Managerial Accounting Assignment: Use Of Budgeting In Nigerian Companies

Question

Task:
Purpose: This managerial accounting assignment aims at developing your understanding of the purpose and use of management accounting systems, and its usefulness in aiding managers make informed decisions. You are to critically evaluate the literature (using journal articles) to analyse the practical use of management accounting systems by contemporary companies, in terms of their relevance to the decision-making by managers and achievement of business goals.

Assignment Task:
Journal Article Critique
You are required to conduct a literature search and discussion in this assignment.

You are to choose a peer reviewed journal article (from any country) on the:

• Use of Budgeting as a management technique for managing resources.

The article should be published between 2010 – 2020. Choose your article only after you have accessed several relevant articles, and then choose the best articles that will answer the assignment question below.

Required: Critically evaluate the relevance and challenges of budgeting systems by answering the 5 questions below:

Questions:

1. Briefly discuss the budgeting process.
2. Based on your selected journal article, discuss citing examples whether the budgeting process satisfies the purpose of planning, controlling and evaluating performance.
3. The two widely used practices in preparing budgets are ‘top down’ budgeting and ‘bottom up’ budgeting. Identify and explain the practice adopted by the organisation discussed in your selected journal article and further explain the behavioural implications of adopted practice.
4. Based on your literature findings (above), critically evaluate the comment that ‘traditional budgeting practices are constraint on creativity, and the time and energy spent on budget formulation is better spent elsewhere’.
5. Based on your literature findings (above), would you recommend budgeting for contemporary organisations for planning and control purpose? Explain.

Answer

Abstract
The report on managerial accounting assignment aims to evaluate the changing role of the management accountants and the role of management accountants in the listed companies of Nigeria. To ascertain the role of budgeting and management accounting, the tools and techniques utilized by the companies are discussed. Furthermore, the report elaborates on the process of budgeting and the role it plays in the process of planning and control. The report discusses regarding the top-down budgeting and bottom-up budgeting followed by the role of traditional budgeting in contemporary organization. The report concludes that relying on traditional budgeting alone is a risky decision because it needs to be used with other tools for better results.

Introduction
Financial and management accounting are two vital pillars that help the organization to steer forward and is applicable irrespective of the fact whether it is profit-making or non-profit making. Management accounting has been used as a potent tool in the process of developing and enhancing the accounting practice of the organization. The objective of the report is to stress the function of management accounting and the role of the management accountant. It has been correctly advocated by Spires, Wallin & Young (2012) that management accounting helps in reducing the cost and thereby apt as a cost controller. Furthermore, the use of budgeting is a vital tool that helps the management to look into the internal problem and formulate plans. The report initiates with the discussion of the budget, usage of budgeting as a tool of controlling and planning, the behavioral implication of the practice, critical evaluation of the process of traditional budgeting followed by the conclusion.

1. Discussion of the Budget process
   Budget is an important tool that projects the financial implication of the plans, addresses the resources that are needed to be used to attain the plans, and provides means of measurement, control, and viewing the results that are obtained (Spires, Wallin & Young 2012). Further, the obtained results are compared with the predetermined results to find out the variance. The budget can help in minimizing the imminent issues. A budget is an excellent tool that points out the operational, as well as the financial objective of the period. The budgeting process involves chalking out plans in numerical form (Pellizzari & Wall 2015). They are defined in financial terms or can be called as another form of the results that are anticipated. The financial budget can be defined as the value expression of the activities of the company. The manager can understand the requirement of financial resources when the aims and objectives are clear. The budget can be defined as a tool that helps in the implementation of plans and the undertaking of decisions. budget management utilizes a different mechanism that allows the proper expression of costs and expenses. The main role of the budget lies in the function of financial planning, the function of financial balance, and the function of the control of financial execution (Alot 2017). The article reveals that the major function of management accounting is budgeting and this budget is prepared for a specific period. As discussed budget will enable sales plan, forecasting of costs, and the modules of the company. The budget comprises of financial accounts that relate to the production cost, income and resources allocation, and the planning of the cash flows. The annual budget is segregated into the quarterly and monthly budget with a particular target for the teams (A lot 2017). The budget process is done in the following manner:
   • Estimating the yearly income in the revenue form
   • The yearly income is estimated in the revenue form or subsidies from the government
   • Budget working papers are drafted and the drafted papers submitted to the authority for permission
   • Budget approval and circulation among the members of the organization
   • Budget implementation
   • Comparison and contrast of the actual result with the budgeted ones
   • Variance analysis and the discussion
   • Comparison of the actual results and figures with the budgeted figures
   • The budget deficit or surplus in analyzed by conducting an analysis.

