Management Accounting DB3
Management Accounting DB3
Some people say budgets are not good for control but great for planning. This statement can be interpreted in a broader spectrum within the subject of managerial accounting. It is common practise for accountants to use budgets in the achievement of both planning and controlling. In most cases the role of planning is to outline the number of activities to be undertaken in the pursuit of various organizational objectives. The budget gives the estimates in relation to the outlined activities and is often limited by the amount of capital at the disposal of the organization. On that premise, budgets have over time proved useful for general outlining of the activities to be undertaken within the period in concern. Budgets enable a realistic pursuit of organizational objectives within their financial abilities.
However, budgets have proved to be good planning tools but not good at control. This often occurs because of the challenges that arise during the actual implementation of the approved plans. In many cases, the circumstances would occasion deviation from the budgets thereby creating the need for changes to be entertained. This requires a variance from the budget contrary to the requirements of control using the budgets. The problem can be explained by the fact that the budgets are often futuristic in nature but heavily rely on historical costing concepts. The deviation during the implementation can be explained by the gap occasioned by reliance on historical costs. It is, therefore, imperative to appreciate the limiting nature of budgets for purposes of control. The need to bring the plans to currency would definitely lead to a deviation. However, in overall, the planning role achieved through budgeting balances the inconveniences experienced in control.
Managerial accountants are often confronted with decision making dilemmas especially given the limited capital against an influx of potentially viable investments. In such cases, the accountants can use budgets in evaluating the investment proposals. Budgets can be used in the evaluation at two different levels. Foremost, evaluation can be from the organizational budget level. In that context, an investment proposal would only be accepted and reviewed if the capital outlay and costs needed fall within the organizational allocation for such investments. In that context, the organizational budget would be used for the sanction and or disapproval of the investment proposal based on the necessary capital. At the second level, the investment proposal budget can be analysed in detail with keen evaluation of the costs versus the returns. This can be evaluated in the context of the duration of the investments and the points at which expenditure would arise. The accountants would be keen to identify the budgetary areas of the investment that can be reviewed so as to employ alternative means that could achieve the same result but with lower costs. This entails the detailed analysis of each stages and the nature of its contribution to the whole process.
Over and above that, the accountants need to appreciate that budgets often tie monetary factors to time. In that context, investment proposal evaluations need to be sensitive to time. The effect of time on the value of returns needs to be factored in. In that approach, the organization can easily budget for the returns and propose further investment utilizing the generated returns. That process would still fall within the province of budgeting as it entails the use of budgets.
References
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