Part I
Today, it is very vital for corporate organizations and also smaller and large business to have a budget plan on which they run. Many companies, especially the publicly traded ones, have come out to announce their budget after every financial year. Having a budget has proved to be a great way of planning on the future companies. This paper looks at how management and budget activities contribute to a company so as to ensure optimal performance and the realization of the set company goals.
A company’s managerial strategy is very determinant of its result on a long term or short term basis. It founds the base on which the enterprise operates on. One such management strategy is the activity-based management (ABM). ABM is a management strategy that aims at first identifying then evaluating the activities that are carried out in a certain business environment (Taschner & Charifzadeh, 2016). This is realized through the use of activity-based costing (ABC). ABC is a far much-preferred way of allocation because it conducts a general chain analysis of production activities, comes up with a cost for those activities, and uses that data to determine the cost of the products (Activity Based Costing, 2016). It provides accuracy regarding costs of production and costs of products. Again, it helps in decision making within an organization because all spending is documented thus making it easier to realize flaws on wasteful spending (Activity Based Costing, 2016).
Delegate your assignment to our experts and they will do the rest.
ABC is characterized by some activities. It first identifies costs that are to be allocated (Activity Based Costing, 2016). From there, secondary and primary cost pools are loaded. Secondary cost pools are those that are realized when other services are being provided to other areas of the company that are not directly aligned to production (Activity Based Costing, 2016). Primary costs are costs that are incurred from activities that correlate with the manufacture of goods (Activity Based Costing, 2016). After an analysis of this done, costs are finally made to products. A report is then prepared for the purpose of managerial reviews which presents a budget on which the company is expected to run on.
Most of the companies that use ABC are those involved in manufacturing, construction, and healthcare provision. In such companies, customer needs mostly dictate the overhead and selling costs (Taschner & Charifzadeh, 2016). This makes it crucial to ensure that a value chain analysis is conducted all through an organization through the use of ABC. One such company that has used ABC over the years is General Motors (GM). It is an American multinational corporation that is located in Detroit, Michigan. The company is a designer and manufacturer of vehicles which places it in the manufacturing industry. They adopted the use of ABC in 1986 and by 1993 had already fully implemented it. This way, they could be able to regulate their expenses on production reducing cases of misspends and determine the right product prices. The incorporation has turned out to be a successful undertaking as GM has grown tremendously over the years.
Part II
Preparing of a budget is equally important in an organization. It allows the company to have ultimate control over its finances (Weygandt, Kimmel & Kieso, 2009). They can see how they grow regarding profit generation over the years and also be able to determine what amounts of cash to return to the business. It also helps to maintain focus on the goals of the organization while making way for the setting of new ones (Weygandt, Kimmel & Kieso, 2009). It lays out a master plan of how money is spent in an organization ensuring that there is no misappropriation of funds. It is used a control function in organizations because it gives an overview of a particular organization. It affects areas like resource allocation, where the most profitable ones are prioritized (Weygandt, Kimmel & Kieso, 2009). It also prepares the company in the case of unforeseen changes in its environment.
Traditionally, planning and control were done through variance analysis. Variance analysis refers to the difference in actual result from the planned or expected result. It is advantageous in that it offers a great measurement of performance (Weygandt, Kimmel & Kieso, 2009). Advanced variance is viewed as an indication of poor performance where else favorable variance is seen as a sign of positive growth. Additionally, variance accounting also makes managers and workers accountable for their actions (Weygandt, Kimmel & Kieso, 2009). This is because it is conducted on a departmental basis. Each department comes under scrutiny for its overall performance, and those charged with it are directly answerable for results realized.
However, variance analysis is not fully dependable to give accurate merits, especially on both performance assessment and accountability. It is possible for an enterprise to incur smaller unrecognizable losses that could amount to costly mistakes. Raw data obtained from variance analysis can be costly especially when used in decision making without fundamental research. For every variance noted, research should be conducted to determine the cause before any crucial decisions are made.
I would therefore not refer to the use of variance analysis as a measure of performance. There are far much better ways of measuring the performance of an organization to ensure qualitative inputs and outputs. The use of KPIs and balanced scorecards have proved to be quite progressive as compared to variance analysis (Weygandt, Kimmel & Kieso, 2009). They monitor how well strategies of an organization are implemented and how effective they become to an organization.
In conclusion, the management strategies put in place in any organization greatly influence its overall performance. They contribute a great deal to ensuring that optimal performance is reached from a contributive work-force effort of all those that are involved. Further, companies that engage in the manufacturing industry, or rather companies that are greatly influenced by customer need should always advocate for the implementation of ABC. It ensures that they maintain a balance in their input as well as their output.
References
“ Activity Based Costing.” (2016). Accounting Tools . Retrieved 17 January 2017 from http://www.accountingtools.com/activity-based-costing
Taschner, A. & Charifzadeh, M. (2016). Management and Cost Accounting . New York, NY: John Wiley & Sons, Inc.
Weygandt, J. J.; Kimmel, P. D. & Kieso, D. E. (2009). Managerial accounting: Tools for Business Decision Making. New York; NY: John Wiley & Sons, Inc.
