STRATEGIC MANAGEMENT ACCOUNTING

Strategic Management Accounting



Strategic Management Accounting

Question 1)

Budgeting is the process of expressing the predicted costs and resources for a planned course of action over a specified time period. Budgets can be drawn up for business units, departments, products, teams or the entire organization (see master budget below). Another term for a budget is a financial plan, but budgets can refer to non-cash resources, such as staff or time.

Budgeting helps all types of organization to plan and control their operations, and to support their managerial strategies. A budget sets out the benchmark against which performance will be measured. For example, this might be the minimum profit and loss performance expected by senior management. Performance against budget may be part of the organization's appraisal system for individuals who are deemed accountable for such performance (Clemen, 2004, pp. 31).

Therefore budgets are a management tool, expressed in quantitative terms because this is the easiest way to prioritize and co-ordinate complex competing decisions throughout the organization.

However, budgets may be dismissed as a 'finance' tool because they usually originate from the finance department and involve numbers. An unenlightened manager might undervalue their contribution. Budgets are often unpopular because of the time and effort spent on preparing and negotiating them, or explaining variances (Goodwin, 2002, pp. 74).

One school of thought believes that budgeting contributes to information overload, restricts management action and generally drains rather than contributes to the organization. This has led to the development of alternative approaches to traditional budgeting.

Traditional incremental budgeting

Traditional budgeting uses the incremental approach. It begins with previous year's budget and adjusts up or down from that budget to reflect changing assumptions for the new year. For instance, if previous year's budgeted expenditures for a department were $1.8 million, the department may request a 4 percent increase ($72,000) to maintain the same level of service for next year (Clemen, 2004, pp. 31).

The justification for increased expenditure is the increased cost of inputs, such as materials and labour. This incremental approach may not incorporate a careful evaluation of the level of services being offered. Under the incremental approach, government unit managers often strive to spend the year's entire budget, so there is no surplus at the year end.

This acts to maintain the current budgetary level and to help the unit manager apply additional funds. For example, at a certain government department office in the New Territories, the officer-in-charge, Wong Kar Ming, was faced with the possibility of having surplus funds of around $150,000 at the fiscal year end. Kar Ming found methods to spend the extra money before the year ended. He posted an internal notice to colleagues saying that those who lived in Kowloon and Hong Kong Island were welcome to apply for a travel allowance. Brand new office furniture was acquired for a new section (before office furniture was centrally dispatched from the government warehouse). The inefficiency and wastage portrayed in this example is often perpetuated and encouraged by incremental ...