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BUDGETING AND BUDGETARYCONTROL IN BUSINESS ORGANISATION.
(A CASE STUDY OF EMENITE NIGERIALIMITIED EMENE ENUGU BRANCH)
BYAGU CHIKA E.ACC/2006/244
A PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTANCY, FACULTY OF MANAGEMENT AND SOCIAL SCIENCES,
CARITAS UNIVERSITY.
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF
BACHELOR OF SCIENCE (B.SC.) DEGREE IN ACCOUNTING
JULY, 2010.
APPROVAL PACE
This is to certify that this research work has been
carefully assessed and approved as having met the partial
requirements of a Bachelor of Science (B.SC.). DEGREE IN
accounting, from the department of Accountancy Caritas
University, Enugu State.
--------------------- -------------------MR. C.C UGWU DATESUPERVISOR
---------------------------- -------------------MR. C.C UGWU DATEHOD
---------------------------- ------------------ETERNAL EXAMINER DATE
DEDICATION
This work is dedicated to the Almighty God, for his grace
and loving kindness.
I also dedicate this work to my dearest parents; Mr. and
Mrs. F.U AGU for their immeasurable support and my beloved
siblings; Collins, Ogo, Ify, Oluchi, Esomchi and Chinazom.
ACKNOWLEDGEMENT
When kindness cannot be returned, it should be
appreciated. A number of people have helped to make this
project research and writing a successful one. So their kind
genure ought to be appreciated.
My most sincere gratitude goes to my supervisor Mr.
Collins Ugwu who took his time in the in depth supervision of
this work and who made sure that this project came to a
successful and smooth completion. And also for his utmost
contribution towards the fulfillment of my dreams of
becoming a certified accountant.
My profound gratitude also goes to my lecturers who
have taught me over the years; Mr. P Nsoke, Mr. Frank Ovute,
Mr. Chinedu Enekwe, Mrs. Eyisi, Mr. Ezeamaama and so many
others whom I did not mention, I am very grateful to you all.
I cannot forget the, the immense contribution of my
dear parents and siblings both financially and otherwise, you
will live to eat the fruit of my labour.
Then to my most wonderful friends who were always
there with encouragements and advice Adaobi Muoghalu,
Loveth Ugwu, lorita Anike, Anya Uduma, Oguejiofor Ani,
Ikechukwu Agu, and others. You will never be forgotten.
Above all I thank the Almighty God for keeping his words in
life.
Thank you and God bless you all.
ABSTRACT
This research work conducted with special reference to the budgetary system of Emenite Nigeria Limited with the view to ascertain the major role budgets play in the achievement of profitability for an organization. Budget as a profit planning device sets standards of performance of manager, while budgetary control is a tool implored by management to keep track of actual performance to ensure budgeted standards are achieved. In the course of this research work 40 managers were taken as sample population. Data is obtained through personal interview and the administration of questionnaires secondary data source is also implored. Data collected in subject to chi-square test in order to prove or disprove hypothesis therein. The analysis of the finding indicates that Emenite Nigeria Limited has a formal system of budgeting and does attach incentives for the attainment of budgetary goals.
AGU CHIKA .E.
TABLE OF CONTENTS
Title page: - - - - - - - - - i
Approval page:- - - - - - - - ii
Dedication: - - - - - - - - iii
Acknowledgement: - - - - - - - iv
Abstract: - - - - - - - - - v
Table of contents: - - - - - - - vi
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study:- - - - - 1
1.2 Statement of the Problem: - - - - -
2
1.3 Objectives of the Study: - - - - - 4
1.4 Significance of the Study:- - - - - 5
1.5 Formulation of Hypothesis: - - - - 7
1.6 Scope of the Study: - - - - - - 8
1.7 Limitations of the Study: - - - - - 8
1.8 Definition of Terms: - - - - - - 10
CHAPTER TWO:
2.1 Literature Review: - - - - - - 11
2.2 The Concept of Budgeting and Budgetary Control: 12
2.3 Main Types of Budget: - - - - - 17
2.3.1Other Types of Budget: - - - - - 18
2.4 The Budget Period: - - - - - - 30
2.4.1The Budget Committee: - - - - - 31
2.4.2The Budget Manual: - - - - - - 32
2.5 Stages in the Budgeting Process: - - - 32
2.6 Zero Base Budgeting (ZBB): - - - - 38
2.6.1Administration of Budget: - - - - -
41
2.6.2Human Factors in Budgeting: - - - - 42
2.6.3 The Principal Budget Factors/Forecasting: - 44
2.6.4 Budget Education: - - - - - - 45
2.6.5Budgeting in the purchasing Department of Small and Large Companies: - - - - 46
2.6.6 Relationship Between Budgetary Control and Standard Costing: - - - - - - 48
2.6.7 Participative Budget and Imposed Budget: - 49
2.6.8 Principal Budget/Forecasting: - - - - 51
CHAPTER TREE: RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design: - - - - - - 54
3.2 Source of Data: - - - - - - -
56
3.3 Population Size: - - - - - - 57
3.4 Sample Size and Sample Techniques: - - 58
3.5 Research Instrument: - - - - - 61
3.6 Methods of Data Analysis: - - - - -
61
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Data Analysis (Questionnaires): - - - 63
4.2 Test of Hypothesis: - - - - - - 68
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings: - - - - - 77
5.2 Conclusion: - - - - - - - 77
5.3 Recommendation: - - - - - - 78
Bibliography: - - - - - - - 80
Appendix:- - - - - - - - 81
Questionnaire: - - - - - - - 83
CHAPTER ONE
INTRODUCTION
1.1BACK GROUND OF THE STUDY
A budget is a financial and a quantitative statement prepared prior to a
defined period of time of the policy to be pursued for the purpose of attaining
a given objective.
Also according to A.U. Nweze (2004) in his profit planning.
Budget is a plan quantified in monetary terms, prepared and approved prior to
a defined period of time, usually showing planned income to be generated
and or expenditure to be incurred during that period and the capital to be
employed to attain a given objective.
Furthermore a budget is an attempt made at the beginning of each
financial year to plan the profit and loss account for the year and to aim for a
definite balance sheet. This profit planning must be a well thought- out
operational plan with its financial implication expressed as both long and
short range profit plans.
In any organization where budget is used as a means of profit planning
many alternative plans have to be considered and the most profitable one will
be adopted, because where the plan chosen in great expectations, then the
best use has been made of the available resources.
On the other hand budgetary control is the establishment of policies
and the periodic review or comparison of the actual result with the budgeted
performances either to secure approval for individual action or to serve as a
remedial course of action. Budgetary control whereby actual state of affairs
can be compared with that planned for by the management, so that
appropriate action may be taken to correct adverse situation that may occur
before it is too late. It is also used to fix responsibility.
A budget systems serve the needs of management in respect of the
Judgments and decisions it is fruited to make and to provide a basis for the
management functions of planning and control. Developing a budget is a
critical step in planning any economic activity. This includes business,
governmental agencies and individuals.
Therefore businesses of all types and governmental units at every level
must make financial plans to carry out routine operations, to plan for major
expenditures and to help in making financial decisions.
On this back ground, every organization no matter nature has a plan for
the future, simply because the success of any organization depends on the
level of plan that is put into the organization.
1.1.1 STATEMENT OF THE PROBLEM
The main problem with budgeting is that it reflects data from the past
and present, and will only enable predictions and forecasts to be made out the
future. At the same time, numerous pressures in the job may impose
constraints upon managers, which affect the quality of information they
collect. The problem can be numerous; clearly, nothing can be forecasted
with absolute certainty. No matter what financial and marking researches take
place every organization has to take risks.
Though accounting information may reduce the unpredictability of
event in the future. It will never eliminate it.
All these can interrupt the system of budgetary control:
(1) If the actual results are completely difference from the target the
budget can loose its significance as a means of control. Whereas a
fixed budget is not able to adapt to changes, a flexible budget will
recognize changes in behaviour and can be amended to fall into line
with changing activities.
(2) Following a budget to rigidly can restrict an organization’s activities.
On the other hand, if a manager realizes towards the end of the year
that his or her department has under spent, he or she might go on
spending spree.
(3) If budgets are imposed upon managers without sufficient consultation,
they may be ignored.
An appropriations budget limits expenditures to the appropriations
provided in the budget. Naturally, the amounts appropriated tend to be in line
with the expected revenues for the period. Such a system provides little in the
way of flexibility. It also has a serious defect because the control aspect is
limited to an end-of-the period comparison of actual revenues and
expenditure with those budgeted.
