Question

What problems are there with budgetary accounting?

Answer 1

The problems associated with Budgetary Accounting are as follows:-

1. Inaccuracy- A Budget is based on various assumptions that are generally persisting with in an organization. IF the Company's cost or revenue structure changes significantly it will also make the variances of actual results from those that were budgeted of. In this condition budget somehow becomes less realistic.

2. Time Consuming - The process of entire budgeting process is a very cumbersone process especially in the organisation where the internal control structure is poor and it is moreover difficult to budget in an organization whose Dynamics are constantly changing making budgeting iterations difficult.

3. Expesnes Allocation - The budget allocates the estimated cost to the various departments . It mostly happens that department managers are not happy with the cost allocation methods used to allocate costs and it creates organisational chaos.

4. Focus on Only Quantitative Terms - Budgetary Accounting focuses more on achieving higher profit for the company and ignoring the qualitative aspects that are relevant from the customers point of view making the budgeting an entire process focusing on numeric terms.It is moreover difficult to include qualitative aspects in budgeting.

5. Window Dressing of Data- Sometimes financial experts and managers try to create a budget slack by deliberately increasing the budgeted revenue and reducing the expenses which shows a better figure in comparison to actual results creating a data slack. This itself is a very big problem as it hides the true position and inflates the financials of the company.