   The above steps are followed by the organization for the budget implementation process. The presence budgeting system has undergone an immense change and the management accountants are looking forward to new and varied techniques for attaining the desired budget.

2. Usefulness of Budgeting in planning, control and evaluation
   As seen from the article that highlights the changing role of management accounting in the Nigerian companies it is ascertained that budget occupies the topmost position when it comes to planning and control. The process of budgeting in the Nigerian companies performs within the structure and the establishment of networks and information helps in processing the information. Accounting never stops and hence the budget never comes to a standstill. The journal explains that the command and control of the budget on the information projected by accounting. The control process of budgeting in Nigerian companies involves the implementation of plans through the review of performance. The actual results are compared with the objectives. This frequency is determined by the management as per the level of comfort. Variance from the budget is projected in the performance report and hence unexpected result can be identified at the beginning. Furthermore, the budget helps in planning because performance needs to be provided at the earliest so that the management is aware of the situation and the planning process is undisturbed. Having a budget ensures that the organizational efforts will be enhanced and that the planning process will be more defined (Mitchell 2014). The presence of a budgeting system helps the managers to plan at every level. The critical assessment of the budget at a higher managerial level helps the manager to understand the operations that are done at a lower level (Berland, Curtis & Spoenm 2018). Furthermore, the budget committee reviews the plans and integrates the plan to attain the goals. This process ensures that the entire organization from top to bottom is engaged in communication that vouches for the organizational goals. This communication helps in better coordination and control. The emphasis is more on controlling and hence budgeting is undoubtedly a cost-benefit act that enables the organization to be cost-effective in nature.
3. Practice adopted by the organization
   Budgeting has been used as an effective management accounting tool from times immemorial. This article focuses on the management accounting practices used by companies in Nigeria in the past, present, and future and also views how the management accounting practices have changed from time to time (Van Roestel 2016). Due to the shift in the expectations of the customers, the management accounting practices have changed accordingly. This paper reviews the changing role of the management accountants in the listed companies.

   The history and theory of management accounting focus on two basic approaches of budgeting namely the top-down approach and the bottom-up approach. When the Board of Directors and Executives at the top level do the entire budget formulation, planning, and implementation without much involvement of the subordinates, then the approach that is followed is said to be the top-down approach (Odia 2015). This is more of a dictative style of budgeting where the individual targets are just thrust on the subordinates. Budgeting was viewed as a practice of a watchdog and corporate police.

   The second approach is the bottom-up approach where the budgeting is done by the mutual discussion and consultation with all the team members. The individual reviews, opinions, and feedback are taken into account for the formulation of the budget. This is a more participative approach where the practical suggestions are considered and the solutions for the same are also sought from the budget.

   Upon analyzing this article, the statistical methods of analysis and tests of hypotheses were used on 62 accountants from 10 listed companies (Odia 2015). The analysis revealed that the most important functions in management accounting were costing, budgeting, information provision, project evaluation, and forecasting. Internal consultation, education of the management, staff, and decision making were considered to be the least significant functions. Based on the table of statistical analysis presented, capital budgeting was a major activity of the past and strategic management, performance management, and process improvement is a present activity while the capital budgeting, environmental management, mergers and acquisitions, divestitures and process improvement and compliance reporting is a future significant activity. In the past, external financing and process improvement was a low significant activity area which indicates that the top-down approach of budgeting was being followed in the past. Areas like compliance reporting, performance management, mergers, and acquisitions were given moderate significance in the past. Thus this is the top-down approach (Odia 2015).

   In the present, areas like external financing, internal consulting, compliance reporting, environmental management are given moderate significance. As the strategic management involved internal consulting, the approach can be said to be more participative and hence it is the bottom-up approach. The competencies of the various team members are taken into consideration and aligned to make a perfect fit for the achievement of the organizational objectives. These days companies are organizing workshops, discussions, and seminars to increase the level of communication and tutor the employees about the company’s changing needs and their role in the same.