The fixed or fore type of budget is criticized as being a restrictive
budget, which establishes expose limits that cannot be exceeded. The future
cannot be certain, therefore, it is extremely difficult to forecast what will
happen in future.
Hence, when circumstances that will alter the forecast materially occur,
an inflexible plan propels a company into trouble.
It is impossible to state the duration of a budget programme because
the longer a budget period, the more difficult it because to anticipate how
general economic conditions will affect the business of the company.
1.1.2 OBJECTIVES OF THE STUDY
The objective of budgeting and budgetary control in a business
organization includes;
PLANNING - To produce detailed operational plan for the different
sectors and facets of the organization.
CO-ORDINATION-To bring together and reconcile into a common
plan the actions of the different parts of the organization.
COMMUNIATION- To provide a definite line of communication so
that all the parts will be kept fully informed of the plans that the
policies, and constraints to which the organization is expected to
conform.
MOTIVATION- To influence managerial behaviour and motivate
managers to perform in line with the organizational objectives.
CONTROLLING- To assist managers in managing and controlling
the activities for which they are responsible.
PERFORMANCE EVALUATION- To evaluate performance by
providing a useful means of informing managers of how well they are
performing in meeting targets that they have previously helped to set
out.
CLARIFICATION OF AUTHORITY AND RESPONSIBILITY-
To make it necessary to clarity the responsibilities of each manager
who has a budget. Also to authorize the plans contained in the budget
so that management by exception can be practiced (ability to give a
subordinate a clearly defined role with the authority to carry out the
tasks assigned to him). To MATERIAL pg 7-9
1.4 SIGNIFICANCE OF THE STUDY
This study is Budgeting and budgetary control is of great importance to
a business organization because;
The preparation of budget helps in the delegation of responsibilities to
each executive and induces early consideration of basic policies. It also
assists in the focusing of attention on the contribution which may be
made by each product and market to the total profit and reveals any
opportunity which may be made by each product and market to the
total profit and reveals any opportunity which may be made in
maximizing profit.
It provides a means of ensuring that capital invested in the business is
kept to a minimum level justifiable with the level of activities. It also
ensures that adequate liquid resources are made available at anytime.
It defines goals and objectives that can serve as benchmarks for
evaluating subsequent performance.
Better control of current operations is helped by regular, systematic
monitoring and reporting of activities.
It regulates the spending of money and expose loss, waste and
inefficiency and through this corrective action will be taken to improve
the adverse situation.
It encourages management to decentralize responsibilities without
losing control, especially where a company has many branch offices or
factories.
It provides for the co-ordination of sales production and other activities
of the business and forces all members of management team to plan in
harmony and consider all relevant factors before a decision is taken.
Where budgetary control is in operation, cost consciousness is always
increased and through this means, waste and inefficiency will be
reduced. It also gives lower levels of management to also take part in
the management of the business.
It provides a means of communicating management’s plans through the
organization.
It uncovers potential bottle necks before they occur.
1.5 FORMULATION OF HYPOTHESIS
STATEMENT OF HYPOTHESIS
H0: Budgets are not an effective guide to business growth.
H1: Budgets are an effective guide to business Growth.
H0: Budgets are not a means to control and synchronize organization’s
personnel and functions.
H1 Budgets are a means to control and synchronize organization’s
personnel and functions.
H0: Budgets are not more effective when reward penalty is
based on goal attainment.
H1 Budgets are more effective when reward penalty is not based on goal
attainment.
1.6 SCOPE OF THE STUDY.
The study of “budgeting and budgetary control” in business
organizations could have been extended to cover the whole of the accounting
and financial areas of the business organization in all the states of Nigeria and
abroad. But because of some limiting factors, the scope of the study will be
limited to only the facts on the budgeting and budgetary control in business
organizations in general and with special reference to Emenite Nigeria
Limited budgeting system.
1.7 LIMITATIONS OF THE STUDY
Though budgeting and budgetary control has many impressive and far
reaching advantages, but it also has certain limitations and pitfalls which the
organization must consider.
According to Terry Lucey in his costing sixth edition, (pg 386) the
principal factor limiting budget is customers demand, that is the company is
unable to sell all the output it can produce.
Other factors limiting the study are; the system requires the co-
operation and participation of all members of management and not only that,
the basis for success is executive managements absolute adherence and
enthusiasm for the budget. This is really very important; but most often
budgetary control has failed because some of the members of management
have paid lip services to its execution.
To install budgetary control takes time, times without number
management has become impatient and lost interest because it expects
too much within a short time, whereas the system must be explained to
the responsible officials, guided them where necessary, train and
educate them in the fundamental steps, methods and purposes of a
budgetary control system.
Budgetary control system does not eliminate nor take over the role of
administration hence the executives should not feel confined to a
particular area, rather, it should be designed to provide detailed
information which will guide them to operate with strength and vision
towards the achievement of the organizations.
Looking at planning, budgeting or forecasting, one will simply agree
that there is none of these terms that can be regarded as a science, but
there is a certain amount of judgment involved.
Budget ignores responsibility centers in performance evaluation.
It represents on ordinary tool which may not be effective without
closer supervision.
The need for superior executive ability in preparation and presentation.
Budget may encourage interdepartmental conflicts among divisional
heads.
Establishment of unattainable targets or standard for workers.
Lack of realistic data in budget preparation.
Persistent increase in the level of inflation.
Frequent changes in the level of technology.
Political instability.
Negative attitudinal trait of the operating managers against the budget.
1.8 DEFINITION OF TERMS
BUDGETARY CONTROL: According to the Chartered Institute of
Management Accountants (CIMA). Budgetary control is the establishment of
budgets relating to responsibilities of executive to the requirements of a
policy and the continuous comparison of actual with budgeted results, either
to secure by individual action the objectives of that policy or to provide a
basis for its revision.
RESPONSIBILIT CENTRE- According to Colin Drury in his management
and cost accounting sixth edition (pg653). Responsibility centre is a unit of a
firm where an individual manager is held responsible for the units
performance.
BUDGEYING- According to Ugwu Chukwuma Collins in his understanding
cost accounting (2009) page 234. Budgeting is the act of preparing a budget.
BUDGET- According to Terry Lucey in his costing sixth edition. A budget is
a quantitative statement, for a defined period of time, which may include
planned revenue, expenses, assets, liabilities, and cash flows, which provides
a focus for the organization, aids the co-ordination of activities and facilitates
control.
CHAPTER TWO
2.1 LITERATURE REVIEW
In the purchasing handbook by Georges Aljian, Aljian (1976) defined
budgeting as a formalized financial plan for balancing expenditures against
incomes.
Budgeting periods are very common but the most commonest period of
time is usually one year within this year, there may be monthly or quarterly
budget reviews made this term budget is popularly applied to that portion of
money allocated for a specific purpose i.e. the “manufacturing budget”, the
“labor budget” or the “procurement budget. There can be as many as those
individual budgets as the complexity of the organization regures usually,
these individual budgets are parts of an overall budget which is commonly
referred to as the master budgets.
The preparation of the master budget and the presentation of it to the
officers of the company is usually the responsibility of the budget director
who reports to the controller. In a small company, the budget director may be
one of the officers of the company who acts only as a budget director in
addition to other managerial responsibility to co-ordinate the efforts of the
individual departments or management groups who will be asked to submit
their cash requests in the form of a budget for their projected operations.
There are three main parts to the budgets;
The review of the previous year.
The estimate of income and expenditure for the current year.
The finance bill to make such alternations in the taxation system as
may be requested.
A feature of the budget that is now sometimes criticized is that there is
no continuity from one budget to another; each financial year is completely
self contained.
Budgeting is a familiar and very important type of short range plan, a
plan that expresses in numerical terms (usually dollars) how the resources of
a company can be distributed to attain a desired profit.
Since working out a budget force a company to determine how much
money will be coming in what cost will be entailed, it simultaneously
becomes a controlling as well as a planning operation.
Since the budget in a guideline to what will take place over a lengthy
period of time, a great deal of careful thought must go into its planning.
Consequently, the master (or operating) budget, which is an overall estimate
of revenue, cost and expenses, is based on several sub-budgets, including the
sales budget, the production budget and the cost of goods sold budget.
