Free Paper Example on Budgeting in Advanced Cost Accounting

Introduction

Advanced cost accounting enables to evaluate the cost of goods sold by providing features and a framework to incorporate valuable and relevant cost data. It allows the addition of cost components and activity-based costing to the standard inventory cost of a company. Through this, companies manage to gain more flexibility in determining the exact cost needed to operate a business effectively. Advanced cost accounting is broad, and there are several topics that one can consider when researching it. Budgeting is one of the issues under advanced cost accounting that all companies should consider. A budget is a vital tool in cost accounting that helps firm management perform functions such as coordinating, planning, and efficiently controlling its operations. A budget is defined as a plan quantified in monetary terms that is prepared and approved before a specified period. It indicates planned income to be generated or the expenditure to be incurred during the time and capital needed to attain a specific objective (Sokolov et al., 2018). Hence, this paper will investigate the issue of budgeting and how it affects organizations as they forecast and plan for their activities.

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Literature Review

Today, the concept of money management has become essential for private and public entities than ever before. Budgeting hence plays a significant role in the effective control of operations. Business and business problems have become more complicated due to the movement towards the decentralization of large enterprises (Nawale, 2020). It has led to the need for better planning and control of business operations. Hence, it has created the need for better budgeting techniques, with corporate restructuring playing a significant role in placing the importance of budgeting at a higher level in an organization to ensure proper cost control. In earlier days, companies gave little concern to budgeting, and it was often buried deep in the accounting operations. Today, budgeting has become one of the significant functions in organizations, and it is given a strategic role at the top management.

A budget committee is a common thing to find in many firms, and it consists of members from different departments within an organization (Nawale, 2020). It helps to ensure there is the coordination, and with proper administration, the budgetary committee can perform the role of reconciling and encompassing the diverse interests found in modern business. For the budget to be sufficient, it has to meet the operational needs of the company. To ensure that the organization's goals are met, cost control is a sure method of realizing budget objectives.

In advanced cost accounting, a budget contains both financial and non-financial information (Nawale, 2020). It is a financial plan that helps to project the revenue of a company by analyzing how much it expects to sell and also looks at the expenses the company may experience. Some of the non-financial information in a budget include the number of employees that one wishes to have. Although a budget is a forecasting tool, it can also be used as a financial control tool.

For a business to be successful, it is essential to monitor the various activities occurring within it. One significant activity is to control spending to ensure it does not go beyond the budgeted spending. A business should not be allowed to spend more than it has budgeted. Budgets are made to cover a given period, with a year being the most common period (Dybvig, 2018). A budget focuses on the future, but it considers historical information to plan for it.

Budgeting

Budgeting refers to the process of creating a budget. All the departments within the firm are required to work together in developing the budget. The budget should consider all the situations which may or may not happen (Daryakin et al., 2019). It should also indicate all the firm's planned activities to ensure it covers all the company's objectives.

Budgetary Control

Budgetary control is a tool used by the management to plan for the future. It enables the allocation of authority and responsibility within an organization and provides ground for measurement to determine how efficient the operations are (Dybvig, 2018). A budget offers guidelines for what the company should pursue within a specific time. The budget should be prepared after a comprehensive study of what the company wants to achieve. All the actions of the company should be used to plan for the budget. A budget also serves as a form of communication between the top management of the firm and the staff who are implementing the policies of the firm.

Budgetary control helps the firm control its financial position, plans, policies, actions, and economic trends (Daryakin et al., 2019). It enables the organization's management to coordinate its activities and goals. It makes it possible to achieve the objectives by continuously comparing the budget with the company's actual performance. Budgetary control puts into consideration the process of building a budget and the individual goals of a firm.

Cost Control

Cost control is also referred to as cost management and is a crucial cost accounting method that ensures that an organization's goals are met by reducing cost or limiting their growth rate (Daryakin et al., 2019). Cost control is useful in evaluating, monitoring, and promoting efficiency in areas such as divisions, departments, production lines, among other business operations.

Cost control strategies are essential in boosting or preserving a company's profits and increasing its competitive advantage (Dybvig, 2018). Hence, a budget is crucial in cost control to ensure that the responsible parties work within the budget constraints (Nawale, 2020). A budget will help ensure that all the activities are accounted for and show the level of activity required from each of the responsible persons and the number of resources one should use to achieve their targets (Nawale, 2020).

