Budgeting as a form of management control Essay

Budgeting as a form of management control - Essay Example Budgeting is a very useful tool in businesses. The benefits to be gained from budgeting are numerous and are available to all companies inclusive of Production Solutions Ltd. It ensures the achievement of the organisation’s objectives (BPP 1998) by forcing managers to carry out an assessment of what may happen in the future and set detailed plans for achieving the targeted results for the functional departments in the organisation. It also takes into consideration the problems that are likely to be encountered. Budgeting communicates ideas and plans (BPP 1998) so as to ensure that each employee that is affected by the plan is aware of his or her role in helping the organisation to achieve its goals. Communication can either be two-way or one-way. Two-way communication allows for dialogue until an understanding exists of what exactly needs to be done. One way communication takes place when management gives instructions or orders to subordinates to perform a task.Budgeting can a lso coordinate activities among the various departments at Production Solutions Ltd to ensure that there is full integration of the efforts to achieve the goals that have been set. In this respect the sales expected will be communicated in the sales forecast and the production department will base its production plans on the sales forecasted. The purchasing department will plan its purchases based on the amount of buffer stock it needs to maintain at all times and in conjunction with the production plan. Budgeting can provide a framework for responsibility accounting (BPP 1998) by making the different functional departments or budget centres at Production Solutions Ltd responsible for achieving their plans for the operations under their control. Budgeting can also establish a system of control by way of managers comparing the actual results with the plan (BPP 1998). Any deviation from the plan needs to be investigated and appropriate actions taken to close the gap between the result s and the plan. Additionally, budgeting can be used to motivate employees to improve their performance by offering them rewards if they meet their targets. BPP 1992 suggests that two levels of attainment should be set so as to challenge employees. â€Å"A minimum expectations budget and a desired standards budget which provides some sort of challenge to employees†. The appraisal system lets them know how badly or how well they are doing and what they can do to improve performance if they are performing below standard. The cash budget will indicate cash surplus and cash requirements. Therefore, management can make decisions on how to address the shortfall where this exist. The cash budget for the Company suggests that it may not be a good idea to carry out the plans noted as it could place the company in a worse position than it is in currently. The increased sales and the resultant changes in the credit terms will affect the profits and the cash flow position respectively. At tention should be placed on preparing a master budget which will link or integrate the various functions in the organisation. A master budget is an essential management tool that communicates management’