2.2 THE CONCEPT OF BUDGETING AND BUDGETARY CONTROL
There is a consensus among authors that, in-order to avert business
failure, an enterprise must have a vision of where it wants to be in near
feature and accordingly draws up a strategic business plan.
These long term plan are further broken down into detailed step by step
procedures by which to attain the business objectives. The end result of
planning is profit maximization, which is also a yardstick for judging
management performance-profit planning especially in the short term, it is
generally agreed, is carved out by the use of budget. A.W wills more is of the
view that budgeting is a service functions and that budgets do not replace
management. Wills more also observes that planning goes from top down
whereas budget formulation flows from bottom to up.
Isaac Reynolds agree with wills more but noted that “budget planning
is the key to survival in today highly technical and competitive environment
and that failure to plan results, for many firms in a business failure that might
have been avoided by profit planning.
Reynolds also listed the outcome of the reliability to establish and use
a formal budget structure as follows;
1. Lost sales due to under production.
2. Excessive inventory costs due to over production.
3. Excessive personnel turnover.
4. General lack of control over the outcome of business operations in
terms of profit.
J.F Weston (1978) and E.F Brigham are in agreement with Reynolds.
But are guides so submit that the budget is not a means of limiting
expenditure. Rather, it is a method to improve operations, a tool for obtaining
the most productive and profitable use of the companies resources through
careful planning and controlling.
Hingren and foster (1988) agreed that the budget not a penny-pinching
device. They also concurs are agreed with the view expressed by other
authors that budget is an aid to co-ordination and implantation. They went
further, to say that well managed organization usually have the following
budget cycle;
1. Planning the performance of the organization as a whole as well as its
units. The entire management term agrees as to what is expected.
2. Providing a frame of reference a set of specific expectation against
which actual result can be compared.
3. Investigating variance form plans, corrective action follows
investigation.
4. Planning again, considering feed back and charged conditions.
All authors examined agreed that budgeting have some benefit and as
follows;
1. Budget induce managers to plan ahead. Interns is the key to business
success. The budgeting process also provides for the co-ordination of
the activities and departments of the organization so that each fact of
the operation contributes towards the overall plan.
2. Budget set a control framework, which helps expenditure to be kept
within the agreed limits and points out deviation so that corrective
action can be taken.
3. Budget clarifies the responsibilities of each manager who has a budget
and thus enables management by objectives.
4. Budget enables communication between top and middle management
regarding the firms objectives and the practical problems of
implementing these objectives.
5. Budget especially participate budgeting have been proved to motivate
middle and lower management by the establishment of clear targets
against which performance can be judged.
T. Lucy (1989), while disputing the earlier submissions, has listed
some of the typical problems of budgeting.
1. Variance is just often due to changing circumstance and poor
forecasting as due to changing circumstance and poor forecasting as
due to managerial performance.
2. Budget tends to hide inefficiencies by basing estimate on past
performance which may not be appropriate for current conditions.
3. The existence of well documented plans may cause inertia and level of
flexibility in adopting a change hence over budgeting can be unduly
cumbersome and expensive.
4. Badly handled budgeting system with undue sure or lack of regard to
human factors may cause antagonism and may lower morale.
5. Budgetary goals may come to supersede enterprise goals.
Budgetary control, Walter Scott asserts, is the use of the budget as an
instrument for the guidance of business operations. In that case, budgets serve
as a yardstick for executive control of operation, to determine the extent to
which planned goals and objectives are being attained and to arrest off-line
drifts on time. While agreeing that budgetary control follows budget
preparation, lucky opined that budgets require not only top managerial
support but that control is assisted as well by “participation of budget holders
into the investigation of solution to the problems which arise”.
B.C Osisioma, concurs with the above views but stated that budgets
fulfill two basic requirements in the overall control process.
Feed forward- To provide a basis for control at the point of action that
is at the decision point.
Feedback- To provide a basis for measurement of the effectiveness of
central after the point of action.
Control they say promotes efficiency and reduces waste. It can do
according to S. Modetola Odeleye, “ensuring that corrective actions taken
where necessary and possibly, to bridge the gap between the budget and
actual performance” and to review unrealistic budgets.
There is no opposing view to the assertion made by brown and Howard
that’s budgetary control enables management by exception because
management attention is concentrated only on those areas of the operations
that do not work according to plan.
The above assertions are self-evident truths and the author cannot help
but agree with them all.
2.3 MAIN TYPES OF BUDGET
FIXED & FLEXIBLE BUDGET
A fixed budget is a budget which is designed to remain unchanged
irrespective of the volume of output or turnover attained. That is, it is a single
budget with no analysis of cost. The major purpose of a fixed budget is at the
planning stage when it serves to define the broad objectives of the
organization where there is no analysis of cost into fixed and variable. The
fixed budget is unlikely to be of any real value for control purpose except if
the level of activity turned out to be exactly as planned.
Flexible budget is a budget which by recognizing different cost
behavior patterns, is designed to change as the volume of activity changes for
control purpose, it is vital that flexible budgeting is used only by comparing
what the cost should have been with the expenditure incurred at the actual
activity level can any control be exercised.
A flexible budget often reflects, increases or decreases in business
activity throughout an organization In some organizations, changes may be
greater in some departments and smaller in others. In some departments
ability to produce more units are there without incurring high additional
costs. While in anther cost increase or decrease in direct proportion to
production increase or decrease. The flexible budget attempts to deal with
this situation with a fair degree of accuracy. It keeps the expense to the level
of activity possible and so facilitates the control of expenditure and
comparison of expense with revenue or volume of production.
In order to be able to prepare flexible budgets with some degree of
accuracy, it is necessary to classify overhead cost into fixed, variable and
semi-variable. With variable cost, a specific sum per unit of output or
standard hour is set and so total variable cost is obtained by multiplying the
unit cost by units or hours.
2.3.1 OTHER TYPES OF BUDGET
The specific types of budget to be prepared by the management of an
organization will depend on so many factors such as the nature, size,
complexity, operation, etc. of the organization. But in practice, the following
types of budget are common;
CASH BUDGET - A cash budget involves detailed estimate of
anticipated cash receipts and payments for the fourth coming year or
period. This is because while it may be possible for an organization to
exist and continue to survive without profit, the existence of an
organization is doubtful without liquidity. A cash budget identities
potential period of cash deficit or cash surplus to the organization. This
organization will therefore assist the adverse effect of cash
squeeze(lack of cash) by arranging for an overdraft facility or to
maximize the benefit associated with surplus fund through short-term
investment.
MASTER BUDGET - The master budget also known as profit plan is a
comprehensive set of budgets covering all phases of an organizations
operations for a specified period of time. The master budget is the
principal output of a budgeting system.. It is a comprehensive profit
plan, that ties together all phases of an organizations operations. It is
comprised of many separate budgets, that are interdependent. They are
- Operational budget
- Financial budget.
OPERATIONAL BUDGET: Shows how operations will be
carried out to produce an organizations goods and services. The
essence of operational budget is for the organization to be able to
meet the demand of its goods and services.
FINANCIAL BUDGET: This shows how an organization
will acquire financial resources during the budget period.
SALES BUDGET: Sales budget shows the quantities
of
each product that the company plans to sale and the intended selling
price. This budget is very important because it is an estimate of the
revenue to be generated by the organization from its operations. It
provides the prediction of the total revenue from which cash receipts
from customers will be estimated and it also supplies the basic data for
constructing budgets for production cost and for selling, distribution
and administrative expenses. The sales budget is the foundation of all
other budgets since all expenditure is ultimately dependent on the
volume of sales. This budgets also serves as a tool for inventory
management.
PREPERATION OF SALES BUDGET
The preparation of sales budget is one of the most important aspect in
budgetary control system. The sales forecast in this respect must be sound
and accurate. In most of the businesses, the sales forecast is based on the past
sales, market and sales analysis. The preparation of sales budget is
approached in two different ways,
1. Judging and evaluating external influence-
2. Considering internal influence.
The two influences have to be considered when forecasting sales. The
external influences are made up of general trend of Industrial activity,
government policies, cyclical phase of the nation economy, purchasing
power of the population, population shift and changes in the buying habits. In
the case of internal influences, sales trends, factory capacity, new products,
plant expansion, seasonal products, sales force estimates, and the
establishment of sales quotas for salesmen and sales territories must be given
adequate consideration with the company’s profit desired.
