AC 312: MANAGEMENT ACCOUNTING I

BUDGETING & PLANNING: CONTROL IN

MANAGEMENT ACCOUNTING
A Strategic Tool for Organizational Success

Compiled By: Margaret Aeka Course: Bachelor In Accountancy Year: (3) Online

Student ID: 22700021

1|Page
Table of Contents
Introduction……………………………………………………….……………………….….3
Background of the study………………………………………….……………….…….3
Techniques of Budgetary Control…………………………………………………….4
Budget Overview………………………………………….………………………………….5
Objectives of Budget Overview..………………………………………………………5-6
Significance of Budgetary Control…………………………………………………….6
Control Functions of Budgeting…………………………..……………………………7
Issues & Limitations of Budget Planning……………………..….………….….7-8
Case Study…………………………………….……………………………………….…...…8-9
Conclusion and
Recommendations…………….……………………………………………………….……..10
References…………………………………………………………………………………………10

2|Page
Introduction:
Budgetary planning and control is the most visible use of accounting information in the
management control process. By setting standards of performance and providing feedback by
means of variance reports, the accountant supplies much of the fundamental information required
for overall planning and control

1.1 Background of the study

Modern business is marked by instability and uncertainty. Due to competition, government

policies, new regulations, new production techniques, and changing consumer behaviour,
businesses must adapt to survive.

Due to these issues, all organizations have started to use budgetary techniques. The technique of
budgetary control is used to compare actual expenditures and budgeted expenditures, as well as to
analyze and correct variations.

In public sector accounting, budgets refers to financial proposals, which are placed before the
legislative assemblies periodically for approval and allow governments spend money for the
benefit of the citizenry. Thus, it entails the entire financial operations of the government, which
may form the basis of future fiscal planning for the economy.

According to Sidik (2012), budgetary control system in a multinational institution like any other
business is inevitable and largely influences performance and decision making at all functions of
the organization. It is an important tool used in monitoring the performance of the organization,
which is done through variance analysis i.e. assessing and devising possible reasons that have
caused actual results to be different from what was budgeted and taking necessary corrective
actions to prevent or minimize future reoccurrence.

The scope of the budget will determine the level of operations to be carried out and proper
budgetary control will aid in decision making as it tracks the level of performance of every activity
and then identifying underperformed activities that may require revision or possible elimination.

3|Page
Techniques of Budgetary Control

In budgetary control, four (4) techniques are used namely: variance analysis, responsibility
accounting, adjustment of funds and zero based budgeting.

 Variance analysis compares actual accounting figures to determine whether the variances
are favourable or unfavourable.
 Responsibility accounting on the other hand creates cost center, profit center and
investment center which are just like departments of any organization after which all
employees work on the basis of their centers, each with specific targeted performance.

 For the adjustment of funds technique, top management takes the decision to adjust fund
from one project to other project.

 In the Zero based budgeting (ZBB) technique, every next year budget is made on nil bases.
It can only be possible, if your estimated income will be equal to the estimated expenses.

 Budgetary control is one of the commonly applied mechanisms of assessing managers’

performance and to communicate organizational objectives, strategy, planning processes
and how management intends to meet set targets while at the same time, closely monitoring
expenditure. Budgetary control is also used as a tool of cultivating managers’ supportive
behavior aimed at achieving organization’s objectives.

4|Page
Budget Overview

Figure 1: A basic diagram of the budget process

Objectives, Importance, and Functions of Budgetary Control

The main objectives of budgetary control are as follows:

1. Production efficiency. Budgetary control is a technique marked by advanced planning

for the effective use of materials. Thus, it leads to smooth production chains.

2. Success of costing records. Budgetary control improves the utility of cost accounts,
which provides knowledge about future costs. Hence, cost variations can be minimized.

3. Future planning. Every producer plans a definite output for a specific period for which
it is possible to use budgets to estimate the required amount of finance, materials, labor,
and other expenditures.

5|Page
 4. Cost control. Budgetary control is useful for cost control because the production process
rotates around predetermined targets. Here, actual costs are compared to budgeted costs,
and any variations are corrected by the management.

5. Helpful in policy framing. Budgeting provides a tool through which basic policies are
periodically examined, restated, and established as guidelines for the entire organization.

Significance of Budgeting in financial planning

A budget is an essential tool for any organization, as it provides a comprehensive financial plan
that helps to ensure that the company achieves its goals and objectives. Every company has set
targets and goals for each year, and it is through these budgets the company prepares the plan of
action to achieve them. Some of the key benefits and importance of a budget include:

 A guide to help managers align activities and resource allocations with organizational
goals;

 A vehicle to promote employee participation, cooperation, and departmental coordination;

 A tool to enhance conduct of the managerial functions of planning, controlling,problem

solving, and performance evaluating;

 A basis on which to sharpen management’s responsiveness to changes in both Internal and

external factors; and

 A model that provides a rigorous view of future performance of a business in time to

consider alternative measures

In addition, budgeting plays a significant role in facilitating planning within the manufacturing
industry. It enables companies to assess their performance and identify areas for improvement
through budgeted statements. Additionally the budgeting process aids in resource allocation. Helps
control costs effectively. By analysing the budgeted statements companies can make informed
decisions regarding resource allocation and ensure cost control measures are in place. This
comprehensive approach, to budgeting enables manufacturers to achieve their goals while
optimizing their operations.

6|Page
Control functions of Budgeting

Budgeting, as a control tool, provides an action plan to ensure that the organization's actual
activities are least deviated from the planned activities. Budgets are used to give an overview of
the organization and its operations.

