The Behavioural Issues That May Emerge As A Result Of The Current Budgetary Reporting System

almost every company, inconsiderate to size, difficulty or industry, relies much on budgets and budgetary reporting system for achieving strategic aims. The success and significance of budgeting system is relevant to the identification of aims of company, allocation of roles to achieve these aims and in the end its implementation (Shah, 2007; Drake and Fabozzi, 2010). It is a most strong and useful techniques of management accounting which can result in better rewards for company if they are analyzed and implemented in an effective way. The budgetary reporting system includes setting of strategic aims and goals and projecting revenues, sales, costs, cash flows and other relevant aspects (Bonner, 2008). Through integration of financing strategy and investment strategy, the company can identify that which investment is to be made and the way of financing these investments. In other words, capital budgeting, structure of capital and working capital can be put together through budgeting (Drake and Fabozzi, 2010). The outcome of the procedure is creation of formal document known as budget.

However, there are both technical and behavioural factors related to budgeting which can give advantage to company if implemented in an appropriate way. Although, the technical factors are most important, but, it is important for management to recognize both technical as well as behavioural effects. Boon et al (2007) have focused on organizational and behavioural issues which must be considered while implementing budgetary reporting system. The technical aspect of budgeting is related to mathematical calculation of forecasted costs and expenses. The behavioural aspects linked with current budgetary reporting system are related to people working in an organization. Robinson (2007) argued that behavioural issues are important portion of budgetary reporting system.

A budget is termed as a measurable plan relevant to a specific period of time. Although budgets are usually stated with respect to money, they are relevant to the amounts made and sold, total employees which are needed to be hired or weights of items to be used (Noguchi and Boyns, 2012).

Budgetary reporting system must be created through analysis of long term planning; companies have different ambitions which must consider the environment, the internal and external markets, competitive analysis and products offered by them. This information, usually projected help the company in plotting its long term strategic plans and then objectives are set to achieve those plans. According to management theory, participation in decision making, like setting of budget is often considered as a way of bringing benefits to the company. It helps in gathering information from different sources. Due to increased level of participation, the motivation and commitment level is also enhanced, as individuals feel difficulty in ignoring the targets set by that individual. However, sometimes there is more involvement of need and desire of participation with the polemics of new management than traditional management, because in participation there is a need of more time, proper knowledge and expertise (Van Mourik, 2006).

The current budgetary reporting system adopted by company is static budgetary reporting system. In static budgetary reporting system, the budget is fixed for the whole period, with having no changes depending on actual work activity. So, even if company experiences change in sales then in case of static budgetary reporting system, the amounts entered in budget will not be changed. In case of having high predictability of sales and costs, it is more reliable to use static budget model. Through high predictability level, the finance manager can assure that values of sales and costs will not be changed to that extent. In flexible environments in which there is a possibility of substantial change in operating outcomes, it is not reliable to use static budget, since comparison can be done between actual outcomes and budget which is not relevant (Flood, 2013).

Company can use static budget depending on which original outcomes are compared. The end variance is known as static budget variance. These kinds of budgets are usually used as a base of measuring sales performance. These budgets are not effective to evaluate the performance of costs centres. Like, if a manager makes high static budget and sets low expenditures than the static budget, then he will be given reward by company because he sets low costs and expenditures. But, due to this the profits and revenues of company will also be reduced. The similar issue arises if company experiences higher revenues than expectations. In this case, there is a need of spending more than the set amounts in static budget. This will result in inappropriate variances; even company is doing efforts for keeping up with demands of customers (Hoyle, Schaefer and Doupnik, 2013).

With the help of static budgets, the variance is usually noticeable n case of variance analysis, particularly for those periods of budget, since management feels difficulty in making correct projections for few months. The value of variances can be made smaller through the use of flexible budgetary system, since this kind of budgetary system is adjusted for taking account of variations in actual volume of sales.

In static budget, volume is not adjusted during the year on the basis of sales volume of performance of company. For example, if company has set $2,000 budget for giving sales commission to employees, then this will remain $2,000 even if sales would increase with high percentage. With the help of budgetary reporting system, the company can have control on its costs and gives assurance to finance of business. This helps the company in maximizing its savings and ensuring that business is spending money in an appropriate way (Shim and Siegel, 2009).

