and motivation
- Delegation of responsibility and budgetary authority
- Behavioural implications of different budget types
- Participation in budget decisions and the setting of targets
Excerpt from the Book
Type of budget
There are several factors to be considered that may have impact on employees. Firstly, the type of budget will influence to certain extent manager’s behaviour. It is often claimed that flexible budgets are far better than fixed budgets (Wood and Sangster, 2008d). Flexible budgets will enable making more valid comparison between budgeted and the actual results whereas a fixed budget has a potential to create a negative attitude from manager – if a manager works to a fixed budget and is being held responsible for adverse variances where there have been variations, for instance due to changes in sales or production level. Interestingly, in a study within UK food and drink industry in 2004 Abdel-Kader and Luther discovered that, flexible budgets, despite being considered as important, were never used in 29% of the companies while only 13% used it very often.
Further it can be distinguished between periodic and rolling budgets, where the latter one is seen as more realistic, however can create uncertainty among some managers. On the other hand as Atrill and McLaney (2007c) suggest managers within rolling budgeting system may be encouraged to a more forward-looking attitude, thus improving overall performance and satisfaction. On the contrary, a very rigid and fixed type of budget can result in managers spending resources unwisely, according to a ‘use it or lose it’ approach, particularly if they feel threatened of losing the budget allowances in the next period. They further indicate that a ZBB approach can be potentially very threatening to some managers as there would be scrutiny over the budget spending, thus ZBB should be applied with certain sensitivity. On the contrary an ABB approach could show positive impact because being a much more accurate budgeting system; it could lead to more achievable targets and thus greater job satisfaction.
Finally, as Drury (2005e) suggest, it is not only the type of budget that has impact on employees. A disparity between the budget type and the actual situation and context of work can also have negative influence on people thus resulting in lower performance.
Chapter Summaries
INTRODUCTION: The introduction defines budgets, outlines types of budgeting and describes the preparation of a master budget. It also introduces criticisms of traditional budgeting and its potential benefits.
ADVANTAGES OF BUDGETING: This chapter examines budgeting’s roles in planning, coordination, control, performance evaluation, communication, motivation, authorisation and delegation.
BUDGETING IMPACT ON EMPLOYEES: This chapter considers how budget types, participation in budget decisions, and target setting and evaluation can affect managers’ attitudes and performance.
CONCLUSION: The conclusion brings together the discussion of budgeting and performance, emphasising the importance of implementation and organisational circumstances.
Keywords
budgeting, management accounting, financial planning, budgetary control, coordination, performance evaluation, employee motivation, participatory budgeting, flexible budgets, rolling budgets, zero-based budgeting, activity-based budgeting, target setting
Frequently Asked Questions
What is this work about?
It examines the organisational advantages of budgeting and its potential effects on employees and managers.
What are its central topics?
Its central topics include planning, coordination, control, motivation, participation, budget types and performance evaluation.
What is the work’s primary objective?
It aims to explain how budgeting can support organisations and how its design and use may affect the people involved.
What research method does the author use?
The work discusses budgeting concepts and behavioural issues using published management accounting literature and previously conducted studies.
What does the main discussion cover?
It covers budgeting’s management functions before examining budget types, involvement in budget decisions, and target setting and evaluation.
Which keywords characterise the work?
Key terms include budgetary control, participatory budgeting, flexible budgets, employee motivation and performance evaluation.
How are flexible and fixed budgets discussed?
The work considers how each can influence comparisons between planned and actual results and how managers respond to variances.
Why does participation in budgeting matter?
The discussion considers whether involving managers in budget decisions can affect their acceptance of targets, motivation and understanding of compromises.
How does the work approach budget targets?
It discusses target difficulty, the consequences of meeting or missing targets, and the relationship between targets, evaluation and incentives.
- Quote paper
- Linda Vuskane (Author), 2010, Budgeting - a short overview, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/154391