Budgeting Techniques

There are two effective methods of budgeting, which include zero-based budgeting and incremental budgeting. The figures in incremental budgeting are based on the previous year's expenditure, with a percentage included catering for the inflations in the new year (Sokolov et al., 2018). The technique is easy, but it is often inaccurate. For the zero-based budgeting, previous figures are not used as the basis for the new year budget (Sokolov et al., 2018). It makes the budget more accurate and detailed. However, it takes more energy and time to prepare this type of budget. The zero-based budgeting technique can be used by new businesses and proactive businesses willing to take up new challenges.

Research Methodology

This section analyzes the methods used to conduct the research. It includes the target population, research design, and the sampling technique used. It also identifies the instruments used in data collection and data collection procedures.

Research Design

This study's research design was the cross-sectional research method, which is suitable for use when dealing with people from different groups with different interests, but with shared characteristics such as educational background, socioeconomic status, and ethnicity. Although the method sounds simple, it was challenging to find participants with similar characteristics, with only one specific variable bringing out the difference between them (Rusiba, 2017). A cross-section survey was suitable for the study as it enabled a single point of data collection for each participant. It is also affordable compared to other methods, such as the longitudinal survey.

Target Population

The research targeted twelve manufacturing companies listed on the New York Stock Exchange. The accountants of the firms were used in the study as they are responsible for budgeting and the overall finance of the firms (Rusiba, 2017). The various companies within the state of New York were used in the study to make it manageable in terms of visiting them.

Data Collection

The study used both primary and secondary data. A questionnaire was used to collect the primary data. The questionnaires were distributed to the top managers of the firms or the accountants to ensure that the information obtained was reliable and indicated how budgets are used to monitor the finances of the firms.

Interviews were also used in cases where the managers were available and willing to respond. It enabled the researchers to obtain information from reliable sources within the companies. Open-ended and close-ended questions were used. Open-ended questions provided more details on how the firms use budgeting to control their finances, while close-ended questions were crucial in obtaining specific and unique information (Dybvig, 2018). The questionnaire was used as it was cheaper, less biased, and convenient. Secondary data was obtained by analyzing the organization's budgetary records (Rusiba, 2017). Other forms of data relating to budgeting were also analyzed and used to complement the raw data.

Conclusion

First, the study aimed to determine the number of years that the respondents had worked in their respective companies. The results indicate that 52.3% of the participants had worked between five to ten years, meaning they had the experience to deliver their functions effectively regarding budgeting as an advanced cost accounting tool for financial performance (Rusiba, 2017). 29.4% had worked for more than ten years, while 17.6% had worked for less than five years (Rusiba, 2017).

The research also investigated the approach used to prepare budgets by each of the companies. From the information obtained, 82% used fixed or static budgets, while 14% used flexible budgets (Wegmann, 2019). The research also investigated the starting point of budgeting. The results showed that 71% of the respondents began their budgeting from the managerial level, while 29% started from the top management level (Wegmann, 2019). From this, one can conclude that the budgeting process begins from the management level of the firms.

The study also aimed to determine how frequent the budgets are prepared. It was found that 76% of the firms prepare budgets semi-annually, while 24% do it quarterly (Rusiba, 2017). The research also sorts to determine the extent to which internal staff is involved in preparing the budget. Findings indicate that 65% of the companies have their staff engaged in budgeting to a large extent. 24% were, to a very large extent, involved in budgeting, while 12% were moderately involved in budgeting (Rusiba, 2017). The study also investigated whether external consultants were outsourced to help the firms in preparing the budgets. 76% indicated that they outsourced such services, while 24% did not outsource (Wegmann, 2019).

The effectiveness of the budgets prepared was also analyzed, where 69% indicated that the budgets were adequate, 25% stated that they were very effective. In comparison, 6% stated that they were neither effective nor ineffective (Wegmann, 2019). The study also determined whether the respondents were satisfied with having the budget as a management tool in their firms. 71% were satisfied, while the remaining 29% were not (Wegmann, 2019).