Areas Of Budget Conflict Accounting Essay

Category: Accounting

Budgeting has been used for long as a control tool through the budgetary controls. Alpha Limited can achieve organizational control thereby efficacy and effectiveness through key areas of control that budgeting can help Alpha Limited: routine control (repetitive work), expert control (non-repetitive activities), trial and error controls (exercised during uncertainty situations for example in flexible budgeting and sensitivity analysis) and intuitive control (in this situation, activity is not repetitive and is unknown). Budgets are used as a control tool at the end of the budget period and not at the beginning. However, motivation, planning and control can conflict but Alpha should set reasonable objectives in the budgets formulated.

Introduction

According to (Hansen, Otley and Stede, 2003) budgeting and budegtary controls in any organization is perceived as the cornerstone of management control. Consequently, the management of Alpha Limited can use it as control instrument in executing and imlementing key strategies aimed at its expansion and growth. Nevertheless, the management of Alpha Limited should be aware that budget as a control tool is not exhaustive and holistic in nature and operation. Therefore, it is important that as this report is compiled as recommendation to Alpha, it be mentioned from the on set that this tool has its weaknesses despite the widespread application. Drury (2007) argues that practitioners and management accounting scholars posit that the current or modern business environment is characterized by extreme turbulence and dynamism which creates and brings out the significance of budget and budegtary controls. Julia (2011) adds that budgeting should incorporate the behavior of tactical and operational level managers.

How budgets can facilitate Alpha Limited's management control

Alpha Limited strategic and operational managers can utilize budgeting and budgetary control as a control tool such they can prudently boost the company's financial management system which drives its stability, growth and development. According to Nelson and Peter (2010) indicates that the budget process itself is a control measures. Through planning of the operations that Alpha, the management can compare the actual outcome of organizational efforts with the planned or anticipated outcome.

According to Christensen and Templin (2000), the management function of control of Alpha Limited can only be achieved through budgetary controls. On one hand, Alpha Limited managers can make budgets for every department or function where each manager is given a target on production or sales depending on the functions of the department. At the end of a given period, Alpha can assess each department's performance and identify which one had the highest deviations or variances. Consequently, diverse decisions can be taken such as managerial skills of the managers, the capacity of the department or supporting staff's morale. Christensen and Templin (2000) argues that by determining the reasons for the variations in outcome, operational, strategic and tactical level managers can indentify inefficacies such as inferior quality of materials.

Based on the arguments of the Chartered Institute of Management Accountants, (2011), Alpha's management can use budgets as an evaluation tool of managers' skills, capacity and coordination and ability to attain targets. Subsequently, Alpha can use this budegtary control measures to design compensation schemes for managers. According to Chartered of Management Accountants (2007, cited Chartered Institute of Management Accountants, 2011), Alpha can use budgets to authorize responsibilities and scope of roles for its executives. Drury (2007) argues that at the beginning of budgeting process, the budget is a tool but at the end Alpha can use it as a control tool. Therefore, it is used as a control tool at the end of the budget period and not at the beginning.

Otley (1990, cited in Hansen, Otley and Stede, 2003) argues that budgeting and budgetary control is the core integrative control methodology that Alpha Limited can financially match its capacity (resource availability) and the anticipated outcome. In order to achieve organizational control thereby efficacy and effectiveness, there are six key areas of control that budgeting can help Alpha Limited: routine control (repetitive work), expert control (non-repetitive activities), trial and error controls (exercised during uncertainty situations for example in flexible budgeting and sensitivity analysis) and intuitive control (in this situation, activity is not repetitive and is unknown). Alpha Limited can achieve the benefits of budgets as a control instrument or tool through internal controls which entails internal audits, internal checks and balances within departments and operations.

Areas of budget conflict

Although Alpha, can use budget and budgetary controls as a control mechanisms to achieve organizational, functional and operational efficacy, there are conflict areas that budgeting controls arouse. According to Chartered Institute of Management Accountants (2011), the key roles of budgeting is motivation, planning and control. Based on the deductions Drury (2007), motivation and planning can conflict in that Alpha may try to motivate managers with extreme budgets accompanied by lucrative componsation packages. However, this may hinder effective and prudent planning. This essentially occures when the budget provisions are dictated rather than participatively inducted. Additionally, if budgets are used as a tool to identify why managers did not use all the allocated resources, managers may be eager to embezzle the resources in order to get more funds (Drury, 2007). This is a conflict between planning and control. Consequently, Alpha Limited should make budgets that are reasonable in regard to functional capacity and management skill. Drury (2007) indicates that management (in this case Alpha Limited's) should let all objectives be approprately communicated to all functional areas such that motivation does not overide planning.

Conclusion

In summary, budgets can be used as a control tool at the end of the period under planning. Consequently, Alpha Limited can only use budgets as a control tool after it has planned for the allocation and expenditure budgets. Application of budgeting instruments like sensitivity analysis and flexible budgeting enhance control of losses thereby boosting profitability. However, there are conflict areas in the significant roles of budgets such as motivation, planning and control. In order to resolve these probable conflicts, Alpha Limited should implement budgets that are reasonable under given capacity.