Accounting Discussion #5 (part B/C)

Respond to 3 peers' discussion posts. Each response should be a minimum of 150-250 words.

Discussion #1: Responsibility Accounting

Power in organizations is often distributed to certain decision-makers with power being both isolated and divided. Leaders are often given sufficient power to conduct their duties, but their power remains isolated to their areas of control. Therefore the idea is to isolate the manager’s responsibilities and powers to areas under their direct control and authority. It is found that no manager should be accountable for that which is not under his direct control (Albrecht, Stice, Stice, & Swain, 2008). In this way, responsibility accounting is a system that makes managers accountable only for certain parts of the budgets and resources and therefore requires individual managers to create budgets and account for all expenses under their own care. Each manager creates reports, for internal use only, for their own scope of responsibility that allows the organization to assess and judge the individual performance of the manager (Albrecht, Stice, Stice, & Swain, 2008).

            While manager’s decisions must look at the larger goals of the organization and must align with corporate goals, managers should focus on a narrow basis and thus assure that the decisions they make are best for their area of control. Responsibility accounting helps achieve this goal as they are held directly accountable only for the costs and revenues over which they have direct control and the accounting is aligned around goals created specifically for the division or unit under control (Needles, Powers, & Crosson, 2011). Managers must create budgets and reports focused on their goals and their units and are required to file reports showing performance for evaluation. Since the reports and budgets can be directly matched to the goals, manager performance can be more accurately measured and assessed. This allows managers to be judged on the aspects under their control and not for aspects that are under corporate control (Needles, Powers, & Crosson, 2011).

Performance accounting allows managers to create their own projections and goals which can be reviewed and accepted by management. In addition, it allows managers to remain focused on their area and not focused on areas outside of their control. Finally, this system assures managers are fairly evaluated and fairly judged on their actions and performance (Albrecht, Stice, Stice, & Swain, 2008). A major concern is focusing on individual unit performance can harm overall performance and managers may lose sight of the big picture. In addition, managers may be enticed to take actions that benefit them personally that may harm the organization. When bonuses are tied to individual performance, it may invite unethical or selfish behaviors (Albrecht, Stice, Stice, & Swain, 2008).

References

Albrecht, W., Stice, J., Stice, E., & Swain, M. (2008). Accounting: Concepts and Applications (10th). Mason, OH: Thompson Higher Education.

Needles, B., Powers, M., & Crosson, S. (2011). Principles of Accounting (11e). Mason, OH: South-Western.

Discussion #2: Flexible Budgets

The business planning for cycles of production in future is achieved through the process of budgeting. The initial budget is necessary as a planning tool and it is called a static budget but to evaluate the performance of a business during this period we create a second budget known as a flexible budget. The variances in the flexible budget play the role of providing the business with vital information about different performance elements such as overhead costs and profit (Assad, 2011).

Businesses start with a static budget for example, a business period may covers one year and the static budget is created before this period to cover one year of operations. Flexible budget is created after the budget period has ended and it allows businesses to determine what the static budget should be by using actual output figures from the budget period. In order to understand why actual results differ from the expectations, a flexible budget can be helpful by computing variances (Holtzman). A favorable variance plays to the advantage of businesses by increasing overall income whereas an unfavorable variance shows unexpected costs or increase in costs that may negatively affect profit levels. Business must work on areas represented by unfavorable variances in order to improve profits and reduce overhead.

As opposed to a static budget, the information gathered from the use of flexible budget is based on actual results which allows the business to adjust the static budget and make it more accurate. Businesses can also use flexible budgeting as a way to adapt to change and also measure and adjust for inflation. They can make use of it to get a better hold of business activities and evaluate the business performance so that in case of uncertainties, an appropriate response is there to fall back on (Davoren, 2010). It should, however, be noted that it is a time consuming process to continuously monitor changes in the business environment and it also takes time to adjust operational activities in order to accommodate the changes. There is a cost associated with this process as a business may need to hire additional resources for taking on this task and if the business is not in a position to afford these additional costs of monitoring then it may not be advisable to use a flexible budget.

Only Relevant information is required by a flexible budget which is usually a difficult task hence authenticity of a flexible budget is usually at risk. Expenses must be must clearly categorized into fixed, variable and semi-variable expenses for flexible budgeting. It is a complex process hence it requires that the staff is experienced and knowledgeable in order to prepare a flexible budget that is accurate. If the staff is inexperienced, a flexible budget is not the right choice for a business.

