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Budget in Management Control Systems - Essay Example

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Budget in Management Control Systems

(Abernethy et al, 1999)
The first and most critical step of this paper is to understand what a budget actually is and what it entails for an organization. The budget is written documented statement of the future plans of a company set forth by the management which are demarcated in monetary terms is known as a budget statement. This report is basically indicative of the future performance of the company in accordance with the perceptions of the managers. The process of budgeting in the eyes of many is basically the lawful marriage of the accounting and the managerial entities that exist inside a business. However, according to most of the renowned personalities in this field, the process of budgeting is more the prerogative of the managerial function of the business rather than the financial function which is backed by the rationale that the formulation of this plan is in an attempt to better aid and abet the managers of the firm in the proper and utility maximizing mechanism of management of the firm. (Churchill, 1991) Systems for decision making, determining the objectives for the company and earmarking the main concerns of the organization all come under the jurisdiction of the formulated budget. Now, the budget is not merely a managerial instrument but rather has accounting implications as well as the future goals of the company are interpreted into financial goals which have to be met. Therefore, it would not be wrong in considering that a budget is perhaps the most effectual mode of business management that is present in the contemporary business landscape. (Demski, 1994)

Advantages of Budget Preparations:
The level of revenue that will be appropriated for the business activities of the business will be determined by the budget and this allocated amount will determine the level of outlays that the business can ascertain and the final closing balance present to the operators of the business at the end of the period of activity for which the budget was ascertained. A financial management tool as we have already described, the possible applications of a budget include:
Determining particular goals for the future
Assessing the activities conducted in the past in light of the activities planned for the future,
Lay down the formulation of work plans,
Predict the levels of revenue that will be made available to the organization,
Forecast the possible avenues of outlays of these funds,
Compare and contrast the actual results that are found with the planned results as determined by the budget,
Pinpoint the areas of business that have the potential of being problematic and need special consideration,
Approximate the final level of revenues at the end of the period encompassed by the created budget, and
Act as a public information dissemination system. (Gitman et al , 1977) (Harris et al, 1996) (Harris et al, 1998)

Methods for Budgeting:
According to most financial analysts and business groups around the world, there are three major ways in which a budget can be compiled:

Incremental budgeting
This method is budgeting is the one where the budget for the current financial term serves as the basic building block for the new budget that has to be formulated for the next year. Budget adjustments cater to the possibility of ...Show more

Summary

The purpose of this paper is to critically evaluate the use of budgets in management control systems. For this matter, it is essentially important to understand the exact implications of what a budget effectively is, what it entails and what allusions it would have on the company which employs it for its financial management…
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Budget in Management Control Systems essay example
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