MANAGEMENT ACCOUNTING

Management Accounting

Management Accounting

Introduction

The traditional budgeting process consumes extra time, and adds very little value; it also restrains managers to respond quickly to changes in the environment of business. It focuses on performance incentives and fixed targets, which typically leads to unethical and dysfunctional, behaviour of the management (Accounts, 2004, pp. 3-12). It is a traditional way of managing and controlling companies. Motivation, allocation of resources, planning, controlling and coordination of activities within an organization are and has been the primary purposes of budget. Severe criticisms and dissatisfaction toward the budget have grown during the last decade. Budgeting is the foundation of an organization's management accounting system. It is a huge attention grabber of the researchers, as a valuable management accounting practice. All the researches produce evidence of consequences, considered dysfunctional, of budgeting. Today, there are very few practitioners who do not raise any concerns in relation to approaches of budgeting. The alternates to traditional budgeting include “better budgeting” and “beyond budgeting” approaches. The paper is an attempt to evaluate the "Beyond Budgeting" and "Better Budgeting" approaches in managing a business. It also discusses, using empirical evidence, the various motivational theories which a management accountant consider when setting a budget.

Discussion

Traditional budgeting has continued to be criticized in recent years. Researchers argue that traditional budgeting eviscerates the front line, slows down the response against various developments of the market, and discourages the sharing of information. Various researchers advise that a combination of various non-financial and financial measures should replace the budgets, and the performance should be assessed versus international benchmarks. The performance of business units can also be measured against competitor's performance (Budd, 2010, pp. 51-89). Traditional Budgeting methods have many problems.

They provide inferior value to users.

They neglect the shareholder value.

They prevent transient response as they are too rigid

They repress strategy and product innovation.

There focus is mainly on on sales, instead of customer satisfaction.

Disjointed from strategy.

After examining all the weaknesses of budgeting, the managers look out for a more effective solution. The two approaches, taken as alternative to traditional budgeting, are better budgeting and beyond budgeting. Better Budgeting is an attempt to diminish the weaknesses and establish an effective budgeting method. Beyond Budgeting is challenging the existence of budgeting (Bounce & Fraser, 1997, pp. 20-26).

Better Budgeting

The few approaches of better budgeting are as follows.

Activity Based Budgeting (ABB)

This approach is especially useful for organizations that work with Activity Based Costing and Activity Based Management. This management style structures all activities into processes. This way manager can focus on real value-adding processes. The enhanced visibility of processes enables a better Implementation of working methods; therefore, bureaucracy can be eliminated. Advocates of this approach claim that costs savings are the result. With activity based costing, a major criticism, the absence of value adding, elapses.

Zero Based Budgeting (ZBB)

The linkage of budgets to historical data is one of the reasons budgeting faces criticism. Zero Base Budgeting suggests budgets do not rely on data from previous budgets but to construct it from ...