FORECASTING SALES
The responsibility for preparing sales estimates is that of the sales
manager and he is assisted by salesmen and market research personnel in
many companies, different method are used in forecasting sales and
marketing products. One of the methods employed by some companies is to
allow individual sales to prepare their sales estimates. In this case, each
salesman will supply his district sales manager with estimates of what he
thinks he can sell in his territory during the forthcoming year, these estimates
are consolidated and perhaps adjusted by the district manager before he can
forward them to the general sales manager for further adjustments. In making
the adjustments, allowances must be made for expected economic conditions
and competitive situation which the salesmen are not aware of.
In some firms, the above methods are being supplemented by the
establishment of market research or market analysis division which assists
the marketing manager and sales manager and salesmen in arriving at more
accurate estimates.
In large organizations, many factors have to be considered when
forecasting sales, they are-
1. Sales of past years: some companies past sales figures often require
re-assessment to disclose changes in products, profit margins,
competitions, sales areas, distribution method or changes within the
industry. This should be done in an analytical form to bring out
fluctuations due to the above events.
2. Forecast of business conditions in ones own industry or trade
association: This is necessary especially where similar products are
produced by another manufacturer e.g. paper and paper board
manufacturing and converting.
3. Other unusual factors that may influence past sales are inventory
conditions, public economic settlement, competition and customer
reaction.
The basis for determining future sales forecasts are –
1. General business conditions.
2. The industry’s prospects and the company’s potential share of the total
industry market.
3. The plans of other companies and particularly competitive companies.
Most of the manufacturing organizations place their sales budget on a
monthly basis for each product. In the case of Nigeria, the country is divided
into thirty states. This can be regarded as territories or areas. The customer
classification may show wholesalers retailers, government agencies,
institutions, schools and colleges and foreign countries. Such a break down
will indicate the contribution each class of trade makes to total sales and
profit. By adopting on the analysis of this type, it will be easy to know the
classes of customers or trade that the sales managers as well as salesmen do
not give adequate attention to. Through the analysis of this nature, it may be
possible to discover new trade outlets, to locate reasons for a drop in sales to
various customers and pave way for instituting investigations quickly so that
remedial action can be taken without delay.
PROCUREMENT BUDGET:
The production planning department determines quantity and type of
material the required for the various products manufactured by a company.
Most companies have standard parts lists and bills of materials which details
all the materials requirements The requirements are given to the purchasing
department which sets up a buying schedule making certain that sufficient
materials are always available without overstocking or creating a shortage. In
preparing the schedules, the purchasing department must consider-
1. Changes in possible delivery promises by the supplier.
2. Changes in the rate of materials consumption.
DIRECT LABOUR BUDGET: The preparation of direct labour budget
is usually the responsibility of the production planning department
which is often based upon specification drawn up by product engineers.
It is much more preferable to prepare a separate direct labour budget and
to include the indirect labour in the factory overhead budget. The
indirect labor consists of those workers engaged in production
departments to assist direct production workers and the remaining
indirect workers are employed in the maintenance department and stores
section.
The labor budget for direct and indirect labor guides the personnel
officer in the recruitment and training of workers. From this, he will
determine the number and types of workers that will be suitable for the
production schedule. Sometimes, it may be necessary to increase or decrease
the labor force; this then requires the attention of the personnel department to
make plans in advance to ensure availability of workers and to retrain them
when necessary. When workers are no longer needed, the personnel
department must prepare a list of the workers that are affected. It is very
necessary to consider the skills and the seniority rights of the workers. In
many industries the schedule is prepared in collaboration with the union
representatives whose function is to protect the interest of the employees
from injustice and hardship.
The number of men as well as the hours needed to achieve the
production budget must be expressed in terms of money. When arriving at
labor cost, the established labor rates agreed upon in the union contracts
should be used. Any changes in the worker rates of pay should reflect in the
financial budget.
ADMINISTRATION BUDGET: One of the difficulties that can be
experienced under budgeting control system is the classification of
certain experiences into either production or administrative expenses.
There are some expenses such as purchasing, personnel, engineering,
and research which can be classified as one of the two functions or in
some cases, allocated between the two as well as marketing costs, It is
the duty of the management to decide on the best possible method of
classifying them for control purposes.
The administrative expenses involve general management, personnel
management, legal branch and the general office. All of them gives rise to
traveling, expenses, salaries, telephones, stationery, depreciation of office
equipment, audit fees, directors fees, rent and rates and insurance. As with
other budgets, it is necessary to analyze the budget so that responsibility for
financial control can be delegated to all affected cost centre.
CAPITAL EXPENDITURE BUDGET: Capital expenditure may be
incurred in different directions. In the first instance, old plants and
replacements while obsolescent equipment must also be replaced with
a more efficient one for effective and continuous production. In some
cases, the need for new products and processes may require the
commitment of resources to the acquisition of suitable machinery. On
the other hand, the desire of management to expand the existing
business or to set up new branches at home, or in another country,
entails capital expenditure. The size of funds involved and the length
of time required to recover the investment call for adequate analysis
and judgment. Any managerial errors could be quite costly for many
years.
In other to minimize a number of capital expenditure errors,
management has to establish definite procedure and methods for evaluating
the merits of a project before funds are released. It is very necessary for the
management to use the available funds, for the improvement of production
facilities and plant expansion.
One of the means in which capital expenditure is being controlled is by
submitting the capital expenditure proposals through the controller, the board
or a capital expenditure.
Committee for consideration- The management control, in this case,
requires facts in production costs. The management must usually have a
believe that the project is not only consistent with the long range objective of
the business, but also to contribute to the earning position of the company.
RESEACH AND DEVELOPMENT BUDGET The research
involves critical investigation aimed at the discovery of new
knowledge with the hope that such knowledge or idea will be useful in
developing a new product or process.
The development itself is the translation of research findings or other
knowledge into a plan or design for a new product or process or for a
significant improvement to an existing product or process, whether intended
for sale or use-basing the needs of research and development on the above
estimate will be prepared to balance the research and development program,
to co-ordinate the program with the firms other plans and projects and to
check certain phases which are not of financial planning. The budget forces
the hands of the management to think in advance and to consider the total
amount that will be involved. The budget presents an overall picture of
proposed research and development activities and gives opportunity for other
operating managers to criticize and review the research and development
progress through exchange of ideas and information in budget committee
meetings management will be able to exercise control over the program.
The cost accountant is in the best position to deal with the costs and
they include payment to outside research organizations, staff salaries,
provision of accommodation and equipment, test-runs and pilot schemes. The
budget can also indicate the jobs or steps within each project, the necessary
man-hours and service department time required. The budget will give the
cost accountant an opportunity to compare the actual results achieved with
the panned projects and any adverse situation revealed will have to be
improved immediately.
FACTORY OVERHEAD BUDGET: The factory overhead is
divided into two distinctive parts, Fixed overhead and Variable
overhead. The fixed overhead consist of rent, rate, and managerial
services. It is not affected by changes in the volume of sales and
production unlike variable overhead which varies more or less in
proportion to output, such as cleaning, fuel, power and maintenance.
The preparation of the budget requires the co-operation of the cost
accountant, the engineering staff and heads of departments for accurate
estimate of the cost involved.
BUDGETED INCOME STATEMENT
This is an estimated income statement for a coming period of time that
shows the expected revenue and expensive for the budget period assuming
that planed operations are carried out.
PRODUCTION BUDGET: Usually the production budget is stated in
physical unit and frequently it is a sales budget which is adjusted for
any changes inventories. The seasonal fluctuations of sales are usually
leveled out in production planning in other to stabilize employment
without causing a shortage of finished products and inefficient service
to customers.
The production budget like any other budget will have to show in
details the quantity to be produced by months or quarters, along with a
tentative annual budget.
Some companies do not manufacture a standard product but produce
only on orders. In this case, plans can not be too detailed. The program here
is to prepare for production when others are received. However if they
standard parts, production can often be budgeted in a manner similar to that
used by a company producing a standard products. In special order work,
routing and scheduling of work through the factory is great important to
prevent delays and to utilize production facilities fully. The production
budget deals with the scheduling of operations, the determination of volume
and the establishment of maximum quantities of raw material and finished
goods inventories. Its summaries and details provide the basis for preparing
the budgets of materials, labor and factory overheads. The production budget
lists the number of units that must be produced during each budget period to
meet sales needs and to provide for the desired ending inventory. This budget
is expressed in quantities only and it is the responsibility of the production
manager. In production budget, production requirements for a certain period
are influenced by the desired level of the ending inventory.