   This is the shift from the top down to the bottom-up approach from the past to the present. There is a significant difference in the management accounting practices under both these approaches. From the analysis of the current situation, there does not seem to be much difference between the present and future activities. It is the movement of management accounting from routine activities to more analytical activities. The Board of Directors has to view this paradigm shift in the roles and activities of the management accountants as decision-makers, leaders, and change agents to ensure that the culture and activities of the organization promote this change.

   Thus with the changing times, the budgeting methods have also developed and the companies have that have implemented these changes have been able to reap its benefits. Management accounting as a subject is continuously evolving and hence the organizations also have to incorporate and add the changes in their systems.

4. Critical evaluation of traditional budgeting
   Post the year 1980s, there were various scholars who identified the shortcomings of the traditional budgeting techniques, and hence the management accounting practices had to be amended. It was time to change the management accounting practices (Odia 2015). Management accounting today should become a part of value creation and value addition for the organization to help in strategy formulation and implementation of the strategic capabilities into operational and organizational performance. This will enhance productivity. To facilitate this, management accountants have to develop the skills that will help them adapt to modern requirements. The traditional management accounting practices relied heavily on cash inflow and cash outflows. This paper tests the hypothesis that there are no significant changes in the functions, roles, activities, tools, and techniques performed by the management accountants in the past, present, or future. The statistical analysis revealed that while costing, budgeting, forecasting, and project evaluation were the areas of high significance in the past, the present scenario lays emphasis on information provision, performance measurement evaluation, costing, and budgeting. The future emphasis of the management accounting functions was on profit improvement, controlling, information provision, performance measurement, and evaluation.

   The moderate emphasis areas in the past were compliance reporting, accounting systems, financial reporting, risk management, and process improvement. In the present, the moderate emphasis areas are an investment fund, internal consulting, quality systems and control, and profit improvement. In the future, these areas will be internal consulting, planning, project evaluation, quality systems, and control. The low emphasis areas in the past were planning, performance measurement and evaluation, profit improvement, strategy formulation, internal consulting, environmental management, and decision making (Nguyen, Weigel & Hiebl 2018). The present low emphasis areas were process improvement, risk management, compliance reporting, planning, environmental management, planning, and decision making. The low emphasis areas in the future will be process improvement, costing and accounting systems, financial reporting, decision making, and compliance reporting.

   The shortcomings of traditional budgeting practices are many. There is no goal congruence between company strategy and employee actions. In other words, the management accounting practices do not incorporate the vision, mission, and strategy of the company (Odia 2015). The reasons for this reluctance could be attributed to the organization culture, employee dissatisfaction, role conflict and role misalignment, stability with the traditional practices, and the insufficient skill set. For the management to incorporate the new developments in management accounting there has to be a skill set to adapt to these changes and hence the learning and upgrading has to take place. If there is a lack of interest and initiative by the management, then this process is a waste of time, money, and effort. Due to the comfort level with traditional practices, there is resistance to change. As the efforts of management accounting are not a direct profit generation activity in the business, there is a lack of recognition and hence the management accountants are not motivated (Odia 2015). There are internal and external barriers to accept the changes. The ignorance towards the scope of activities to be carried out by the management is the foremost barrier. The internal barriers are employee dissatisfaction and the inability of the organization to cope up with the updated systems. Thus it would be right to say that if the traditional management accounting practices are being continued in an organization in the current times, then it will surely lack behind and its peers will gain over and achieve the competitive advantage and their respective market share.

5. Recommendation of budgeting for contemporary organization
   The case studies, interviews, and surveys revealed the broad nature of management accounting. The modern business-oriented management accounting practices viewed strategic management as business partners. Businesses today are aiming towards value creation to be achieved by long term strategic planning. Management accountants should be more concerned about managing the environment. The factors that lead to change in the management accounting practices were globalization, competition, advancement in production technology, information technology, organization size and structure, accounting software and development, software development, management style, government regulation, organization strategy, key personnel, and management information needs(Wolf et al 2015).

