Monday, March 2, 2009

Concepts of financial budgeting

Concepts-regarding Budget are those which helps even a layman, to realize the various budget-related terminologies, as well as the their true meanings. These important concepts regarding budget are basically financial terms which facilitate a better understanding of the budgetary matters. Some of the most important ideas regarding budget are stated and briefly illustrated below:
Budget Deficit: This is a common economic term, normally used to indicate a situation when the expenditures on governmental levels surpass its financial savings. As a matter of fact, Budget Deficits occur when the government does not plan its spendings, after considering the total amount of money it has saved. In case there is a prolonged accumulation of Budget Deficit for several years or centuries, it gives birth to an economic phenomenon called Government Debts. When a country suffers from Government Debts, a considerable portion of the government spendings are then used for the repayment of these debts, having certain maturity. This maturity however, can be re-funded through issuing government bonds. In fact, Budget Deficit is regarded as a flow, while the Government Debts are considered to be stocks. Government Debts are just a aggregate flow of the Budget Deficits. The definition of budgetary deficit essentially follows from that of the Governmental Debt. While the Government Debts are defined as the total amount of money owned by the government, Budget Deficit indicates the amount by which a savings escalates or a Government Debt grows.
Budget Crisis: This indicates a situation where both the executive and the legislature in a Presidential system of government comes to a standstill, and unable to pass a financial budget. This is a common feature of most Presidential form of governments across the world, where only the legislature has the power to pass a financial budget. However, the executive is also empowered to pass a veto, which consists of inadequate votes, sufficient to overrule the decisions taken. The case is somewhat different in a Parliamentary form of government, where the rise of conditions like loss of supply leads to resignations and making of new elections. This however, makes a Budget Crisis to attain the form of a lengthy disagreement and argument. Budget Crisis also emerges when the legislature possesses a suspension date authorized by the country's Constitution, and the financial budget is not passed till the date specified.
To know more on Important Concepts regarding Budget please see the following links:
Budget Planning
Budget Deficit
Budget Surplus

Management accounting

Management accounting- is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.
In contrast to financial accountancy information, management accounting information is:
usually confidential and used by management, instead of publicly reported;
forward-looking, instead of historical;
pragmatically computed using extensive management information systems and internal controls, instead of complying with accounting standards.
This is because of the different emphasis: management accounting information is used within an organization, typically for decision-making.
Definition
According to the Chartered Institute of Management Accountants
(CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its Resource (economics)resources. Management accounting also comprises the preparation of financial reports for non management groups such as shareholder's, creditor's, regulatory agencies and tax authorities" (CIMA Official Terminology) The American Institute of Certified Public Accountants(AICPA) states that management accounting as practice extends to the following three areas:
Strategic Management—Advancing the role of the management accountant as a strategic partner in the organization.
Performance Management—Developing the practice of business decision-making and managing the performance of the organization.
Risk Management—Contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.
The Institute of Certified Management Accountants(ICMA), states "A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking. Management Accountants therefore are seen as the "value-creators" amongst the accountants. They are much more interested in forward looking and taking decisions that will affect the future of the organization, than in the historical recording and compliance (scorekeeping) aspects of the profession. Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc."
Aims
Formulating strategystrategies
Planning and constructing business activities
Helps in making decision
Optimal use of Resource (economics)
Supporting financial reports preparation
Safeguarding asset
Traditional vs. innovative management accounting practices
In the late 1980s, accounting practitioners and educators were heavily criticized on the grounds that management accounting practices (and, even more so, the curriculum taught to accounting students) had changed little over the preceding 60 years, despite radical changes in the business environment. Professional accounting institutes, perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations, subsequently devoted considerable resources to the development of a more innovative skills set for management accountants.
The distinction between ‘traditional’ and ‘innovative’ management accounting practices can be illustrated by reference to cost control techniques. Cost accounting is a central method in management accounting, and traditionally, management accountants’ principal technique was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period.
While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing, which are designed with specific aspects of the modern business environment in mind. Lifecycle costing recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product lifecycle (i.e., before the design has been finalised and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the product. Activity-based costing (ABC) recognizes that, in modern factories, most manufacturing costs are determined by the amount of ‘activities’ (e.g., the number of production runs per month, and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. Activity-based accounting is also known as Cause and Effect accounting.
Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events (such as machine breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs, such as the provision of a service or the production of a product component.
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An alternative view of management accounting
A very rarely expressed alternative view of management accounting is that it is neither a neutral or benign influence in organizations, rather a mechanism for management control through surveillance. This view locates management accounting specifically in the context of management control theory.
Lean Accounting (accounting for lean enterprise)
In the mid to late 1990s several books were written about accounting in the lean enterprise (companies implementing elements of the Toyota Production System). The term lean accounting was coined during that period. These books contest that traditional accounting methods are better suited for mass production and do not support or measure good business practices in just in time manufacturing and services. The movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn, MI. 320 individuals attended and discussed the merits of a new approach to accounting in the lean enterprise. 520 individuals attended the 2nd annual conference in 2006.
Resource Consumption Accounting is formally defined as a dynamic, fully integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. RCA emerged as a management accounting approach around 2000 and was subsequently developed at CAM-I the Consortium for Advanced Manufacturing–International, in a Cost Management Section RCA interest groupin December 2001. After spending the next seven years carefully refining and validating the approach through practical case studies and other research, a group of interested academics and practitioners established the RCA Institute to introduce RCA to the marketplace and raise the standard of management accounting knowledge by encouraging disciplined practices.