In case of static budgetary system, the company is unable to bring changes in the budget lines of business. This means the company is not capable of allocating resources for propping up the areas which are under-performed. In this way, the company does not give additional capital to that area which is facing some failure and seizing a new opportunity in market. This results in dragging of revenue stream which makes your company operating at loss for a year. A business which is experiencing a loss of money can result in snowball effect in which investors select other opportunities for investments. In this way, the company loses many investors (Jones, 2009).

Another behavioral issue which may be experienced by company in case of static budgetary system is that the system is not flexible, so managers cannot change it for taking benefit of changes in sales or expenses with the proceeding of year. With current budgetary system, company is unable to manage the effect of changes, like reducing a portion of budget in case of reduced volume of sales. This results in lesser control over functions of budgeting. In this kind of budgetary reporting system, the loss in one department cannot be transferred to other departments or divisions of business.

Following behavioral issues can also be experienced by business in case of current budgetary reporting system;

  • There are behavioral indications in case of budgeting for motivation of employees.
  • The current budgetary reporting system is imposed rather than negotiating with employees, so employees feel de-motivated.
  • De-motivation of employees is resulted due to the setting of targets which cannot be achieved practically.
  • In case of budgeting, the departments start feeling competition with each other (Penner, 2014).

Another behavioral issue arises in case of current budgetary system is that the unpredictable events are not accounted for in this. The fixed expenses and cost can easily be projected by variables costs cannot be projected. Due to this, increased budgets will result in stress for management of company. Static budgetary reporting system is not appropriate way of tracking expenses.

The company has to focus on making flexible budgetary reporting system, in order to allocate resources effectively. Due to current budgetary control system of Coffee People Ltd, the management is unable to achieve the set targets of profits, because budgets have been set for giving salaries to employees. The employees feel de-motivated towards working. The management does not involve the employees or workers in decision making of budgetary system. Due to this, they do not feel motivated towards achieving those targets. Due to current budgetary reporting system, variance analysis is done inaccurately. Another problem with this kind of budget system is lack of prediction of investor’s control (Schick, 2007).

b) Impact of variance analysis on organizational control

Variance analysis which is also known as ANOVA or analysis of variance includes the assessment of the difference in between two figures. It is a tool which is being applied to operational and financial data that focuses on the identification and determination of the variance cause. There are different types of variance analysis in applied statistics. Variance analysis helps in the maintenance of the control over any project in project management it helps to control the expenses of the project through monitoring planned costs versus the actual costs. An effective variance helps in organization spot opportunities, threats, issues and trends to long or short term success (Hedges and Rhoads, 2011).

Budget vs. Actual Costs

Variance analysis is significant in helping the management of the budgets through controlling budgeted costs versus actual costs. In project and program management, for instance, the assessment of financial data is being done at milestones or key intervals. For example, a monthly closing report can give quantitative data related to the revenue, expenses and rest of the inventory levels. Variance between actual and planned costs might directly lead towards the strategies, goals and business objectives (Konstantopoulos, 2011).

Materiality

A materiality threshold is termed as the statistical variance which is being considered meaningful or it does not have any worth. This is not similar for all of the companies. For instance, a sales target variance of $100,000 will have more value for the small business retailer as compared to a national retailer which generates billions in the yearly revenues. As 2 percent cost overrun can be immaterial for some of the small business but it may be appeared to be millions of dollars for some of the large organizations.

Relationships

During the performance of the variance analysis, links between different variables are being identified. Negative and positive correlations are significant in planning of any business. For instance, variance analysis might tell that when there is an increase in the sale for widget A then it also increases the sale for widget B. Improved safety features for one items can result into the enhancement of sales. This information can be used in order to transfer the success to some other same items (Zhang, 2014).

Forecasting

Business forecasting is a significant type of prediction. It utilizes some samples of past business data in order to build a theory related to the future performance. Variance data is being put into the context and it allows an analyst to do the identification of some factors like seasonal changes or holidays as the basis of negative or positive variances. For instance, the monthly pattern of the sales of TV sets over past five years can tell about the positive sales trend which may lead to the start of school year. As a conclusion, forecast for television sets for next 12 months may involve enhancing inventory by some specific percentage, dependent upon historical sales patterns, in any week before the initialization of the fall term of local universities.

Planning, Standards and Benchmarks

For the calculation of the variances, budgetary and standard targets should be set in advance in opposed to the performance of the organization. That is why; it promotes proactive approach and forward thinking towards setting up the benchmarks of the performance.

Control Mechanism

Variance analysis supports “management by exception” through enlightening standard deviations which influence the financial performance of any firm. If variance analysis is not done regularly, this can cause a delay in the action of management compulsory in that condition.

