Y-Budget Ltd Monthly Production and Purchase Budgets
Budgeting is the most important management accounting issue because excellent financial management of information resources needs an integrated accounting and budgeting information system that could provide management with appropriate data on the types of expenditures that drive project costs. For companies, the management accounting is a service function. In other words, company must prepare themselves for the future challenges in a realistic way and set only those goals which are achievable. A wrong target is not only unachievable but also impacts negatively on the overall performance of the company because the budget is a detailed plan for the financial affairs of the company. According to Oliver (2000) managers should know that how financial information is used for strategically management of costs.
It is necessary for every business to set a target for a particular time period which could help it in variety of situation. Budgeting is the name of process where managers with the help of management accounting systems carry out functions of management such as planning, coordinating, organizing, and controlling by reference to company’s goals and strategies in order to achieve company’s objectives. The annual operating budget of a company is one important example of such systems. In general, the manager of each responsibility has a great role in the budget making process of a company and, once accepted by the top management, he or she is held accountable for meeting the budgeting targets during the course of the year. The budget system is considered as an essential means for helping managers to carry out these functions.
Some theories in organizational behaviour, however, point out that managerial behaviour has another side to it, one that is more practical in terms of managerial work. Much of a manager’s daily work involves reacting to what seems to be real-time situational factors which have affects on mangers’ performance and put pressure on them to respond almost instantly, sometimes in a corrective way and at other times in an opportunistic style. Managers with the help of his team members play an important role in setting right targets and then achieving them. Setting a right target also helps managers to correctly evaluate the performance of his team members. In other words, new plans and objectives should a connection with performance measures.
Several organizational behavioralists have offered variety of theories about managerial behaviour and organizational life. Some of them suggest that real-time responses are important aspects of management work and that in performing their real-time roles, managers tend to avoid formal accounting and systems. According to Hansen (2007), the success of a budget in fact is the evaluation of a manager. “Budgets are often used to judge the actual performance of managers. Since a manager’s financial status and career can be affected, budgets can have a significant behavioural effect. Whether that effect is positive or negative depends to a large extent on how budgets are used” (Hansen, Mowen and Guan 2007).
It is the responsibility of managers to ensure that the company will produce its service or goods competently. For this purpose they should make decisions which are congruent with company’s goals. A manager should act as a key communication link between different sections of the company because the coordination between different sections makes it easy for the company to achieve its goals. Participation of all sections, including production, marketing and human resource management, in setting new targets is necessary because budgeting requires correct information from them to set a right target.
Different roles of managers are carried out by specific behaviours which can be categorized into managerial roles. Managerial job involves the performance of predetermined roles which are very important for budgeting in a company. According to Albrecht (2007), behaviour is always behind the success or failure of a budget. “Behavioural Considerations Research has shown that several behavioural factors determine how successful the budgeting process will be.” (Albrecht, Stice and Stice 2007)
Interpersonal role is one of the most important tolls for managers in the budget making process. It includes encouraging and criticizing employees, giving them advice, investigating their activities, keeping an eye out for operations that are going wrong, and looking for problems in need of attention. The function of the manager’s role is to effect integration between the work and needs of employees and those of the company. The interpersonal role is concerned mainly with horizontal relationships, which are generally exchange relationships where managers give information in order to get something in return. It is also important for managers to secure their contacts with other managers of equal status in a variety of ways which includes joining boards, acting on committees, and attending conferences and special events. This helps a manager to understand the problems of their sections. For example, a marketing manager before going to increase his targets should consult with the production manager of the company.
Information sharing is very important in budgeting and here managers have to play another important role. Khosrowpour (2006) highlighting the role of managers in budget making said: “It is essential for managers to create a climate of openness” (Khosrowpour 2006).
Understanding of informational roles is essential for managers. This set of managerial actions involves the production, receipt and transmission of information. Managers have a central position in the movement of certain kinds of information. Because mangers have exclusive access to both internal and external information, they are a form of nerve centre for the company. While they may not know as much about each function within a company as do the subordinates in charge, they are the only ones having information about all of its functions (Khosrowpour 2006).
