Nama : Sri Widiawati

Kelas : 3 Akuntansi A
NIM : 155111027
Mata Kuliah : Bahasa Inggris Akademik

WHY COMPANIES NEED BUDGETS

When people hear about budgets, they are often overwhelmed with negative
emotions. In personal life, budgets usually mean restraining yourself from buying
what you want (though, at the same time, it means buying what you want in a long
run). In business settings, budgets often mean a long and painful process of
estimating future sales, expenses, headcount, and so forth.

But let us look at the positives of budgeting. There are many great outcomes from
budgeting; and let’s be honest, if budgets were to result only in wasted time and
energy, companies would not be using them.

Several reasons budgets can be used by companies are as follows (and this list is
not all inclusive by any means):
1. Operational planning: budgets are used to prepare and monitor operational
plans.
2. Performance evaluation: budgets are used to evaluate performance of
departments, divisions and other discrete units, employees or groups of
employees.
3. Communication of goals: budgets are used to inform involved parties about
goals (leadership to subordinates, subordinates to leadership, or
subordinates to subordinates).
4. Strategy formation: budgets are used to form strategies.
These four reasons to prepare budgets are analyzed in a research paper titled
“Multiple facets of budgeting: an exploratory analysis” Management Accounting
Research 2004.
2. Importance and perceived performance of reasons to budget

The research authors surveyed 57 managers responsible for preparing budgets in

their companies. Surveyed companies were quite large (i.e., mean annual sales
were about $1.0 billion).
As part of the survey, the authors looked at the (a) importance and (b) perceived
performance of reasons to use budgets. For example, how important is
communication of goals as a reason to use budgets would be the importance
factor. And how good of a job a budget does in communicating goals is the
perceived performance factor.

Some notable findings related to the importance and perceived performance of

using budgets:
1. The mean number of iterations to finish unit budgets was 4.25 (standard
deviation of 3.72, low of 1 and high of 5). This is quite a bit of iterations
especially when one considers extreme cases. Note that performance of
Nama : Sri Widiawati
Kelas : 3 Akuntansi A
NIM : 155111027
Mata Kuliah : Bahasa Inggris Akademik

budgets for operational planning was shown to decrease with higher

numbers of iterations.
2. The mean extent to which unit’s management participated in setting
budget targets was 3.88 (standard deviation of 0.87, low of 1 and high of
5). This indicates that in a fair amount of instances, unit’s management gets
an opportunity to participate in establishing budget targets. Another
notable finding is that performance of budgets for performance evaluation
purposes increases with the increase in management’s participation in
setting budget targets.
3. The mean number of the difficulty to achieve budgets was 3.39 (standard
deviation of 0.73, low of 1 and high of 5). This implies that a lot of survey
participates felt their budget targets were hard to achieve.
4. 77% of respondents did not use rolling budgets (i.e., where budgets are
extended to the next period after the current period has been passed; this
process happens on a continuous basis). 62% of those who do use rolling
budgets (that’s the remaining 23%) used three months as the rolling
period. Interestingly, performance of budgets for operational planning
increases with use of rolling budgets.
5. Organizations with more easily traceable resources to final products use
budgets for performance evaluations. At the same time, competition
reduces the use of budgets for performance evaluations (i.e., companies
facing more competition don’t use budgets for this purpose as much due to
higher uncertainty in achieving budget targets).
6. Companies that have a job shop environment or higher interdependency of
production processes use budgets to communicate goals to a higher
extent. The same is true for companies facing more competition.
7. Companies use budgets for strategy formation when they are
divisionalized, have a differentiation strategy, and have a job shop type and
competitive environments.
Nama : Sri Widiawati
Kelas : 3 Akuntansi A
NIM : 155111027
Mata Kuliah : Bahasa Inggris Akademik

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