 

Reference

Holtzman M. How to implement a flexible budget. Retrieved from http://www.dummies.com/how-to/content/how-to-implement-a-flexible-budget.html

Davoren J (September, 2010). The disadvantages of a flexible budget. Retrieved from http://smallbusiness.chron.com/disadvantages-flexible-budget-57384.html

Assad A (June, 2011). Why Would a Company Find a Flexible Budget Variance More Informative? Retrieved from http://smallbusiness.chron.com/would-company-flexible-budget-variance-informative-34699.html

Discussion #3: Profit Planning

     The key role of the manager involves planning, controlling and decision making. Profit Planning is an invaluable tool for this purpose. It involves a number of steps whereby a series of mini budgets are prepared and put together to make up a Master Budget. "A budget is a detailed plan for the future that is usually expressed in formal quantitative terms". (Noreen)

     It aims to achieve a comparison between the planned amount of money that goes into the business and the amount that comes out in terms of profit or loss. A budget creates a picture that one can use to assess the state of the business with reference to a predetermined goal. When there are deviations from these goals, consequent adjustments are made to get back on track or at least, as close as possible. This in managerial terms is referred to as control.

     In a large organization, there may be many segments, departments or divisions. Budgets should be made to cater for every unit with the involvement and contribution from both top level and front line managers. (Noreen

     Budgets are made to cover a preset period. The choice of how long this should be and how often it is rolled over depends on certain factors. There is greater uncertainty with making accurate predictions in the business environment on a long term basis. The more frequently the budget rolls over the tighter the control will be. On the other hand, one has to bear in mind  that creating a budget is cumbersome; it involves a lot of work - meetings, discussions, data collection and comparisons to mention a few.

     Profit is an objective measure of business performance and is a very good item for strategic planning. There is a positive correlation between formal quantitative plans and business performance. Even small and medium businesses do better when they use profit planning to "plan" and control their business.(Sandada, Pooe & Dhurup, 2014)

     . At the behest of the financial crisis in 2009, the International Federation of Accountants recommended that countries use financial information to "control" their performance just like companies. The importance of budget planning can not be over emphasized (Ugbede, Lizam & Kaseri, 2013).

References

Noreen, E., Brewer, P., & Garrison, R. (2013). Managerial Accounting for Managers 3rd Edition. New York: McGraw-Hill

     Irwin.

Sandada, M., Pooe, D., & Dhurup, M. (2014). Strategic planning and its relationship with business performance among small

      and medium enterprises in south africa. The International Business & Economics Research Journal (Online), 13(3), 659.

      Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/1525360857?accountid=40195

Ugbede, O., Lizam, M., & Kaseri, A. (2013). National budget and debt as measures of public sector performance: Empirical

      evidence from nigeria. Asian Journal of Finance & Accounting, 5(2), 22-46. Retrieved from http://search.proquest.com.

     proxy.davenport.edu/docview/1508482243?accountid=40195

Discussion #4: Beyond Budgeting

 

Managing through budgets was developed in the early 20th century by such companies as Du Pont de Nemours and General Motors in the US, Siemens in Germany, and Saint Gobain and Electicite de France in France (Weber. 2005). In today’s multinational businesses and diversified corporations budgeting is the most important tool. According to some scholars it serves three purposes: “forecasting the future development of the organization and its environment, coordinating activities and talks, and motivating employees (Weber. 2005).” However, the same budgeting tool was used in Soviet Union and they did this budgeting plan every 3 and then every 5 years since 1917 after the communist revolution up to 1991 when it collapsed, they couldn’t produce even a toilet paper—it  didn’t work. Or we can look at Government operating budgeting in our country, like for example Welfare program, if one visit their offices, they look like a third world country business operation, although they are using the same budgeting operation. Therefore, there are some other factors that have to be considered when talking about budgeting.

Karl Marks advocated “participation budgeting” meaning everybody in the business starting from the factory workers, so called “proletariats”, should participate in budgeting and decide for them selves what to do inside a business (da Silva. 2008). To see how disastrous this idea is one should read Atlas Shrugged by Ayn Rand who showed that according to this idea there will be only one possible means to implement budgeting which is the “need” not an “achievement” therefore employees will be “beggars” (Ayn Rand.1957).

That is why one of the most important concepts is a Responsibility Accounting which separates planning and control, and sets the rules where managers should be held responsible for the planning and only for those items that they can actually control. Furthermore, Self-Imposed Budgeting which also part of the planning and controlling starts from the Supervisors then Middle Management and Top Management which allows the evaluation of the managerial performance. But the most important concept in all is that businesses should operate in capitalistic environment where privet property and profit is the center of the corporation and that will bring all other values to human wellbeing.       