Responsibility Accounting

Variance analysis support performance control and measurement at the points of responsibility centers (like designation, division, department, etc). For instance, procurement department will answer in situation of a substantial enhancement in the cost of purchasing raw materials (like adverse material price variance) on the other hand production department will be answerable for the increment in the use of raw material (like adverse material usage variance). That is why; the responsibility centre’s performance is evaluated and measured against every budgetary standard related to only those regions which are within the control (Robinson, 2007).

Differentiate Short-Term and Long-Term Issues

The management team should be acknowledged of whether particular negative variances are termed as long term trends or they are the outcome of one-time event like hurricane such that the shopkeepers move away from the stores for like almost a week. It is the duty of owner to identify that persistent variance is evidence, so in that case the strategic plan should be revised and new techniques should be implemented. Variance analysis does not imply to look at negative variances only. Positive sales surprise, for instance, can alter the technique too. The owner can even do the allocation of more of the resources for marketing of the services or products that outperform forecasts.

Detect Changes in the Business Environment

Variance analysis gives the hint regarding the current position in the competitive and economic environments in which the organizations perform their operation. The onset of any economic slowdown can even be depicted as negative variances. These cutbacks may not display in the actual revenue image of the company for a long time (Konstantopoulos, 2011).

Uncover Inefficiencies in Planning

With the passage of time, the owner of the organization hopes that his financial staff along with him becomes even more proficient at producing the outcomes accurately. Consistently missing the main target of forecast revenue, for instance, can even cause the shortages of cash that will force the owner of the organization to reduce the expenditures.

Hold Managers Accountable

Finance staff writes the variance analysis in the form of report along with the description of the reason of occurrence of major variances. The owner of the business may discuss the outcomes of the report with all of his managers, or she may have a monthly meeting with them and go over the outcomes of all of the departments. These discussions will help the owner to acquire more detailed description related to the occurrence of variances and to discuss what should be done by the manager of each department in order to address more serious variances through doing revision of the techniques or by making alterations to the operations (Bonner, 2008).

 

 

 

 

References

Boon O.K., Arumugam V., Safa M.S., and Baker N.A. (2007), “HRM and TQM: association with job involvement”. Personnel Review. Vol. 36 No. 6 (2007), pp. 939-962.

Bonner E. S. (2008), Judgment and Decision Making in Accounting, Pearson Education Inc., Upper Saddle River, New Jersey

Drake, P.P, and Fabozzi, J.F. (2010), The Basics of Finance: An Introduction to Financial Markets, Business Finance, and Portfolio Management, John Wiley and Sons Inc., Hoboken, New Jersey

Flood, J. (2013). Wiley GAAP 2013. Hoboken, N.J.: Wiley.

Hedges, L. and Rhoads, C. (2011). Correcting an analysis of variance for clustering. British Journal of Mathematical and Statistical Psychology, 64(1), pp.20-37.

Hoyle, J., Schaefer, T. and Doupnik, T. (2013). Advanced accounting. New York, NY: McGraw-Hill/Irwin.

Jones, P. (2009). Budgeting, costing and estimating for the injection moulding industry. Shrewsbury: ISmithers.

Konstantopoulos, S. (2011). Fixed effects and variance components estimation in three-level meta-analysis. Research Synthesis Methods, 2(1), pp.61-76.

Noguchi, M. and Boyns, T. (2012). The development of budgets and their use for purposes of control in Japanese aviation, 1928?1945. Accounting, Auditing & Accountability Journal, 25(3), pp.416-451.

Penner, R. (2014). When Budgeting Was Easier: Eisenhower and the 1960 Budget. Public Budgeting & Finance, 34(4), pp.24-37.

Robinson, M. (2007), Performance Budgeting: Linking Funding and Results, Palgrave Macmillan, New York.

Shah, A. (2007), Public Sector Governance and Accountability Series: Participatory Budgeting. The International Bank for Reconstruction and Development/ The World Bank, Washington.

Schick, A. (2007). Performance Budgeting and Accrual Budgeting. OECD Journal on Budgeting, 7(2), pp.109-138.

Shim, J. and Siegel, J. (2009). Budgeting basics and beyond. Hoboken, N.J.: John Wiley & Sons.

Van Mourik, G. (2006). Better budgets. Monash Business Review, 2(3), pp.44-45.

Zhang, J. (2014). Analysis of variance for functional data. Boca Raton: CRC Press.

 

 


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