Question

Many managers complain about the budgeting process. They claim it takes too long, requires too much management time, encourages managers to “pad the budget” because of uncertainties, and creates unnecessary tension among managers. As a result of these charges, some managers and business leaders have called for an abandonment of traditional budgeting practices. However, regardless of budgeting’s failures, it continues to be widely used across all types of businesses and not-for-profit enterprises. One reason for the continued use of budgeting is the belief that a competent management team can plan for, manage, and control in large measure the relevant variables that dominate the life of a business. Managers must grapple with uncertainties regardless of whether or not they have a budget.

Do these complaints create costs for organizations? If so, why do organizations continue to use budgets?

Answer 1

Yes; these create costs.

Budget is the accounting of future periods, for which data are collected on estimation.

There are so many complaints against budget, like time consuming, huge involvement, expenses, etc. but still there are some benefits to be continued with the budget; these are as below:

1) Planning: It helps for future planning. Suppose a specific plan has been taken, like expansion in a project; the association of costs and revenue generation could be understood through the budget. If it is not done, the plan would be worthless.

2) Performance: It helps to evaluate performance. If a budget is drawn, the actual performance could be compared very easily. Suppose standard costing approach might be taken for calculating variances; in such case, material cost could be verified; if actual material cost is lower than the budgeted one, the variance would be favorable.

3) Fund arrangement: Budget helps to understand how much money is required in coming years; the management should be in process for arranging such funds now. This is very necessary for continuous operation.