Budgeting and management accounting

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  1. Outline the purpose of budgets within organisation.

Budget is a plan which is made in detailed to show the policies that an organisation needs to follow in order to achieve the organisation’s objective.

Followings are the purpose of making an budget within an organisation :

  • Planning : Planning is the first and foremost purpose or objective system in making budget. This enables an organisation to plan activities and operations to reach any target.
  • Coordination : Activities and operations of every department in an organisation should be well organised in order to achieve the target that have been expressed in budget.
  • Motivation: All the budgeting systems should contain one incentive scheme to encourage the workers in the organisation to make an effort to reach the organisation’s objective or target.
  • Key Performance Indicator/Evaluation : The decision made and the real attainment should always be compared with budget in order to know the actual performance that an organisation had attain and to make sure what are the decision that have taken previously have given such and such result. The key performance is measured using the growth of revenue, keeping well skilled workers ,healthy and clear records of operation of the business.
  • Control and make an action : In order to reach the plan(financial plan),the operations and activities within an organisation should be controlled and the right action must be taken if the performance of the organisation is poor or dissatisfied.
  1. Explain the relationship between objective budget and operational budgets.

Objective budget is the overall financial plan of an organisation showing expenditure of available fund and in the other hand, it can be said as a predetermined target to achieve an organisations objective while operational budget relate to the day to day operating of an organisation include the budget for sales, budget for manufacturing cost, budget for materials(raw materials),budget for labour, budget for overhead, budget for merchandise purchases, budget for selling expenses and budget for administrative expenses .For example, let say the objective of an organisation is to increase the amount of sales and the profit of the business by reducing the cost of production such as cost of raw material purchased a and cost of selling price and otherexpenses,the organisation need to prepare an operating budget such as sales budget to fix the amount of resources such the amount of raw material needed and the amount of workers needed in order to increase the sales of the organisation. When the fix target of budgeted sales is reached, the business can be said has reached their objectivse. Therefore, the success of the objective of an organisation can be said that it depend on the operational budget of the organisation .As the day to day operational budget is achieved, the objective budget of an organisation can be easily achieved.

  1. Analyse the factors that managers might have to take into consideration when preparing budgets.

The factors might be considered by managers before preparing a budget is the manager need to know whether the budget he is planning is for either long term budget or short term budget. If the budget is prepared for a short-term objective, it can be achieved in short period of time which is from a month to 5 years .Short-term budget usually include paying off start-up company loans, marketing existing products and hiring workers or employees .If the budget is being prepared for long-term based, the business can reach their objective within 5 to 10 years or more. The manager should take consideration over the previous year budget as well. This is because by looking at the previous year performance, the organisation can actually improvise their current year budget to reach their organisation objective at the right time. The managers should also take consideration on what are the resources required to achieve the goal of an organisation, such as the human capital, direct materials, direct labours of the organisation .Other than that the effectiveness and efficiency of the organisation producing the product or providing the services to the customer also should be considered when preparing budget. If there is a lack of effectiveness and efficiency in an organisation, the managers should implement the ways to improvise their organisation’s qualities of production and services.

  1. Evaluate how budgeting can contribute to a business achieving its aims.

Budgeting can contribute to a business to achieve its aims by providing way on how to allocate and use the resources within an organisation effectively. By allocating the resources such as scarce resources, an organisation can maximize their net profit of their business by reducing their cost of expenses. For example, let say a an organisation may have a limited amount of machine hours to produce an product or service, by preparing a budget the organisation can reduce the cost of expenses such as selling cost or marketing cost.

By preparing budget it helps to control and monitor the operation of an organisation .In this case, the organisation’s budget which is their objective is being documented in financial term .So this budget is used throughout the year. When the prepared budget is used throughout the year, the organisation can get to know the performances of the organisation by comparing the budget and the actual growth of the business.

Budget can also motivate the employees in an organisation.For example,the organisation’s owner may provide a reward promotion or schemes for the employees who make higher sales or sole in the business. So this might and can motivate the employees in the organisation to work more effectively and provide more contribution to the business by increasing the sales or the profit.


  1. Explain the key differences between financial accounting and management accounting.

Financial Accounting

Key Difference

Management Accounting

External Users

-Accounting information’s are used by external users such as investors, creditors[(direct interest),suppliers and bankers)] buy judging the wisdom of buying, holding or selling their financial interests on the basic of accounting data and evaluate the risks of granting credit or lending money to particular businesses on the basic of accounting information obtained about those businesses. Income tax agency(Inland Revenue Board,IRB and Regulatory Agencies,JPN) will also use this accounting information’s.

[External people will make the financial decision]


Internal Users

-Accounting information’s are used by internal users such as management owners(shareholders),employees(managers) in planning, controlling, and evaluating business operations.[Managers who plans and control an organization]

Based on historical perspective

The accountant of the organization will relate to the past performance of business where they will use the actual result of the organization from the past year to create financial statements of the organization.

