People do not work alone in a company. The Oxford Dictionary (1999) defines a company as ．group of people united for business or commercial purposes・. It implies that the actions or managerial decisions normally involve different groups of people such as the marketing, human resources, information system, production, purchasing and finance functions, etc. The view of the manager of High Tech Industries Ltd is a danger because any decisions s/he make might not represent the best interests of the company in a whole. For example, the manager might decide to implement an updated information system that would benefit the company for more efficient work. However, s/he might ignore the other resources that are required from her/his decision such as training cost from human resource department, the job re-design issues of the whole company, etc. It is therefore important to coordinate these various interrelated activities within a company by a budgetary system.
A budget is a detailed plan that shows how resources are expected to be acquired and used during a specified time period (Hoggett and Edwards, 1996). According to the CIMA (Dyson, 1997), a budgetary control (system) is ．the establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a basis for its revision・. Hence, the ultimate goal of a budgetary system is to efficient and effective use of the scarce resources in the company.
There are six benefits for using a budgetary system in High Tech Industries Ltd, which are planning, coordination, communication, motivation, control and performance evaluation.
A budget promote forward-thinking and identify possible short-term problems on a systematic basis. Cash flow is the life-blood of any business. Plan ahead would help managers to identify anticipated sources and uses of cash to determine cash needs for the year. During the process, the managers do plan for future operations and avoid knee-jerk solutions before the problems arise. The budget also allows managers to produce detailed plans for the implementation of the long-range plan to meet the goal of the company.
A budget serves as a formal coordination system so that managers of different functions do not operate in different directions and against the best interest of the company. Goal congruence can be achieved by the unifying effect of budgeting, particularly when it is combined with responsibility accounting (Hoggett and Edwards, 1996). Budgeting therefore compels managers to examine the relationship between their own operations and those of other departments; and in the process to identify and resolve conflicts (Drury, 2001),
A budget serves as a communication device with which the various managers can exchange information concerning goals, ideas, achievements, expectations and constraints (Hoggett and Edwards, 1996; Drury, 2001). Budgeting also enables the managers to interact and understand how each activity contributes to the company・s overall operation. Through the budget, top management can communicate its expectations to lower level management, so that all members of the company may understand these expectations as well.
A budget acts as a stimulus to the managers to work hard and maintain an enthusiastic attitude toward their jobs which in line with the company・s objectives. This is achieved by having realistic goals and the thrill it gives when such goals are met or achieved. Managers are also motivated by authorizing a particular amount they can spend in the year (Atrill and McLaney, 1999)..
A budget assists managers in managing and controlling the activities (especially the use of resources) for which they are responsible. It can be done by investigating variances. For example, actual performance can be compared against budgeted. This should give managers an insight whether the operations are up to expectations or not. If deficiencies arise, corrective actions can be implemented to bring the operation back on target. Specific areas can be pin-pointed and investigated.
A manager・s performance is often evaluated by measuring her/his success in meeting the budgets (Drury, 2001). The budget thus provides a useful means of performance evaluation between the manager and her/his senior. However, one must deal with care as performance should not be evaluated on quantitative factors only, qualitative factors should be considered as well.
Although there are benefits for a budgetary system, it has its limitations. Firstly, there is a danger that the purposes of a budget may conflict with each other. For example, when a budget is used as a system of authorization, managers may be motivated to spend to the limit of their budget. If the managers are not allowed to carry over unused funds to the next budget period or the budget for the next period will be reduced if not all the funds for the current period were spent, there would be a temptation for the managers to use up the funds for unnecessary purposes. This conflicts with the role of budgets as a means of exercising control. Secondly, a potential problem with a fixed budget for control purposes is that it does not take into consideration the possibility that the sales or production goals of the business may not be achieved (Hoggett and Edwards, 1996). This is the limiting factor that will prevent the managers from achieving the budget・s targets in the end.
It has concluded that it is a danger for not using a budgetary system in High Tech Industries Ltd. A budget serves the purposes of planning, coordination, communication, motivation, control and performance evaluation. Yet, it has its limitations. The conflict between the different uses of a budget means that managers must decide a given priority of the budget purposes, and must be prepared to trade off the benefits resulting from the decision. Also, a flexible budget should be used to provide a comparable basis for evaluating financial performance when the actual level of activity is different from the fixed budget. Finally, a good budgeting system would require individual managers to participate heavily in the preparation of their own budgets and targets.
Atrill, Peter and McLaney, Eddie (1999), Management Accounting for Non-specialists, 2nd Edition, Prentice Hall Europe
Drury, Colin (2001), Management Accounting for Business Decisions, 2nd Edition, Thomson Learning, London
Dyson, J R (1997), Accounting for Non-Accounting Students, 4th edition, Prentice Hall
Oxford Dictionary (1999), Oxford University Press
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