ACCOUNTING FOR DECISION

MAKERS
Coursework

University of Sussex
Yuxing
Table of Contents
I. Introduction .............................................................................................................. 3
II. Importance of management accounting ................................................................... 3
III. Application of management accounting in making decision, planning and
controlling ........................................................................................................................ 4
IV. Conclusion ............................................................................................................ 6
Reference........................................................................................................................ 7

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 I. Introduction
Businesses now have to face various challenges from constantly evolving business environment,
which can significantly impact business performance both directly and indirectly. To survive and
grow sustainably, firms have to optimize its business operation to minimize cost and improve its
profitability. One of the key factors of driving business success is that can assist firms in making
the right decision and improving its operational efficiency is to have an effective management
accounting system. Such system is a helpful tool for management team in term of management
procedure, which is helpful for firms to plan, organize, control its operational activities and to make
decision. According to Sprinkle (2003), management accounting can be exploited to promote
quality of business decisions. Thus, this essay aims to validate the impact of management
accounting technique, particularly budgeting, on business planning, monitoring and decision
making.

II. Importance of management accounting

Decision making is a comprehensive and prudent procedure that takes into account all opinions
and interests of relevant parties, from which an optimal solution is derived (Shapira, 2002).
Greenberg and Baron (2008) claims that decision making is one of the most important manager’s
activities, which can be defined as the procedure of choosing among different possibilities. The
success of decision making process is highly dependent on the management reports (Axson,
2010). As decision-making is a complicated action towards unpredictable future, firms need to
have both capability and in-house system that support their decision (Burstein and Holsapple,
2008). Additionally, managers need to have competent knowledge on analyzing accounting
information to understand the financial impact of their decisions.

Management accounts are perceived to bring lots of benefits to managers to achieve business
objectives and to support managers in making strategic decisions. The International Federation
of Accountant describes management accounting as a process of classifying, measuring,
collecting, interpreting data and communications (IFAC, 1998). Such process aims to plan and
control resources efficiently, which is a crucial part of business management (Chenhall, 2003).
According to Romney and Steinbard (2003), accounting system is an element of financial
management that has the following impacts: control business activities, plan for future activities,
manage resources, monitor business performance, make decision and improve business
communications (IFAC, 1998; Libby and Waterhouse, 1996). Management accounting is built to
generate financial information for internal decision-makers, in term of expenses, sales, profits or

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other performance indicator (Alleyne and Marshall, 2011). According to Akintoye (2008), making
decision and controlling is the most prominent purpose of management accounting in the U.S and
the UK during industrial revolution. Seliem et al (2003) suggests that, through such management
accounting system, righteous decisions can be made to reinforce business growth. Sulaiman et
al (2004) also agrees that management accounting promotes firm’s capability to reach its goals.
Additionally, business sustainability can be achieved by exploiting accounting information
(Chenhall and Morris, 1995). Management accounting, thus, is an essential tool to support
managers in making informed decisions based on financial data to optimize resources and
promote its business performance (Gerdin, 2005).

III. Application of management accounting in making decision,

planning and controlling
Among different management accounting techniques, budgeting is perceived as one of the most
prominent tool for management purposes (Pietrzak, 2013). In budgeting technique, different
departments within an organization will forecast both business expenses and income in normal
business environment (Suberu, 2010). Budgeting is commonly applied to control internally as it is
a useful platform for allocating resources. Through budgetary control, firms can develop its
expenditure plan and compare actual spending with its original scheme to decide its upcoming
actions to meet its financial targets. According to Carr (2000), controlling budget is a crucial
process of implementing budget in firms. The budgeting technique is widely applied to manage
firm’s spending patterns, in both public and private sectors (Dunk, 2011). Similarly, Epstein and
McFarlan (2011) also claims that budgetary control is a handy technique to plan for the future.
Drury (2008), Atrill and Mclanye (2009) suggest that budgeting is an essential part of business
management. In order to succeed, firm needs to visualize its plan to achieve the target.
Afterwards, the expense of such plan has to be estimated so that the optimal solution can be
achieved. These steps could clearly be completed by using budgeting.