DIRECT MATERIAL BUDGET: This shows the number of units and
the cost of material to be purchased and used during the budget period.
The direct material budget details the raw materials that must be
purchased to fulfill the production budget and to provide for adequate
inventories. The objective here is to ensure that the right materials are
on-hand, in the right quantities and at the right time to support the
production budget.
2.4 THE BUDGET PERIOD
The conventional approach is that once per year the manager of each
budget centre prepares a detailed budget for one year. The budget is divided
into either twelve monthly or thirteen four – weekly periods for control
purposes. The preparation of budget on an annual basis has been strongly
criticized on the grounds that it is too rigid and ties a company to a twelve
months commitment. This can be risky because the budget is based on
uncertain forecast.
An alternative approach is for the annual budget to be broken down by
months for the first three months, and by quarters for the remaining nine
month. The quarterly budget are then develop on a monthly basis as the year
proceeds, Example , during the first quarters the monthly budget for the
second quarters will be prepared and during the second quarters, the monthly
budget for the third quarter will be prepared. The quarterly budget may be
received (I.e. change as new information comes) as the year unfolds. This
process is known as continuous or rolling budget and ensures that a twelve
month budget is always available by adding a quarter in the future as the
quarter just ended is dropped. Rolling budget also ensures that planning is not
something that takes place once a year when the budget is being formulated.
The main disadvantage of a rolling budget is that it can create ascertaining for
managers because the budget is constantly being changed.
Irrespective of whether the budget is prepared on an annual or a
continues basis, It is important that monthly or four weekly budgets be used
for control purposes.
2.4.1 THE BUDGET COMMMITEE
The budget committee consists of high-level executives who represents
the major segments of the business its major task is to ensure that budgets are
realistically established and that they are co-ordinated satisfactorily. The
normal procedure is for the functional heads to present their budget to the
committee for approval. If the budget does not reflect a reasonable level of
performance, it will not be approved and the functional head will be required
to adjust the budget and re-submit it for approval. It important that the person
whose performance is being measured should agree that the revised budget
can be achieved. Otherwise if it is considered to be impossible to achieve, it
will not act as a motivational device.
The budget committee should appoint a budget officer, who will
normally be the accountant. The role of the budget officer is to co-ordinate
the individual budget into a budget for the whole organization, so that the
budget committee and the budgetee can see the impact of an individual
budget on the organization as a whole.
2.4.2 THE BUDGET MANUAL
A budget manual is prepared by the accountant- it will describe the
objectives and procedures involved in the budgeting process and will provide
a useful reference source for managers responsible for budget preparation. In
addition, the manual may include a timetable specifying the order in which
the budget should be prepared and the dates when they should be presented to
the budget committee. The manual should be circulated to all individuals who
are responsible for preparing budgets.
2.5 STAGES IN THE BUDGETING PROCESS.
The important stages in the budgeting process are as follows,
1. Communicating details of budget policy and guide lines to those
people responsible for the preparation of budgets.
2. Determining the factor that restricts outputs
3. Preparation of the sales budget.
4. Initial preparation of various budgets.
5. Negotiation of budgets with superiors.
6. Co-ordination and review of budgets.
7. Final acceptance of budget.
8. Ongoing review of budgets.
COMMUNICATING DETAILS OF THE BUDGET
POLICY: The top management must communicate the policy effects of the
long term plan to those responsible for preparing the current years budgets.
Policy effects might include planned changes in sales mix or the expansion or
contraction of certain activities. In addition, other important guidelines that
are to govern the preparation of the budgets should be specified. E.g. the
allowances that are to be made for price and wage increase, and the expected
changes in productivity. Also any expected changes in industry demand and
output should be communicated by top management to the managers
responsible for budget preparation. It is essential that all managers be made
aware of the policy of top management for implementing the long term plan
in the current years budget so that common guide liens can be established.
DETERMINING THE FACTORS THAT RESTRICTS
PERFORMANCE
The main factors that restricts performance in the majority of
organization is sales demand, production capacity can also do so, when sales
demand is in excess of available capacity. so before the preparation of the
budgets, it is necessary for top management to determine the factors that
restricts performance, since this factor determines the point at which the
annual budgeting process should begin.
PREPARATION OF THE SALES BUDGET.
The volume of sales and the sales mix determines the level of a
company’s operations, when sales demand is the factor that restricts output.
For this reason the sales budget is the most important plan in the annual
budgeting process. This budget is also the most difficult plan to produce,
because total sales revenue depends on the action of customers. In addition,
sales demand maybe influenced by the state of economy or the action of
competitors.
INITIAL PREPARATION OF BUDGETS.
The mangers who are responsible for meeting the budgeted
performance should prepare the budget for those areas for which they are
responsible. The preparation of the budget should originate at the lowest
levels of management and be refined and co-ordinated at higher levels. This
approach enables managers to participate in the preparation of their budget
and increase the probability that they will accept the budget and strive to
achieve the budget targets.
NEGOTIATION OF BUDGETS
To implements a participative approach to budgeting, the budget
should be originated at the lowest level of management. The managers at this
level should submit their budget to their superiors for approval. The superior
should then incorporate this budget with other budget for which he or her
superior. The manager who is the superior then becomes the budge tee at the
next higher level. At each stage of the budget, the budget will be negotiated
between the budge tees and their superiors, and eventually they will be
agreed by both parties. So the figures in the budget are the result of a
bargaining process between a manager and his or her superior. It is important
that the budgeters should participate in arriving at the final budget and that
the superior does not revise the budget without giving full consideration to
the subordinates arguments for including any of the budgeted items.
CO-ORDINATION AND REVIEW OF BUDGETS
As the individual budget move up the organizational hierarchy in the
negotiation process, they must be examined in examination may indicate that
some budgets are out of balance with other budgets and need modifying so tat
they will be compatible with other conditions, constraints and plans that are
beyond a manager knowledge. Example, a plant manager may include
equipment replacement in his budget when funds are simply not available.
The accountant must identify such inconsistencies and brig them to the
attention of the appropriate manager. Any changes in the budgets should be
made by the responsible manager, and this may require that the budgets be
recycled from the bottom to the top for a second or even a third time until all
the budgets are co-ordinated and are acceptable to all the parties involved.
During the coordination process, a budgeted profit and loss account, a
balance sheet and a cash flow statement should be prepared to ensure that all
the parts combined to produce an acceptable whole, otherwise, further
adjustments and budget recycling will be necessary until the budgeted profit
and loss account, the balance sheet and the cash flow statement prove to be
acceptable.
FINAL ACCEPTANCE OF THE BUDGETS
When all the budgets are in harmony with each other, they are
summarized into a master budget consisting of a budgeted profit and loss s
account, a balance sheet and a cash flow statement. After the master budget
has been approved, the budgets are then passed down through the
organization to the appropriate responsibility centre. The approval of the
master budget is the authority for the manager of each responsibility center to
carry out the plans contained in each budget.
BUDGET REVIEW.
The budget process should not stop when the budget have been agreed.
Periodically, the actual result should be compared with the budgeted results.
These comparison should normally be made on a monthly basis and a report
sent to the appropriate budgetees in the first week of the following month, so
that it has the maximum motivational impact. This will enable management
to identify the items that are not proceeding according to plan and to
investigate the reasons for the differences. If these differences are within the
control of management, corrective action can be taken to avoid similar
inefficiencies occurring again in the future. However, the differences may be
due to the fact that the budget was unrealistic to begin with, or that the actual
conditions during the budget year were different from those anticipated. The
budget for the remainder of the year would then be invalid.
BUDGETING AND PLANNING, PROGRAMMING AND BUDGETING
SYSTEM IN NON- PROFIT ORGANISATION.
In non profit organization the annual budgeting process compares
budgeted and actual inputs, but does not provide information on efficiency
with which activities have been performed, or the effectiveness in achieving
objectives. The aim of planning, programming and budgeting systems is to
enable the management of a non- profit organization to make more informed
decisions about the allocation of resources to meet the objectives of the
organization. The planning, programming and budgeting system involves the
following stages,
Establishing the overall objectives.
Identifying the programmes to achieve these objectives.
Determining the costs and benefits of the programmes so that budget
allocation can be made on the basis of cost- benefits of the different
programmes.
