Significance Of Budgets In Management Accounting

The Purpose of Management Accounting

Management accounting is that one significant segment of any corporation that assists the same in the accomplishment of its goals. Management accounting aids the organization in the making of effective decisions. Management accounting is performed by the management accountant of the company. The management accountant of the company helps in organizing various activities as well as provides support to the financials of the company. This means that it is the management accountant of the company that basically looks after its budgets (Horngren & Foster, 2008). Considering the significance of budgets in an organization it can be said that budgeting is the most important task handled by the management accountant of the company. He also looks after assigning funds to their respective departments.

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The most significant purpose of the management accounting is to facilitate budget. It is only due to management accounting that the organization is able to implement budget techniques appropriately. It can be observed that the objectives of the management accounting are similar to that of the budgeting techniques and the process of budgeting. The management accountant enjoys the control of budgeting which is one of the strongest tools of any company (Parrino, Kidwell & Bates, 2012). If the budgets are appropriately planned and managed by the company then there are chances for the company to excel and thrive in the market.

Planning is the derivative of budgeting. Planning is incorporated alongside when a budget is made so as to help an organization to accomplish its goals. Every single plan of a company is analysed for the purpose of budgeting so as to allow it to become tangible that shall assist the company in the tracing and tackling of potential risks. This sheds light on the application of the running process by the management accountant so as to mitigate risks that can impact the performance and financial well being of the company (Horngren & Foster, 2008). Budgeting provides processing of planning processes that are to be implemented by the management accountant so as to tackle the potential risks associated with the business in such a manner that the operations and performance of the company are not impacted (Shim & Siegel, 2009).

The entire concept of budgeting is on the basis of facts and represented in figures that are estimated in the process so as to carry the concerned activity based on that and draw comparisons with the actual results. The same has been highlighted with the help of these two articles. A budget helps the organization in detecting and mitigating any existing and potential risks. It is highly significant for every organization for it helps in choosing the best way out of several options that are available for the purpose of employing the finances of the organization in a manner that yields high returns. Where every single expense is reported by the company the need for the preparation of master budget arises. A master budget is required by a corporation that reports all its expenses no matter how huge or small they are. The master budget is inclusive of all the budgets such as production budget, sales budget, purchases and sales of any equipment done or should be done by the company, etc. Considering all such scenarios, it can be said that budgets act as a decision making tool for it highlights such departments and the areas of an organization that needs to be taken duly care of (Needle & Powers, 2013).

The Importance of Budgeting in Management Accounting

The budget also provides assistance to the corporate in adjusting its strategies. It means that if a company gets to know of its areas that need improvement and restructuring, the same can be done with the help of incorporating newer strategies or redeveloping the older ones so as to regulate and avoid the unnecessary expenditures (Marsh, 2009). Take, for instance, an organization is lacking behind in the estimated sales targets. The same can be overcome by means of boosting its marketing skills and better strategies. If an organization is lacking behind the targeted value that was estimated for revenues the same can be overcome by enhancing its marketing and sales. Such strategies help the company and should be taken into consideration while preparing the next budget.

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The progress of the business of a company can be ascertained and evaluated by means of stating the plans made by it in context to the purchase of property, types of equipment and machinery in the budget. It is the choice of the company to distinguish the funds that are reserved for the purpose of development from the funds that are saved for the purpose of purchasing of more assets. Since the organizations are more into safeguarding its existence in the years lying ahead, the process of decision making has gained more significance and has, therefore, become a broader concept.

The budget allows the company to evaluate its performance. This is due to the fact that the budget also acts as a tool for performance measurement. It means that a company can easily measure its performance with the help of budgets by means of analysing and assessing the same. This allows the company to evaluate its success for a particular period of time. The comparison drawn between the actual performance and the budgeted performance of a company highlights the performance of all its areas and segments. The performance of all these areas can be evaluated and considered for the next budgets (Brown, Fisher, Peffer & Sprinkle, 2017). This comparison drawn between the actual and budgeted performance of the company allows it to evaluate the appropriateness and effectiveness of each and every task. If the results of the comparison say that the company is not operating effectively, then such measures are planned and implemented so that the performance of the same improves in the upcoming years and the goals are accomplished.

Coordination is also one of the by components of budgeting and an important factor in the framing of the budget. A budget helps the company in being aware of the efficiency of coordination that exists between the different departments and segments of the company. For an organization to accomplish its goals the level of coordination between the segments, departments and the people is really important. Better the coordination better shall be the performance of tasks and therefore better are the performances and results. This shall make easy for an organization to accomplish its goals (Brown, Fisher, Peffer & Sprinkle, 2017).