 

Reference:

 

Weber, Jurgen. (Mar/Apr 2005). Budgeting, Better Budgeting, or Beyond Budgeting. Cost Management. 19.2 Retrieved from  http://search.proquest.com.proxy.davenport.edu/docview/209700379?pq-origsite=summon

 

de Silva Carlos. (2008). Participator Budgeting: Developing human capabilities. The University of Utah. Dissertation. Retrieved from  http://search.proquest.com.proxy.davenport.edu/docview/304437419?pq-origsite=summon

 

Ayn Rand. (1957). Atlas Shrugged. Signet. Penguin Group Inc. USA. New York. USBN 0-451-19114-5.

Discussion #5: Advantages of Budgeting

 

One aspect to the business setting that cannot be underestimated is that of budgeting (Duke University, 2014).  This holds true in the settings of both personal finance and budgeting at the organizational and corporate levels.  In the context of business, budgeting is often a make or break issue.  The text lists three main ways that businesses can benefit from budgeting (Noreen, Brewer & Garrison, 2014).  The first way is that budgets are a strong way for management and upper levels within the company to communicate throughout the business.  A budget sets priorities and also lets the employees know what is valued.  For example, a company that spends one hundred thousand dollars on making factory locations eco-friendly is establishing an important message throughout the organization.

 

The second way that a company utilizes budgeting is that is stimulates managers and decision makers to really think about the future.  When managers aren’t forced to consider long term plans, it is tempting to get bogged down in the daily issues and sometimes crisis management.  However, a budget helps managers to think about more than just short term plans and goals.  A budget and financial planning gets managers to think about the future.

 

The third way is that budgeting benefits a company is that it gets managers to allocate funds to the departments where they most effective for the company overall.  This critical contribution cannot be underestimated.  If a company is sinking money into departments where the money is not being returned, it can drive the company into bankruptcy.  Thus it is imperative for managers to evaluate this through budgeting. 

 

The fourth way is that budgeting can uncover bottlenecks that might otherwise be damaging to the company.  Bottlenecks can results in a number of problems including stalled production and disorganization (Wallace, 2014).  The fifth way that a company can reap rewards through the budgeting process is that it helps create a sense of unity among the various departments.  The company has over riding goals that require cooperation from independent units.  For example, the research and development team members would rarely otherwise work closely with the marketing people.  However, in a budgeting situation, they have shared interests. 

 

The sixth and final way is that budgeting clearly defines objectives.  This is probably the most important reason for budgeting.  An organization really needs to have definite standards with which to measure its performance.  Budgeting gives this purpose and structure.

 

 

References

 

Duke University. (2014). What is a budget and why is it important? Personal Finance @ Duke.

Retrieved from: http://www.personalfinance.duke.edu/manage-your-finances/budget/overview

 

 

Noreen, E. W, Brewer, P., & Garrison, R. (2014). Managerial Accounting for Managers (3rd

Ed.). New York, NY: McGraw-Hill Irwin.

 

Wallace, M. (2014). Effects of a bottleneck in warehousing. Houston Chronicle.  Retrieved from:

 

 

Discussion #6: Evaluating a company’s Budget Procedures

That’s the topic I got this week, so there was not too much on the Internet about this except the case from our textbook. Hopefully this information will suffice. From one article I read online it spoke more about how to develop and manage a budget than evaluating a company’s budget. I guess it’s almost the same thing. It did cover some interesting topics from our textbook though.

            First you have to develop a strategic plan for your business- basically this is the mission statement of the company and how you will go about achieving the mission statement. After this, you have to write down some realistic business goals. So annual business goals are used normally and this needs to be covered by the budget funds. Thirdly, you have to take revenue projections into consideration. With the historical financial performance of the company, as this planned growth will go hand in hand with the company’s organizational goals.

            Then you have to look at the fixed cost projections, which deals with monthly predictable costs. We look at these concepts in chapter 5 such as the company’s rent, utility costs, insurance and employees’ salaries. Then you got to look at variable cost projections; these include costs that are unstable from month to month. So these comprise of the overtime costs, and supply costs. Then these expenses need to be controlled and budgeted.

            Then you have to examine annual goal expenses and these deal with projected amounts associated with the company’s established goals. So the projection of costs should be sought out and carried out within the department’s budget in charge of these goals. For the seventh point, one must examine a Target profit margin, as this allows for returns for the business investors or owners.  Then a board should approve the budget, as monthly statements need to be reviewed as well for this task. Lastly, budget variances should be reviewed to what caused these variances in the first place.

 

Reference:

Lotich, P. (2014, March 12). 10 steps to developing and managing a budget. Retrieved

October 2, 2014, from http://thethrivingsmallbusiness.com/budgeting-process/

McQuerry, L. (2014). How to evaluate policies and procedures. Retrieved from

            http://www.ehow.com/how_5869238_evaluate-policies-procedures.html

 

Noreen, E.W., & Brewer, P.C. & Garrison, R, H. (2014). Managerial Accounting for Managers. New York, NY: McGraw- Hill Companies.