“The traditional budget is a rigid tool and therefore be discarded in practice”. Should the traditional budgetary model be abandoned as suggested above?

Introduction

What is budget and budgeting?

Budget is a financial plan, which is tailored individually for each entity covering specific future period of time and which enables to determine manager’s targets and to predict the consequence of that specific financial period (Langfield-Smith, et al., 2006). Budgeting has been recognized as one of the most significant concepts used for planning and controlling organizations performance since the early 20th century. As a process, budgeting comprises of a set of activities and procedures that undertake the development of a budget. Budgets are used by corporations to serve various operational and functional purposes that include facilitating in planning process, predicting future development, simplifying communication, allocating resources, motivating employees and controlling operations. The process is effectively completed through the evaluation of performance indicators and incentives (Weber & Linder, 2005). Consequently, organizations recognized budgets as a key element in management control systems (Libby & Lindsay, 2007).

Background and definition

From the 18th to 20th century, traditional budgeting has set a range of common goals and institutions. It can be defined as “an annual, incremental, conducted on a cash basis in the form of line items which serves a purpose of accountability, control in many senses, pursuit of efficiency or effectiveness, economic management and planning.” (1978; 502 cited in White, 1998). From the early 20th century, budgeting has been recognized as one of the major management tools that is widely adopted and used by companies in the United States, such as General Motors, and in Germany by companies such as