2.6 ZERO BASE BUDGETING (ZBB).
Zero base budgeting is a method of budgeting that is mainly used in
non- profit organizations but it can also be applied to discretionary costs and
support activities in profit organizations. It seeks to overcome the
deficiencies of incremental budgeting. 2BB works from the premise that
projected expenditure for existing programmes should start from base zero,
with each years budget being compiled as if the programme were being
launched for the first time. The budgetees should present their requirements
for appropriations in such a fashion that all of cost benefits or some similar
kind of evaluative analysis. The cost benefit approach is an attempt to ensure
“value for money”. It questions long- standing assumptions and service as a
tool for systematically examining and perhaps abandoning any unproductive
projects. 2BB involves the following three stages.
- A description of each organizational activity in a decision package.
- The evaluation and ranking of decision packages in order of priority.
- Allocation of resources based on order of priority up to the spending
cut-off level.
Some of the benefits of 2bb can be capture by using “priority- based
incremental budgets”. Priority incremental budgets requires managers to
specify what incremental activities or changes would occur if their budgets
were increased or decreased by a specified percentage (say 20%). Budget
allocating are made by comparing the change in cost with the change in
benefits, priority incremental budgets thus represents an economical
compromise between zbb and incremental budgeting.
ADVANTAGES OF ZERO BASED BUDGETING.
1. Zero based budgeting tends to extrapolate the past by adding a
percentage increase to the current year. It avoids the deficiencies of
resources by need or benefit, and not taking the level of funding for
granted.
2. Zero based budgeting creates a questioning attitude rather than one that
assumes that currents practice represents value for money.
3. ZBB focuses attention on outputs in relation to value for money.
4. It requires a close and realistic re-evaluation of an organization
programmes.
5. It tends to prevent errors which might have characterized the basing of
the preparation of budget on the past figures.
6. The system of zbb requires each manager to justify any proposed
expenditure for his cost centre before authority can be obtained for
spending the amount request.
7. The zbb requires a re examination and thorough analysis of cost.
Alternative courses of action, measures of performance and other
benefits that may occur to the users of the system
8. It helps in the communication of present activities to management for
effective appraisal of performance .
9. It allows managers to set priorities over he activities of the business.
DISADVANTAGES OF ZERO BASED BUDGRTING
1. It diverts managers attentions from their primary areas of
responsibility.
2. It is time consuming exercise.
3. It could lose the benefits of long term companions of trends in
efficiency control.
4. It requires management to apply higher skills in planning.
2.6.1 ADMINISTRATION OF BUDGET.
A flow up on the budget is at least as important as budget preparation.
Horngren most Apathy captures the need for budget administration in the
quotation below:
“Budget helps managers/ but budget need help, mange your budget,
don’t let your budget manage you . Budgets should not be prepared in the
first place if they are ignored, buried in the files, or improperly interpreted.”
In other word, there must be enthusiastic top management support for
the budget, Hence, the appointment of the budget committee and the writing
of the budget manual. The committee seems to supervise and direct the
budget and to ensure that the budgeting system is participating. Again the
manual serves to educate staff personnel, which is very vital to good
administration of the budget.
The achievement of budgeting goals takes plenty of intelligent
administration to achieve in practice. This will call for a precise and clear
organization structure with definite and district lines of responsibility. In
addition to budget preparation, the budget director ensures that agreed
budgets are published and distributed to all responsible managers. Any
revisions made in the department’s budget should be discussed with the
manager.
In this way, budget services as a means of communicating plans and
objective downwards.
Budget administration leads to responsibility accounting, that is a
system the measures the performance of responsible managers. A
responsibility report, budget, any control statement, is speedily prepared
usually monthly to furnish the manger with figures which the varies.
Variance are immediately investigated so that operations may be signed with
the plan in this way, the budget provides feed back on the progress made
towards meeting plans.
Budget administration should not be rigid, manager should be allowed
some decision making described in plan. These changes in plan coupled with
the experience of generations and other observed difficulties are fed to the
budget committee so that budgetary planning is continually refined.
2.6.2 HUMAN FACTORS IN BUDGETING:
Budget preparation and administration cannot be done insulation of the
mangers for whom it is meant. The extent to which these human aspect are
taken into account, is the extent to which budget will succeed.
Budget can be imposed by top management by such a budget will stifle
commitment, initiative and responsibility. This is because an imposed budget
underlying objectives may be imperfectly understood by budget holders.
If budget holders are genuinely involved in the budgetary process, they
became more highly motivated because the objectives are better understood
and budgetary goals are more like accepted.
The budget should not be used to fix blames in case of unfavorable
variance. It used in that way, mangers will view it as a pressure device and as
club over their heads instead of a tool in their hands. Variance are not man to
pinpoint misconducts but to indicate to the person in the organization who is
best placed to provide management with timely information for effective cost
control.
However, motivation is increased when the reward/penalty system of
the organization is built into the attainment of budgetary targets.
Studies have shown that people work effectively when targets and
objectives are clearly defined so that they are understood by everyone, in
addition , and as for as possible, individual foals and aspirations should be
integrated into the organization goals as a basis for budget.
If individuals and organization goals are not congruent the budget may
be accepted, and sabotage and frustration may be the result. Information flow
may be blocked which might eat management capacity.
Speedy and accurate and concise information flow up, down and
bottom up is vitally important for effective budget administration.
But even as budgetary success depends on the good will on co-
operations of staff budgetary goals may still be missed, operations may lack
direction and progress. If any, will be haphazard, even staff, good will and
co-operation are secured. This according to Horngern, is because budget is
not cure all. They are not remedies for organization or a poor accounting
system.
2.6.3 THE PRINCIPAL BUDGET FACTORS/FORECASTING:
The first step in budgeting is the determination of the principal budget
factor. The principal budget factor is that factor which at any given time,
effectively limits the activities of an organization usually , it is customers
demand but NOVOKO argues that of companies in developing countries like
Nigeria , production devices but the effectiveness depends on the accurate
prediction of cost behaviour patterns.
Reynold (1984) noted that many well managed companies prefer
flexible budget because it provides management with a basic for variance
between budgeted and actual costs, which is accomplished by comparing
actual expenditure with previously set amounts adjusted for valuing levels of
production.
Continuous or rolling budget is a type of flexible budget but is more
regularly updated. Owler and brown defines the rolling budget by adding say
a further month or quarters so that the budget can reflect current conditions.
At every point in time a twelve month budget is available and as the month or
quarter expires a month or quarter in the future is added. The desirability of
the continuous budget owes to the fact that it constantly forces management
to look to the future and to keep tract of changes into the operating
environment.
Ifeoma Okeye (1991) noted that if might be possible for an enterprise
to use both flexible budget and fixed budget, capacity is the limiting factor.
However, the limiting factor can change over time because as a constraint is
removed, another well occurs.
After determination of the principal budget factor, a forecast is made of
how it is excepted to behave during the budget period. The budget schedule
derive form and are tied to the limiting factors and its observed pattern.
Forecasting is a very important activity because the effectiveness of the
budget on accurate forecasts.
2.6.4 BUDGET EDUCATION
Budget education is all about holders knowing what is expected of
them in the budgetary process. They should revive a copy of the statement of
budgeting premises, participate fully in budgeting and be informed of any
revisions made in the budget submitted to them. They are also entitled to
receive a copy of the final approved budget. The budget manual and the
budget director serve many of these purchases. But in addition, employees
can be educated on the budget though the methods of seminars, conferences,
lectures, etc. Budget education motivate employees commitment to a
successful budgets implementation. The responsibility budget, often failure to
the organizational structure of the particulars enterprise is a control device of
responsible individuals. It works by comparison of actual performance with
the expected performance in order to check significant deviations.
2.6.5 BUDGETING IN THE PURCHASING DEPARTMENT OF
SMALL AND LARGE COMPANIES.
As already stated, it is very difficult to budget with any great degree of
accuracy as far as a year ahead changes in the general economic situation,
changes in the company’s product line, and employment changes are but a
few of the factors which can influence the budget. It is probably a good idea
for the purchasing head to check sales and manufacturing regularly to
determine changes in business that might affect his operations.
If a company with name xyz manufacturing company had expended its
operations to the point where four people could no longer handle the
purchasing operation, it might be necessary for the purchasing agent to add
another employee or two, say sometime around the middle of the year, in this
event he would also have to increase s this budget request for the balance of
the year. This can be done in either one ors two ways;
1. The purchasing agent can prepare a revised budget request for the six
months from July 1st through December 31st, increasing each of the
various items shown on his budget.
