Behavioral Implications of a Master Budget in Managerial Accounting
Original post by Marilyn Lindblad of Demand Media
Managerial accounting focuses on reporting detailed financial data to internal management. A company prepares a master budget so it can forecast its cash flow for the coming fiscal year. The budget is the company's managerial accounting plan to meet its financial needs. Establishing and following a master budget is a disciplined approach to business that fosters strategic thinking and encourages fiscally responsible behavior.
Commitment to Cost-Cutting
Employees who understand the budget are more likely to be cost conscious and try to conserve resources. Communication about the budget is the key to getting employees to commit to follow it. An organization that publishes its budget and discloses how actual expenses compare to budgeted expenses as the fiscal year progresses provides transparency in the budgeting process. Informed employees understand how their spending fits into the big picture. For example, if the company asks the workforce to cut expenses so it can meet a fiscal goal, employees who are engaged in the company's goals are likely to join in the effort and hold off on discretionary purchases.
A master budget forces managers to think ahead, to anticipate results and to take action to change course when needed. If an overseas factory misses a shipping deadline, for example, management must decide whether to ship the products via air freight and blow the budget or use less expensive methods and miss delivery commitments. A budget crisis challenges a manager to find creative a solution. Rather than pay high air freight, a company might shift inventory to meet some of its delivery commitments and offer discounts on late deliveries to soothe customer relations.
Managerial accounting may also lead to competitive behavior within the company. As strategic planners socialize the budget throughout the organization, managers and departments begin competing with one other for scarce resources such as headcount and office space. Some businesses redirect the competitive energy into healthy rivalries by sponsoring contests among departments with prizes for coming in at or under budget.
The transparency inherent in managerial accounting motivates individuals to count the true cost of every phase of the business. Managerial accounting encourages the business to account for intangibles such as environmental and reputation costs. These costs can be difficult to quantify, but companies that attempt to manage them experience gains as they garner positive attention for being responsible corporate citizens. The company's enhanced reputation attracts top talent, and the entire organization benefits.
- Accounting Principles; Roger H. Hermanson, et al.; 2005
- EPA; Accounting and Capital Budgeting for Environmental Cost Workshop; December 1993
About the Author
Marilyn Lindblad practices law on the west coast of the United States. She has been a freelance writer since 2007. Her work has appeared on various websites. Lindblad received her Juris Doctor from Lewis and Clark Law School.