Time Focus

Focuses on future emphasis

The management accountant focuses on forecasting and decision- making.[Future and present]

Primary focus or relates to the entire organization.

Segment Reporting

Focuses on the smaller segments of an organization.

Financial accounts are supposed to be in accordance with a specific format, General Accepted Accounting Principles(GAAP).

General Accepted Accounting Principles

No specific format is designed (Formal and informal recordkeeping)

To disclose the public to show their financial status.


To help management by providing information that used by management to plan, evaluate, and control the organization to reach their target.

  1. Outline the different types of decision made in a business. Which do you think is most important and why?

The different types of decision made in a business is strategic decision,tactical decision and operational decision.Strategic decisions can help specifically to the accomplishment of normal objectives of the venture. They have long haul suggestions in the business enterprise. They may include significant flights from practices and methodology being emulated prior. By and large, vital choice is unstructured and consequently, a supervisor need to apply his business judgement, assessment and instinct into the meaning of the issue. These choices are dependent upon incomplete information of the environmental components which are indeterminate and element and such choices are taken at the larger amount of administration. While, Tactical decisions can identify with the usage of key choices. They are coordinated towards creating divisional arrangements, organizing workflows, building conveyance channels, procurement of assets. For example, men, materials and cash. These choices are taken at the centre level of administration. Operational decisions identify with everyday operations of the endeavour. They have a transient skyline as they are taken monotonously. These choices are dependent upon certainties in regards to the occasions and don't oblige much of business judgement. Operational choices are taken at easier levels of management. As the data is required for helping the director to take balanced, overall educated choices, data frameworks need to focus on the procedure of managerial choice making. Strategic decision is the most important among the three decision that is listed. Strategic decisions stands at the highest level of management in an organisation. This is because they are major choices of actions and influence whole or a major part of business enterprise.

  1. Explain what is meant by a “ratio”. Explain the purpose of the main ratios used by businesses.

Ratio is one variable measured in term of another. Ratio also can be called as ratio analysis. Ratio analysis shows the relationship among the selected items of financial statement data. For example, the relationship between sales and gross profit, relationship between net profit and average assets. Ratio also can be shown in term of percentage or rate.

This ratio analysis helps the users in an organisation to interpret and analyze the figures presented in the financial statements. The ratio analysis makes the financial statement more meaningful and useful for a person who is not trained or not well experienced users.

There are 3 main categories on ratio namely profitability ratios, liquidity ratios and solvency ratios. The profitability ratio measures how efficiently a company is utilizing its assets to generate profit. They relate to the business objectives, which is to make profit, obtain a return on investment, or collects its debts quickly. Liquidity ratios is the ratio between the liquid assets and the liabilities of a bank or other institution. It measures the availability of cash to pay the debt. Solvency ratios measures the ability of a company to survive over a long period of time.

Accounting management ratios are an effective tool to assist you in monitoring and analysing various aspects of your business. These ratios will provide you information that is essential to the business and also a warning of a possible improvement or downturn in a company’s financial situation. Financial ratios allow for comparisons between companies, industries, different time periods for one company and etc. Without ratios, financial statements are uninformative. Besides that, ratios enable financial statements to be interpreted if you compare like with like. Parties are interested in analysis include: shareholders, lenders, customers, suppliers, employees, government agencies and competitors. Successful companies generally have solid ratios in all areas. Certain ratios are examined because of their relevance to a certain sector.

  1. Evaluate the other tools used by management accountant. Which do you think is most important and why?

There are also other tools that is used by management accountants. One of it is financial statements analysis. It is the main tool of management accounting. In this tool, we collect four financial statement, which is balance sheet, profit and loss account, cash flow statement and fund flow statement. It is a systematic analysis and interpretation of data as revealed in the balance sheet and income statement to the management for determining the liquidity, solvency and profitability.

Second is budgetary control. It is an essential tool used in the process of controlling and planning. It is helpful in bringing economic to the business. We make budgets for planning and control of fund to achieve the best possible profits. Besides that, decision accounting is one of the management tool also. It is helpful in taking main decisions and throughput accounting is the extension of decision accounting. TA is a principle-based and comprehensive management accounting that provides managers with decision support information for enterprise profitability improvement. It identifies factors that limit an organization from reaching its goal. It focuses on simple measures that drive behaviour in key areas towards reaching organizational goals.

I think the most important tool used by management accountants is budgetary control. Budgetary control help the business to identify where it will incur costs and where the revenues are from. Budgetary control known as a profit plan which a budget can help us plan direct management, purchases and sales, and motivate employees. To begin the budgeting process, it is vital to start with the level of sales that is expected over the budgeting period.