The use of budgets in the improvement of management performance and Essay

The use of budgets in the improvement of management performance and control within global businesses - Essay Example What were relevant a century ago are no longer valid because of increased competition and ever changing products, their characteristics and consumer preferences. The following piece of information would be useful for companies presently engaged in traditional budgeting but willing to switch over to other types of budgeting. The purposes of budgeting One of the functions of management is â€Å"planning†. Budgeting is a part and form of planning necessitated by resource constraints. It has been defined as the formal expression of plans, goals, and objectives a management is committed to, concerning all aspects of operations in a business for a given period of time. It is a part of profit planning mechanism based on forecasting and probabilities according to the manager’s best judgement. Budgeting is more often found to be useful in making a business more profitable (Shim, Siegel, & Shim, 2011). Thus, budgeting helps estimate resources in terms of monetary value needed for business activities. Budgeting process forces one to rigorous thinking and the realities of the process will also force one to rethink the plans. Budgeting helps in determining the timing of the requirements. The business is able to monitor its income and expenditure and identify problems if any. It is the basis for accountability of managers and provides transparency. Without the budget, funds cannot be raised from financiers (Shapiro, 2001). Conventional budgeting Called traditional budgeting, it is based on the historical accounting though for the first year the figures are only estimates. Past expenditures are taken as bench marks for future performance. Thus, the budget turns out as list of planned expenditure and incomes. These budgets calculate estimated sales through market demand or production capacity and arrive at estimated revenues. It main purpose is to verify whether actual results are as per the estimates made for each cost or responsibility centre. Thus, budgeting s erves as a management tool for the purpose of controlling the responsibility centres. It also helps to have an overview of how different responsibility centres are interrelated. This type of budgeting can be useful for producer dominated markets such as those existed during the period immediately after world war II when demand for products was high with limited competition (Rohm, 2007). Types of budgets Unlike traditional budgeting which is function oriented, activity based budgeting (ABB) focuses on activity. It looks at the budgeted cost of activities that are required for manufacture and sale of products or for providing services. The activity based budgeting is directly linked to cost management as a part of planning and control. As in traditional budgeting, ABB starts with the forecasting of demand for the company’s products or services known as sales budget. Where as in functional budgeting, company proceeds to make inventory budget, material purchases and the cost of g oods sold budget, ABB considers the demand for output of each activity determined by its cost driver. Rate of consumption of resources for each activity is used for estimating or budgeting the needed resources. In functional budgeting, resources required are directly measured with the use of sales forecasted. In ABB, sales forecasts are employed to measure the activities which then enable determination of resource requirement. This way a company is able control waste and efficiency which is the ultimate goal of budgeting. Application of activity based costing helps preparation of master budget in a more practical manner. In effect, ABB applies the ABC model which assigns resource costs to activities and allocates activity costs to produce products and services (Shim, Siegel, & Shim, 2011). Zero Based