Decision making is one of the most important roles of managers in budget making. Weygandt(2009) says that setting a realistic target help in motivating managers and their teams. “If the managers view the budget as being unfair and unrealistic, they may feel discouraged” (Weygandt, Kimmel and Kieso 2009).
The decision making involves managerial activities that are concerned with making important decisions, mainly those of a strategic nature. Two roles in decision making are investigated. The first of these, entrepreneur, is a proactive role. Here, the manager acts as maker and designer of much of the controlled change within a company. This involves the use of decision discretion, the exploration of opportunities, and the solution of non-pressing problems. The other decisional role is resource allocator. It involves the scheduling of time, programming of work, approval of actions, and allocation of important organizational resources, including money, time, equipment and work force. In performing this role, a manager must call on substantial stores of information and draw on extensive factual knowledge of the broader organization and its environment.
Budget making can create some problems for managers if they have failed in setting a right target. Therefore, it has always been suggested that two budgets should be made, a realistic one for forecasting and planning and a more optimistic one for motivation. If a target is not right the pain and misunderstanding that one budget can create is sufficient for the closure of the business. Naturally, the relatively unsophisticated budget is based on more conservative assumptions than the real budget, and will be helpful for managers in ensuring that plans are realistic. A likely solution to this problem may be to set budget holders personal targets which are more challenging than the budget. On the other hand, the motivational impact of such goals will be remarkably dependent on whether the budget holder can be persuaded that these targets, and not the budget, represent the real target.
Behavioural Aspects of Budgeting
Budget making process creates some issues related to behaviour. Understanding of behavioural aspects of budget is very important for managers. The essence of budget-related behaviour has been captured through four theoretical constructs, variance analysis, budget pressure, participation, and interactions. Some features are consistent mechanisms. For example, variance analysis focuses on budget-related behaviour which comes from the need to monitor, explain, and correct budget variances through the making of reports, the submission of written explanations on the causes of variances, and the documentation of act taken to stop their subsequent occurrence. This feature tends to be formal as it results from upper management’s specific use of budgets to evaluate performance of managers. Responses of managers to overspent budgets and budget pressure by charging some activities to other accounts, shifting figures, and stopping some activities tends to be informal. And some features of budget-related behaviour, like participation and communication, are formalized in that suggestions and changes are included in the final budgeted plans and interactions are checked by prevailing rules, guidelines and standardized documentation.
It is very clear that management accounting systems are useful in performing some managerial roles. The manager role, for example, involves keeping an eye out for difficulties within the company and looking for operations going wrong. Therefore, budget systems and cost reports, mainly as they compare actual with planned levels, should be well suited for this purpose. It also seems reasonable that the decisional roles, entrepreneur and resource allocator, would be related to managerial actions and involvement in budget making. For example, in contemplating change as part of the entrepreneur role, managers would not ignore significant budgetary considerations. It seems possible that there should be some vital associations between specific managerial roles and accounting and information systems such as the operating budget (Berry 2005).
In general, it is considered that managers of high-performing companies are more active in terms of budgetary behaviour. Managers in general should direct their efforts towards entrepreneurial activities, particularly planning, initiating, and implementing changes and paying close attention to working with their team members. Managers should get involved in budgetary contribution to the extent possible and keep a close eye on budget variances. For successful budgeting it is important to examine the relationship between management accounting systems and performance.
In conclusion, it can be said that budgeting is an important issue of management accounting where top management needs to understand that managers’ budgetary behaviour is associated with managerial roles.
List of References
Albrecht, W. S., Stice, J. D., and Stice, E. K., 2007. Accounting: Concepts and Applications. California: South-Western College.
Berry, L. E. (2005). Management Accounting Demystified. New York: McGraw-Hill Professional.
Hansen, D. R., Mowen, M. M., and Guan, L., 2007. Cost Management: Accounting and Control. Nashville: South Western Educational Publishing.
Khosrowpour, M., 2006. Advanced topics in information resources management. New York: IGI Global Publishing.
Oliver, L., 2000. The Cost Management Toolbox: A Manager’s Guide to Controlling Costs and Boosting Profits. New York: American Management Association.
Weygandt, J. J., Kimmel, P. D., and Kieso, D. E., 2009. Managerial Accounting: Tools for Business Decision Making. Cambridge: Course Technology.