STRATEGIC MANAGEMENT ACCOUNTING

STRATEGIC MANAGEMENT ACCOUNTING

STRATEGIC MANAGEMENT ACCOUNTING

PART 1

A budget is a numerical scheme for allocating resources to specific activities. It is common for managers to prepare budget revenues, expenditures and major capital expenditures such as machinery and equipment. It is not unusual, however, that budgets are used to make improvements in time, space and use of material resources. It is one of the most important event in the financial year of any organization. It is not a standalone event. Rather, the process of budgeting is spread over a few months. The process is strictly controlled by various regulations, internal and external controls.

The budget and budgetary control are criticized more and more virulently. Proposals for improvement of these management tools are gaining a lot of attention. Budgetary controls started after the World War II when organizations started using budgetary controls to control expenditures and allow them to determine the deviation in their expenditures compared to what was expected (Aristovnik, Aleksander, Seljak, Janko 2009 pp 123-127).

There are two basic approaches that managers can take to their budgets. By far the most popular is the traditional budget. But in recent years, managers of some organizations have attempted to develop effective budgets to experiment with the zero-based budget.

The traditional budgeting or incremental budgeting have two specific characteristics. First, funds are allocated to departments or units of the organization as per requirements. The managers of these units in turn allocate funds to activities they deem appropriate. Second, an incremental budget is based on the previous budget. The budget for each period starts using the previous year as a benchmark. Only incremental changes in the budget are reviewed disregarding most of the possible changes that might take place in the near future (Joyce ,Sieg 2000 pp 25-34).

The zero-based budget, originally developed by Texas Instruments, requires managers to justify their requests for approval of detailed budget for every budget period. The managers construct a budget from scratch, regardless of previous budget allocations, depending upon the anticipated resource requirement. Once established, the activities organizations can take their own normal way of flow.

Traditional Budgeting - Stable and Static Market Place

An organization operating in a static market, which does not change frequently and cannot be categorized as a dynamic market, should implement traditional concept of budgetary controls. As the market is static and anticipatable, the organization can rely on pre-calculated budgeted expenses to compare with the actual ones incurred(Wildavsky, Swedlow 2006 pp 78-85).

The traditional budgetary controls are not much time consuming and expenses. This is because it is more or less a fixed schedule of expenses incurred and revenues generated by an organization. The organization is operating in a static market and is almost always familiar with the amount of spending and gains it will be getting. Thus, it is good that it applies the traditional approach of budgeting. There are a number of approaches to budgeting that opt for more dynamic and longer duration of the process. However, these have not been so ...