Management Accounting Fundamentals

Management Accounting Fundamentals

1. Introduction

Due to the trend in favor of increased participation that organizations all around the world are following, there is also a distinct pressure for allowing employees to participate in key decision making efforts of the organization. Budget formation and monitoring is one of the most important financial decisions of any business. Employees are increasingly active in the process. There are many reasons why organizations encourage their employees to actively participate in the formation of budgets. This participation allows for a number of advantages that work in the best interests of the organization as a whole.

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i. Better Understanding of Tasks and Targets

If employees are encouraged to participate in the budget formation, they will have better understanding of their tasks and targets (Parker & Kyj, 2006, pp.27-45). This means that they will be informed beforehand about what is expected from them. When an employee knows his tasks and is knowledgeable of the criteria that he/she has to meet, he may have a clear focus and sense of direction when he works. This clarity will increase the degree of certainty in the work place, hence increasing motivation. Many different works of literature support the idea that availability of information regarding job targets in monetary terms not only gives a clear focus, but also helps in increasing work performance.

ii. Setting of Attainable Goals

Only an employee would know what is attainable for him or her. In many instances, senior managers may decide for other people working under them with the hope that they would be able to meet their targets. However, this approach is often inaccurate as many employees find it next to impossible to reach those targets, which are often seen as unrealistic. Chong & Johnson (2007, pp.3-19) suggested that if employees participate in the drawing up of the budget, they will be able to formulate realistic and attainable targets for themselves which are also challenging. This is a great advantage of participation in the budgetary process, because it decides the fate of the tasks and targets to be met.

iii. Positive Attitude towards the Budget

Some authors suggest that if the employees actively participate in the formation of the budget, they will have more confidence in the fairness and relevance of the budget. They will view their targets as being realistic and attainable, as Subramaniam & Mia (2001, pp.12-29) put it. This is because employees were themselves active participants of the process, thus they perceive the budget as their own production and feel more compelled to fulfill the targets and expectations that have been drawn for them by themselves. They will have more confidence in the budgetary targets set for them and will show a positive attitude. This will increase their motivation levels and will also reflect well on the overall organizational morale and performance.

iv. Lesser Resistance to Change

Budgets are an important component of organizational change. The first effects of change will show on the budget. One important example is of cost-cutting practices that organizations adopt during times of recession. Cost-cutting has its impact on the budget, which obviously shrinks and this means major change for everyone. In such a case, where the whole organization is affected by change, it is important to involve the employees in the process that creates the change: the budget formation. Authors, like Shields & Shields (1998, pp.49-76), believe that if employees have participated in making the budget, they will be less resistant to change.

 v. Innovation is Encouraged

Budget formation is a stringent and long process. It may become very repetitive with time and may lose its effectiveness if it cannot change according to the changing environmental conditions. By employing the ideas given by a range of people from different backgrounds, educational experiences and other situational factors, the chances of incorporating new ideas and helping the organization become more agile and resilient increases. Innovation is often seen to increase in organizations that encourage employee participation in budget making, as is the view of (Dunk, 1995, pp.75-85).

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Author: Chris