2. He can submit a separate budget for the individual or two he adds to
his staff, indicating the increased cost of payroll and expenses that will
result from their addition to his staff.
Aljian in his opinion said that “this is called a budget supplement and
can be stapled or clipped to his regular budget request. In succeeding years,
of course, these additions would be integrated into his regular budget.
PURCHASING DEPARTMENT BUDGET FOR LARGER
COMPANIES
The factor to put into consideration when preparing a budget for the
purchasing department of a large company are just almost the same as those
for a small company.
Aljian (1976)started that in a large company, the procurement officer
may have responsibilities for many functions, as already mentioned such as
traffic , salvage, invoice, clearance, inspection, standards, etc. Involving as
many as 100, 200 or more people. This means that the time and effort
required to prepare this more complex budget will be increasingly greater. It
is basic concerns, however are still with have to request for payroll, operating
supplies for the department, and other miscellaneous expenses.
Budget preparation in a large purchasing department can be made a
joint effort, enhancing the value of the budget and making supervisors or the
purchasing staff aware of its importance. This is done by the supervisors in
charge of the importance subdivisions of the department prepare their own
budget requests for their work group.
This is then consolidated into one composite purchasing department
budget. A simple form of requesting this budget information from division
heads included-s
MAINTAINING THE BUDGET
A budget is of little value as a measure as the only attention given to it
as the beginning of the year when it is prepared between its preparation and
the conclusion of the year for which it was prepared, the budget should be a
living tool Example if individual division heads in different departments of
business organization are asked to assist in the preparation of the budget by
supplying estimates of the cost of operating their groups. This sample of the
purchasing department sown in fig 2 will be similar to be the statement they
will prepare.
2.6.6 RELATIONSHIP BETWEEN BUDGETARY CONTROL
AND STANDARD COSTING
It is clear that standard costing and budgetary control are mostly based
on the establishment of pre-determination of performances. The pre-
determination is used to measure performance and this is done by comparing
actual with planned performance and if there is any deviation from planned
activity, then corrective action will be taken with promptitude. In many cases,
the sane standards are employed for both standard costing and budgetary
control. The only difference is that budgetary control is more widely applied
than standard costing. Budgetary control covers sales budget, production
budget, cash budget, etc. The two techniques are quite different in their aims.
The standards are set with the aim of an ideal level to which costs ought to be
reduced in their aims. The standards are set with the aim of an ideal level to
which costs ought to be reduced while budgets are always based on the
anticipated actual level of costs. Budgetary control can be applied in jobbing
business.
Budgets can be used to establish the pre-determination of overhead
absorption rates. Actually budgets are important to the establishment of
standard overhead. In certain cases, standard costing systems can exist
without any system of budgetary control despite the benefits that can possibly
be derived from the use of budgets.
2.6.7 PARTICIPATIVE BUDGET AND IMPOSED BUDGET
A participative budget is a budget that is prepared with the full
cooperation and participation of managers at all levels of the operations. The
success of a budget program will be determined in a large extent by the way
in which the budget is developed. In the most successful budget programs,
managers with cost control responsibilities actively participate in preparing
their own budget. This approach is in contrast to the approach in which
budgets are imposed from above. The participative approach to preparing
budgets is particularly important if the budget is to be used to control and
evaluate a manager’s performance. if a budget is imposed on a manager from
above, it will probably generate resentment and ill will rather than
cooperation and commitment. in a participative budget system, the initial
flow of budget data is from lower level of responsibilities to higher level of
responsibilities. Each person with responsibility for cost control will prepare
his or her own budget estimates and submit them to the next higher level of
management. These estimates are reviewed and consolidated as they move
upwards in organization.
A participative budget or the bottom-up budget is initiated by inviting
those who will implement the budget to participate in the process of setting
the budget.
A participative budget which can equally be called the bottom up
budget starts by asking those who will ultimately implement the budget to
make proposals and have an involvement in the budget process.
An imposed budget which can also be called a top-down budget starts
with the senior management sending down budgets and targets based on the
organizational goals and strategies. The budget is imposed on those who can
implement it, without inviting them to share in its preparation. An imposed or
top- down budget is set by management without inviting those that will
implement the budget to participate in the process of setting the budget.
2.6.8 PRINCIPAL BUDGET/FORECASTING
The first step in budgeting is the determination of the principal budget
factor. The principal budget factor is that factor which, at any given time,
effectively limits the activities of an organization. usually is customer
demand, but Novoko argues that of companies in developing countries
like Nigeria, production devices but the effectiveness depends on the
accurate prediction of cost behavior patterns.
Renold (1984) noted that many well managed companies prefer
flexible budgets because it provides management with basis for analyzing
and controlling the variance between budgeted and actual costs, which is
accompanied by comparing actual expenditure with previously set amounts
adjusted for valuing levels of production.
Continuous or rolling budgeting is a type of flexible budget but is more
regularly updated. Owler and Brown defines the rolling budget by
adding ,say a further month or quarter, so that the budget can reflect current
conditions. At every point in time, a twelve month budget is available and
as the month or quarter expires, a month or quarter is added in the future.
The desirability of the continuous budget owes to the fact that it constantly
forces management to look to the future and to keep tract of changes into
the operating environment.
Ifeoma Okoye (1991) noted that it might be possible for an enterprise
to use both flexible and fixed budget. Capacity is the limited factor.
However, the limited factor can change over time because as a constraint is
removed, another will occur.
After the determination of the principal budget factor, a forecast is
made on how it is expected to behave during the budget period. The budget
schedule derives from and are tied to the limiting factor and it observes
pattern. Forecasting is a very important activity because the effectiveness of
the budgets is on accurate forecasts
2.6.9 RELEVANCE OF THE REVIEW TO THE STUDY
In this chapter, several studies have been reviewed in order to lay the
foundation for the main body of the work.
Any idea budgetary system, it is generally agreed, ought to participate,
flexible, self-motivated and tailored to the specific organizations needs size
and objectives.
Budgets are not prepared to be tucked away in files but to be used to
extend control during the implantation effort. The end of control can be best
served when control is tied to a precise and clear organizational structure.
Finally there is a chance of opinion that budgetary collapse may occur
even after a budget has been prepared in accordance with the ideal in other
words, a budget will succeed or fail depending on the operation of the
system.
Budget are not prepared to be tucked away in files but to be used to
extend control during the implantation effort. The end of control can be best
served when control is tied to a precise and clear organizational structure.
Finally, there is a chance of opinions that budgetary collapse may
occur even after as budget has been prepared in accordance with the idea in
other words, a budget will succeed or fail depending on the operations of the
system.
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY.
3.1 RESEARCH DESIGN;
In order to do justice in this research work, I employed
three different methods to elicit the required information.
They are;
1. Survey Method
2. Oral interview
3. By the use of textbook and magazines as my research
instrument.
SURVEY METHOD – Since it is believed that observation will
reveal some of the problems of budgeting and budgetary
control. I observed the statement of accounts of most
companies and it is brought to my notice that most of these
companies and business organizations who failed in their
business, if traced back to the find out that the remote cause
of their failure is a result of not being able to budget their
activities very well, and again, they failed because of
inadequate management of their budgetary control
department and their system of budgeting.
Through oral interviews and some investigations, I made
in the textbooks and news papers, I understood that the body
responsible for budget. Preparation/making in a business
organization is the budgeting team, which is made up of
some of the people working in the budgeting department.
And also, the representatives from the various areas of
activity within the organization.
A business organization may appoint a budget controller
to co-ordinate the budgetary activities and the budgeting
team which consists of representatives from various areas of
activity within the organization.
The task of the team can be considered under the
following headings,
Objectives
Information
Making decision
Preparing budgets
Master budget
Control
Feed back
(a) CONSIDERING OBJECTIVES – The team will undertake
its activities designed to enable the organization to meet its
objectives (e.g profit maximizing, improving market share,
and improving product quality)
(b) PROVIDING INFORMATION – The team will also look
at figures from previous years so that new budgets can to
some extent be based on past results. A clear knowledge of
the environment in which the organization is competing is
also important.
(c) MAKING DECISION – Whenever forward planning takes
place, it will highlight the need to make decisions.
(d) PREPARING BUDGET – Detailed budgets are then
prepared for the areas of the organizations activity.
(e) PREPARING A MASTER BUDGET – The individual
budgets, when linked together, can be used to forecast a set
of final accounts.
(f) CONTROLLING – Even though budgets are drawn up,
this does not always mean that such plans are successful.