Planning and Mitigating Potential Risks

The performance of the employees of the company can be evaluated by means of drawing comparisons between the budgeted results and the actual results. This will help the management to come across the weak areas that are required to be given more focus on so as to overcome the shortcomings and ascertain better results. The company shall implement strategies by means of giving better remuneration, bonuses and such other rewards to that personnel who have outperformed themselves or have achieved/ crossed their targets so as to motivate the employees to perform better which could help the company in accomplishing its targets (Vaitilingam, 2010). Optimum utilization of resources can also be achieved by means of a budget for it allows the use and allocation of resources in a manner that can help the company in achieving equilibrium with respect to its cost, risks and revenues.

It completely depends on the company on how it prepares its budgets and how the same is used for accomplishing its organizational goals. The budget helps the management of the company to make decisions based on the results drawn from the comparison between the actual and budgeted performance of the company.

The incentive system is one of the most significant aspects for the management of any organization so as to function its operations. Incentive system is dependent on many factors. The parameters on which incentives of an employee depends upon is performance evaluation, investment planning, motivation, product pricing, utilization of the budgeting information, etc. The appropriateness of the functioning of the budgetary process is as a result of various factors (Lanen, Anderson & Amher, 2008). There are a variety of reasons that can allow the management to approve budgets out of distorted/ biased information in the accounting system. The management approves or rejects budgets out of biasness owing to their inefficient and inappropriate decision making skills which allow the process of budgeting to shatter and fail. Therefore, it is always advisable for the management to scrutinize, assess and evaluate information that seems to appear distorted in their eyes for if ignored the same can impact the company’s performance and its operations (Lanen, Anderson & Amher, 2008).

Also, if the organization takes a group incentive system into consideration the barriers that come in the path of selecting and applying budget gets eliminated. Group incentive system assists in the evaluation of cost and difficulties that can be faced while calculating and the performance of an employee. This system allows the organization to improve its efficiency by motivating its employees to get involved in a manner that improves their individual performance. It also brings coordination amongst employees that helps the organization in bettering its overall performance and yield higher revenues (Vanderbeck, 2013). Compensation to budget is also systematically linked by the company through these group-based contracts and the regular extensive use of the same. The lack of coordination, cooperation and communication amongst employees is noticed while the group budgets are evaluated and assessed (Horngren, 2011). If the budget base contracts are better than other contracts in a group setting is also not yet known.

Performance Measurement with Budgeting

Not just the senior management of an organization but also the subordinated are impacted as a result of the budgeting process. Following are the factors that impact the estimated budgets and are also related to one another.

  • The comparison is drawn between the estimated budget and actual results.
  • The methodology used by subordinates for estimation.
  • Communication of the information to the superior.

The employees are required to be trained with effective programs that are very much required for learning and understanding appropriate budgeting techniques. For the purpose of the same, it is the responsibility of the government to come up with such training programs by means of establishing various schooling infrastructures in as many locations so that more and more employees can participate and learn the techniques of proper budgeting. Activities that have cost aspects and long-term plans can be segregated further into various annual budgets that shall be of help in incorporating and implementing the monetary figures within an organization (Horngren, 2011). The organization can go back to its traditional system as soon as it achieves its long-term goals. This will help in computing the contrast between the costs and expenditures that were estimated in the budget and the costs and expenditures that are actually incurred (Vanderbeck, 2013).

All the above factors are the ways by which budgets act as a tool for decision making to the organization in all the aspects may it be financial or no financial. From the articles it can be made clear that the organization is able to accomplish its targets with the help of decisions taken by the management on the basis of comparison drawn between the standard performance and actual performance of the organization. The decision making process when blended with budgeting techniques can act as beneficial for the organization in achieving its set targets.

An organization needs to assess its financial aspects such as profits, sales, overheads, etc and non-financial aspects such as consumer satisfaction, feedback, consumer loyalty, competition, etc. For the purpose of making effective and appropriate decisions, it is very much required for the company to consider both financial and non-financial aspects for assessment.