   After the analysis, it can be understood that though the management accounting tools, techniques, and practices have evolved over time, the function of controlling, forecasting, and budgeting have remained the same. Performance measurement and profit improvement were the common objectives both in the past, present, and will also be in the future (El-Sayed & Youssef 2015). Management accountants do not have restricted roles of counting numbers today but have to perform the roles of a business analyst. The needs of the organization have to be identified and the possible solutions for the same have to be provided. The recommended solutions should also have the capacity of value creation for the stakeholders. Thus a management accountant performs the role of an internal advisor and acts as a consultant for the organization. The functions from the traditional management accounting practices also have to be performed in addition to these modern responsibilities.

   The current day set up is a wakeup call for the corporate houses to realize the significance of the management accountants not just as the information providers of the company but also as the decision-maker for the existence and survival of the business in the highly competitive industry (Odia 2015). Sustainability has become the new way forward for the world. The management accountant has to accept and accommodate the changes in order to facilitate the growth and development of the company. Their actions are critical for shaping and designing the future of the organization. They should be able to capture the vital information relating to the operational issues and strategies of the company and should be able to translate the same into the management accounting tools and techniques used. These changing requirements are also supported by the professional accounting and training bodies which include the relevant aspects in their curriculum. Thus the new management accountants are trained to be change agents and act as analysts, consultants, and strategy formulators. The education is broadened to attach emphasis on the managerial aspects and elements. Thus relying on the traditional budgeting practices is not recommended for the organizations in the current scenario

Conclusion
From the report and discussion, it can be ascertained that the functions of management has undergone an immense change that pertains to controlling, forecasting, performance, and strategies. Moreover, the function of management accounting and accountants has altered whereby they have been able to conduct numerous calculations with ease. In the present scenario, the management accountant is more concerned with the modern roles that help in providing a different solution to the organization as a whole. In light of the discussion, it can be commented that the management accountant should learn to accommodate budgets with other tools that will facilitate and helps in bringing immense change. It is important for them to change their role and adapt to the new environment that will help the organization to steer forward. In altogether, it can be commented that contemporary organizations have to survive in the cut-throat competitive world, it is of utmost essential to upgrade the management accounting practices and interlink the organizational goals with the management accounting tools. This will help in the broader development of the management accountants and ensure that the activities of the organization are properly coordinated and under control.

References
Alot, Z 2017, ‘The model of the production process for the quality management. Foundations of Management, vol. 9, no. 1, pp. 43-60

Berland, N., Curtis, E., & Sponem, S 2018, Exposing organizational tensions with a non-traditional budgeting system. Journal of Applied Accounting Research, vol. 19, no. 1, pp. 122–140.

El-Sayed, H., & Youssef, M. A. E 2015, ‘Modes of mediation" for conceptualizing how different roles for accountants are made present’, Qualitative Research in Accounting and Management, vol. 12, no. 3, pp. 202-229.

Mitchell, S.W. 2014, An Exploratory Study of Priority Based Budgeting: Identification of Public Values and Public Priorities through Citizen Engagement in Government Budgeting Decisions, Lawrence Technological University.

Nguyen, D. H., Weigel, C., & Hiebl, M. R. W 2018, Beyond budgeting: review and research agenda. Journal of Accounting and Organizational Change, vol. 14, no. 3, pp. 314–337.

Odia, J 2019, ‘Towards a changing role of management accounting and management accountants in Nigeria’, Managerial accounting assignment The Journal of Accounting and Management, vol. 9, no. 1, pp. 31-47

Pellizzari, P., & Wall, F 2015, ‘Simulation in management accounting and management control: Editorial’, Journal of Management Control, vol. 23, no. 3, pp. 95-98.

Spires, E.E, Wallin, D.E,& Young, R.A 2012, ‘Aggregation in Budgeting: An Experiment’, Journal of Management Accounting Research, vol. 24, pp. 177-199.

Van Roestel, M 2016, A collaborative approach to budgeting and the impact on the budgeting process: A case study, viewed 24 May 2020, https://search.proquest.com/docview/1791485066?accountid=30552

Wolf, S., Weibenberger, B.,E., Marius, C. W., & Kabst, R 2015, ‘Controllers as business partners in managerial decision-making’, Journal of Accounting & Organizational Change, vol. 11, no.1, pp. 24-46.