Thus, by comparing actual results with the budgeted or expected figures, businesses can assess
how well they have achieved their financial goals. Positive variances indicate areas of over-
performance, while negative variances highlight areas that require improvement

An unfavourable variance is when costs are greater than what has been budgeted. The sooner these
variances can be detected, the sooner management can address the problem and avoid a loss of
profit. Unfavourable variances often indicate that something did not go according to plan,
financially.

Issues and limitations of budgeting and planning

While budgeting is an essential tool for managing an organization’s financial resources effectively,
there are several issues and limitations associated with its use, including:

1. Lack of Flexibility: A budget is often created at the beginning of the fiscal year and is
typically fixed for that period. This lack of flexibility may make it difficult for
organizations to adjust to changes in market conditions or unexpected events.

2. Inaccurate Forecasts: The accuracy of the forecasts used to create the budget can
significantly impact the budget’s effectiveness. If the sales forecasts, for example, are
overly optimistic, it can lead to unrealistic targets and budget shortfalls.

3. Time and Resource Intensive: Creating a comprehensive master budget requires a

significant amount of time and resources, which may not be feasible for smaller
organizations with limited staff or financial resources.

4. Difficulty in Implementation: Implementing the master budget can be challenging, as it

requires coordination and collaboration across different departments and levels of the
organization. This can be further complicated if there is resistance to change or a lack of
buy-in from key stakeholders.

7|Page
 5. Lack of Alignment with Strategic Goals: If the master budget is not aligned with the
organization’s strategic goals and objectives, it may not be an effective tool for managing
resources and achieving those goals.

6. Inability to Adapt to Changes: Since the master budget is typically created for a fixed
period, it may not be able to adapt to changes in the organization’s priorities or to
unforeseen circumstances.

Overall, while a budget is a valuable tool for managing an organization’s finances, it is not without
limitations. Organizations should be aware of these limitations and take steps to address them to
ensure that a budget remains an effective tool for financial planning and management.

Case Study: AGL Builders Ltd

Overview

The case study is a first-hand account that I see best fit for the essay discussion. AGL builders is
a branch for the Rhodes Group of companies. AGL Builders is a wholly-owned building and
construction company who are experienced in prefabricated as well as conventional construction
methods. The company is recognized as one of local building suppliers in building and
construction and the largest domestic manufacturer of fabricating supplies, within PNG. AGL
Builders have delivered diverse and technically challenging projects across multiple sectors within
PNG. Resource companies and aid agencies continue to trust them with some of their biggest
building projects. With their considerable experience in Papua New Guinea culturally sensitive
projects and land owner negotiations is highly valued.

Together with strategic partnerships and strong relationships built over more than 20 years AGL
Builders have the right team and equipment to deliver a diverse range of quality buildings
anywhere in Papua New Guinea.

The company was incorporated in 2000 under the leadership of founder Andrew Avenell. He
believed success in business would come to a company that anchored its activities in treating
customers, suppliers, workforce, and neighbours with fairness and respect. The company has
extended its services throughout the nation.

8|Page
The company with its subsidiaries has overcome obstacles of change through use of an effective
budgeting system through effective planning and collaboration of the executive management.

Issue

One of the construction project in Woodlark, Miline Bay Province in particular has been
witnessing an unprecedented boom. However, despite the readiness of financial resources as well
as the active participation of fast divesrsed construction companies, the construction projects suffer
from considerable variations in time and cost. The study aims at investigating the main attributes
of the construction industry in Woodlark in an attempt to identify the key factors that cause
variations. The research comprised a set of semi-structured interviews to identify the factors
followed by a questionnaire to investigate the probability of occurrence and the impact of the main
factors on time and cost.

The study shows that the prevalent intervention of the clients in the decision making process
throughout the project lifecycle coupled with a tendency to expedite projects are the primary causes
for variations in time and cost. In addition, the results reflect the gap between supply and demand
in the construction sector due to the rapid growth fuelled by the needs of the fast growing economy
in PNG.

Solution

The study concludes with recommendations to create more awareness among stakeholders, and
especially clients, of the importance of the initiation and planning phases of the project to hedge
against future variations.

9|Page
Conclusion
In conclusion, budgeting and accounting are critical components that must interact to achieve the
goals and objectives of an organization. Budget acts as financial management tool used to measure
the actual and forecast against the budget throughout the planning process, it also assists in
monitoring and controlling of current performance by providing early warning of deviations from
the plans and analyses the anticipated versus actual results. Budget provide a basis for directing
and evaluating the performance of banks. Modern budgeting is best placed when performance
management is integrated with known financial outcomes which are frequently re-forecasted on
budget and linked to the analysis of performance trends. This will ultimately help banks not lose
their control and accountability mechanisms.

Recommendations:
The research thus recommends that AGL Builders Ltd should carefully identify the risks that

may occur over the life of the project, from conception to operation, and allocate those risks to the

Participants who are best able to manage them along fund, budget and variance management.
Bottom-up approach in budgeting should be incorporated while sharing of detailed budget
information with staff will aid in improving budgetary controls through enforcing institution
guidelines

References

(1) Atkinson, R. (1999). Project management: cost, time and quality, two bestguesses and a
phenomenon, it’s time to accept other success criteria. International Journal of Project
Management,17(6), 337-342,

(2) Kothari, C. R. (2010). Research Methodology and Techniques 2nd Revised Edition.
Published by New Age International.

(3) International Journal of Finance and Accounting ISSN 2314-2896 Volume 2, Issue 2, pg 1-8,
2021: https://grandmarkpublishers.com

10 | P a g e