The utility of aggregated budget is immense. The idea is basically to apportion cores that are independent but identical amongst the population so as to derive unit cost. It is a moderate outcome of aggregation in budgeting. The subordinates are compelled to submit aggregate cost distribution so as to evaluate proposals of high budget. There can be such a phenomenon where the senior management keeps the private information related to the costs of a particular project to themselves and submit the same to the management lying above them.  Such a system can help in framing a strong financial policy (Needles, 2011).  This can be of immense help to the companies in terms of creating a favorable policy.

Coordination and Performance Evaluation of Employees

High costs budgeted by the employees in their budgets that are submitted to the senior employees might get rejected by them. This can be due to the reason that the senior management might believe that the budgets are exaggerated and there are chances of misuse of resources which might not be true. It should be noticed that the underlying average cost for the project shall become moderate when there are more than one projects covered under a budget. This shall result in the higher cost realization. So if a subordinate wants the budget to get approved by his seniors it is required for him to develop and present a budget proposal that shows moderate or lower costs with greater returns.

However, if the senior is knowledgeable and has a legitimate experience in budgets, he shall assess the budget developed and presented by the subordinates and analyse the reason behind the aggregation of costs represented in their budgets. If the evaluation of such exaggerated costs seems reasonable to him after he analysed single cost there are chances he might not find the several costs that reasonable which can make him reject the budget proposal.

Apart from the appropriateness and utility of a particular project, there are some other factors on the basis of which a superior can reject or accept the budget proposed by his subordinates. Budget biasing or distorted information in the accounting system are one of the factors on the basis of which budgets can get approved or disapproved. If the decision is taken based on the biasness then this could happen for mainly 3 factors which are discussed below.

Both the articles projects on the utility of the budget. With the help of budget, it is easier to implement control in the organization. It can also help in the performance evaluation of the company. The budget also helps in the tracing and mitigation of potential risks that further paves ways for the organization in accomplishing its goals. An organization through means of management accounting does not just get its budgets prepared but also benefits enormously due to the evaluation of its performance done by the same and by mitigation of potential risks. Budgeting is incomplete and a failure without effective communication for in the absence of the same, coordination gets impacted (Fisher, Peffer & Sprinkle, 2003). Through the means of the budget, it becomes easy to update the respective departments of the organization about the financial plans and such other information that will the help the organization to mitigate its potential and existing risks and survive its existence despite the intense competition in the market in the future (Robinson & Last, 2009).

Optimizing Resource Usage

As both, the articles represent budgets and the implications of budgets it must be noted that the budget has enormous utilities to any organization. Both articles represent that how budgets are significant for every organization. It helps the organization to trace its shortcomings and area that require reconstruction and proper care so as to perform better and diligently accomplish its organizational goals and targets. It helps the organization in decision making, performance measurement and building a positive image. It also helps the organization in long-term planning.

But there is a contrast between both the articles in the context of the form of action. In one article, a compensation scheme is the basis of budget. Managers along with subordinates are most likely to get benefit from this form of the budget. This article is highly significant for the managers so as be aware of the situation where such budget can be considered of taken into use. This article is bent towards the appropriateness of the budgeting process (Fisher, Peffer & Sprinkle, 2003). The other article is more about aggregation planning. This kind of budget is mainly used for high-cost projects as it helps in yielding greater revenues.


It can be concluded that the employees are more enthusiastic about their performance since the incentive plans are implemented. It allows them to earn more income in the form of bonuses and keeps them motivated and engaged at the same time. The estimation made by the intermediate managers was not that different from that which was made during the pre-incentive plan period. This was due to the presence of personal interest of the middle managers. It is required for the management to analyse all the aspects of the budget process thoroughly so as to make sure the budgets are utilized in an appropriate manner in the company.

The target of the organizations gets impacted while the higher level management of the organization becomes distorted if the budget is based on the decisions of the buyers. The interpretation of the performance of the organization can become quite difficult as it can vary due to the decisions based on a single budget that further conflicts with the other utilities if the budget.The management can easily evaluate the performance of the employees with regards to their involvement and level of participation in the various types of budgetary process and depending on the same can reward them.


Brown, J. L., Fisher, J. G., Peffer, S. A., & Sprinkle, G. B. (2017) The effect of budget framing and budget-setting process on managerial reporting. Journal of Management Accounting Research, 29(1), 31. Available from: [Accessed 22 September 2018]

Fisher, J. G., Peffer, S. A., & Sprinkle, G. B. (2003) Budget-based contracts, budget levels, and group performance. Journal of Management Accounting Research, 15, 51-74.  Available from: [Accessed 22 September 2018]

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