Budgeting in management accounting is one of the most important tasks. Many types of budgets are in this discipline. Standard, flexible, and master budgets are all part of the management accounting process. Tips for budgeting in management accounting include using previous year’s figures, creating a participative budgeting environment, and conducting a variance analysis. Large organizations often have several individuals involved in this process, with each individual working a specific part.
A baseline is necessary for budgeting in management accounting. For example, standard budgets require the use of previous year’s figures to create the predetermined manufacturing overhead rate. Management accountants need to keep accurate records for all production cost records. Each piece needs to measure a specific part of the production cost process so accountants can properly account for all costs necessary to create the budget. Accountants can also review the production process to determine what new costs may affect the upcoming budget.
Participative budgeting is a particular type of process a company can use when creating a budget. The purpose of this process is to include all managers at various levels in the organization when working through the budget process. This allows for more input when budgeting in management accounting. In theory, the more managers involved will create a better budget than leaving these individuals out of the process. Additionally, the budget should have a higher acceptance rate from managers when they all have input into the process.
Another necessary process for the budgeting in management accounting process is variance analysis. This compares the budgeted figures to actual production figures at a time later in the year. The purpose here is to determine how well the budget actually portrayed future expected costs. In some budgets, management accountants need to adjust the accounting books for any residual cost found during the variance analysis process. Management accountants review the accounts and then move residual costs to the cost of goods sold account, clearing the production accounts and creating records for future budgeting processes.
One flaw when budgeting in management accounting is budgetary slack. This slack occurs when a manager indicates he or she needs more money to complete the production tasks under his division. A problem with this occurs when the manager comes in under the budgeted cost due to this inaccurate figure. His or her division looks better because it came in under budget; however, the inaccurate cost made this possible. Executives need to watch for this slack and prevent it in order to eliminate budget distortions.