While the role of management accounting is undeniable, it has to adapt to the constantly evolving
business environment to be effective. Different types of budgeting techniques have been
developed to serve business purposes, such as activity based budgeting, balance scorecard,
zero-based budgeting, value budgeting and vice versa. While budgeting is a popular technique
for most firms and has been constantly developed to meet business purposes, there are various
arguments against the application of budgeting. One of the main reasons for ignoring budgeting
is that budget is perceived as a type of performance guarantee, which can eventually lead to

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various disadvantages. First, based on budgeting, firms will only aim to achieve the minimum goal
while resources could be wasted if the budget is not done precisely. Additionally, budgeting can
result in internal competitions across different departments in achieving the budgeted targets,
which makes people aim to sacrifice everything to gain bonuses. This can also result in employee
dissatisfaction as employees feel undervalued. Pilkinton and Crowther (2007) claimed that stop
budgeting is more beneficial for firms. Similarly, Dugdale and Lyne (2006) suggests that firms
should use other techniques rather than budgeting. Hope and Fraser (2001) also argued that
inaccurate forecast can lead to severe issues that prevent firms from operating efficiently in global
market. They argue that to operate and compete effectively, firms need to have a flexible
monitoring system rather than budgetary control. Study by Ekholm and Wallin (2010) shows that
there are certain budgeting issues such as incompatibility with business strategy, lack of
adaptability with evolving business environment, time-consuming and high cost issues. Thus,
budgetary control is low value-added while its ability of measuring performance is restricted and
imprecise. Nevertheless, the main underlying problem of budgeting is the divergence between
business strategy and company’s budget (Hope and Fraser, 1999). Such issue is caused by the
separate of responsibility between strategic management and budgeting across departments in
the firm.

Such criticism raised attention of other scholars and practitioners on the benefits of budgeting.
Dugdale and Lyne (2006) claims that all previous criticisms were derived from banking industry.
Thus, such conclusions may not be applicable for other types of businesses. They also reaffirm
the benefits of budgeting in planning, monitoring and measuring performance. Although there are
certain disadvantages of budgeting such as time-consuming and inflexibility, such constraints are
inadequate to abandon budgetary control completely. Similarly, Alawattage and Wickramasinghe
(2007) also agrees that budgeting activities cannot be replaced but managers should improve
budgeting techniques. In another study by Horngren et al (2008) in North America, it was shown
that budgeting contributes considerably to management activities as 92% of 150 North America
companies would rank budgeting among the top three management techniques. Research by
CIMA (2004) also claimed that 99% of firms in the EU adopt budgetary control. Other studies in
the developed countries such as the UK, Scandinavia, Australia, Japan and USA also reinforce
the importance of budgeting techniques in business planning and decision making (Ekholm and
Wallin, 2010; Bourne, 2004).

Various studies afterwards suggest that budgeting’s weakness can be mitigated by creating the
budget in line with corporate strategy, which can result in more effective planning and remove low

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value-added jobs (Vaznonienė and Stončiuvienė, 2012). As a result, different types of budgeting
such as beyond budgeting and activity based budgeting. More recent study also shows that lots
of firms have applied a more modern approach to budgeting rather than traditional budgeting.
Libby and Lindsay (2010)’s study of 346 companies in North America market shows that 15%
companies have applied beyond budgeting method while 46% of firms intend to improve its
budgeting system in the near future. While Libby and Lindsay (2010) supports Activity Based
Budgeting technique, other researchers such as Pilkington and Crowther (2007), Mitchell (2005)
recommends beyond budgeting techniques, which were also applied in large corporates including
Ford, Shell and vice versa.

IV. Conclusion
Undeniably, management accounting takes a crucial role in providing critical financial information
for managers to make decision, plan for future and control its business activities. One of the most
popular management accounting techniques, budgeting, is an important tool that devotes to the
business success. In such constantly changing business environment, the efficiency of
management accounting systems is also affected, lead to the lack of appropriateness of traditional
budgeting technique. Since budgeting is a crucial tool for management, various budgeting
techniques have been developed such as beyond budgeting, activity based budgeting to meet
business demand. Thus, budgeting should not be abandoned completely and firms should choose
the most appropriate management accounting tools to best serve its strategic management and
business performance.

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