Managers try to se their budgets as a guide to achieving
certain results. If there is a difference between actual
performances at the end of a year and budgeted
performance, action can be taken.
3.2 SOURCE OF DATA.
I obtained the information contained in this project from
the following sources;
1. Primary source
2. Secondary source
PRIMARY SOURCES – These are data I generated from
surveys conducted. They are original in character. I went to
Emenite Nigeria Limited Emene Enugu Branch and got some
facts through oral interview and use of questionnaire with the
staffs of the organization.
SECONDARY SOURCE – These are information’s I gathered
from data which are already collected by some other persons
and have passed through some statistical process of at least
once. I gathered them from both published and unpublished
sources.
The sources of my unpublished data include materials I
found with scholars and research workers. Project reports and
thesis I got from different university libraries.
Then I also got information’s from published materials
which includes;
Official publications of the government.
Reports and publications of trade associations, banks,
trade unions, manufacturers, and professional bodies.
Technical Journals that is books and news papers.
Textbooks
These published materials are what I got from my
research in some of the libraries in Enugu like;
1. Enugu State library
2. Caritas university library
3. National library of Nigeria Enugu branch.
3.3 POPULATION SIZE
The population for this research work comprises of top
management staffs, middle management staffs and lower
level management staffs of emenite Nigeria limited Enugu
branch. This gives a total population of forty five (45) staffs.
DEPARTMENTS
TOP MAMAGEMENT STAFFS
MIDDLE MANAGEMENT STAFFS
LOWER LEVEL MANAGEMENT STAFFS
TOTAL
Sales 3 4 3 10
Production 4 4 4 12
Finance 3 3 3 9
personnel 2 3 2 7
Purchase 2 2 3 7
Total 14 16 15 45
SOURCE; SURVEY 2010
3.4 SAMPLE SIZE AND SAMPLE TECHNIQUE
To determine the sampling size, the Yaro Yamane’s
technique was used. The formula stated as-
n= N 1+N(e)2
Where; n=desired sample size
N = Population size under study
E = Level of significance of error. Assumed to be
5%
I = Constant
Therefore,
n=?
N=45
Sample size (n) = 45 1+45(0.05)2
n= 45
1.1125
n = 40
The next step is to determine the minimum number of
staffs/respondents to be chosen from each department. The
bowlegs proportional formula is used which is given as
NH= n*nh NWhere,
NH = number of questionnaires allocated to each department/no of staffs to be chosen from each department.
N = Total sample size
Nh = Number of staffs in the department.
N = Total population size
SALES DEPARTMENT
Nh= 40*10 = 9 45
PRODUCTION DEPARTMENT
NH = 40*12 = 11 45
FINANCE DEPARTMENT
Nh= 40*9 = 8 45
PERSONNEL DEPARTMENT
Nh= 40*7 = 6 45
PURCHASE DEPARTMENT
Nh= 40*7 = 6 45
Therefore from the above calculation the table for the proportional distribution of the
sample size will be;
DEPARTMENT NO. OF THE POPULATION
PROPORTIONAL PERCENTAGE
NO. IN THE SAMPLE SIZE
PROPORTIONAL PERCENTAGE
Sales 10 22% 9 23%production 12 27% 11 27%Finance 9 20% 8 20%personnel 7 15.5% 6 15%Purchase 7 15.5% 6 15%TOTAL 45 100% 40 100
NOTE-Some staffs were not able to answer some of the
questions in the questionnaire for some reasons best known
to them. So though I distributed 40 questionnaires, some
questions had a total number of responses less than 40 like
question 4 which had 38 responses, question thirteen which
had 34 responses and question 21 which had 12 responses.
3.5 RESEARCH INSTRUMENT
These are the various ways or methods of collecting
both primary and secondary data. Such instruments include
questionnaire and oral interview. I chose these two methods
considering three main factors;
1. Nature, object and scope of my research/study.
2. Availability of funds.
3. Availability of time.
A questionnaire is an instrument for obtaining answers
to research questions by using a form which the respondents
usually filled by him/herself.
Then a research interview is a verbal interaction
between two people to illicit information.
3.6 METHODS OF DATA ANALYSIS
The statistical techniques of percentages and chi-square
were used for the analysis of the questionnaires and
hypothesis respectively.
CHAPTER FOUR
PRESENTATION & ANALYSIS OF DATA
This is a business study and as the researcher I am thus
inclined to measure data not as numerical values but in
categories. In presenting the data that way, it is easier to
determine from examination of the data, the level, if there is
any of dependencies between the two tested variables. In
this type of study, the chi-square (or contingency table test)
method of data analysis is most appropriate for use.
A chi-square test makes it imperative to emulate a null
hypothesis, which assumes that there two objects of interest
and their methods of classification. It is then my task as the
researcher through data analysis, to prove the assumption
wrong. In other words to reject the null hypothesis.
The chi-square statistics can be computed from the data
in a chi-square table by comparing the observed and
expected frequencies in each cell of the table, if the margins
between the observed ends expected frequencies are large,
the chi-square statistics will be large and the null hypothesis
is rejected if however, the difference is small, a small chi-
square value will result and the null hypothesis is accepted.
Finally compare the chi-square statistics of the decision rule
to accept or reject the null hypothesis.
The detailed procedure and computations required in
chi-square test would be presented step by step as the
hypothesis is tested.
The data to be used in testing the hypothesis will result
from the analysis of questionnaires.
The simple percentage method data analysis is used to
analyze the questionnaires, the formular for it is,
A% = a * 100 n 1
When n = Total number of response to a question.
a = Number of respondents ticking a
particular answer option to the question.
A% = “a” expressed as a percentage of N.
In all 50 questionnaires were issued out, but only 40
were collected back.
4.1 DATA ANALYSIS (QUESTIONAIRES)
This analysis is restricted to ten (11) questions only,
which I consider being of direct relevance in testing the
hypothesis. The questions are grouped into three parts.
Each group of questions is expected to provide relevant
information to test a hypothesis. Each relevant question is
first presented and data collected on it analysis. Then the
data that result from the analysis of all the questions in the
group are combined into a single set tabulated data on which
the hypothesis is tested. At the end of any group of is
hypothesis and the response are weighed.
GROUP 1
QUESTION NO. 3
Why does your company use budgets?
ANSWER OPTIONS NO. OF RESPONDENT
S (A)
PERCENTAGES OF RESPONSE
(A%)To plan profits 38 95
To keep proper accounts 2 5
No idea 0 0
Total (n) 40 100
QUESTION NO. 4
Why do you think that budgets help to achieve target profits?
OPTIONS TO ANSWERS NO.OF RESPONDENTS (A)
PERCENTAGES RESPONSES (A%)
IT MOTIVATES MANAGERS 38 100
TARGETS ARE LOW 0 -
IT MEKES MANAGERS RELAX 0 -
TOTAL 38 100
QUESTION NO. 5
When variance occur in your department, into what percentage range does it often
fall?
OPTIONS TO ANSWERS
NO.OF RESPONDENTS (a)
PERCENTAGES RESPONSES (A%)
0 –5% 12 30
5%-10% 25 62.5
OVER 10% 3 7.5
TOTAL 40 100
DISCUSSION
This group of questions was designed to ascertain what
purpose the respondents think the budget services, the effect
the budget has on the work attitude of the manager, and
whether or not the performance of the budget as a profit
planning device. All the respondents say it motivate
managers. Question if indicates that 92.5% of variances fall
within the permissible range of 0.10%.
QUESTION NO. 9
Why do you feel omitted to achieve the targets set for you?
OPTIONS TO ANSWERS NO. OF RESPONDENTS
PERCENTAGES RESPONSES (A%)
HIGHER PAY 32 80
PERSONAL SATISFACTION 8 20
FEAR OF PUNISHMENT 0 0
TOTAL 40 100
QUESTION NO. 13
Which types of variance occur more than often in your department?
OPTIONS TO ANSWERS
NO. OF RESPONSES
PERCENTAGES RESPONSES (A%)
YES 22 64.71
NO 12 34.29
TOTAL 34 100
QUESTION NO. 16
Does variance determine whether a manager should be rewarded or penalized?
OPTIONS TO ANSWERS
NO. OF RESPONSES (a)
PERCENTAGES RESPONSES (A%)
YES 33 82.5
NO 7 17.5
TOTAL 40 100
DISCUSSION
These questions in this section were asked to find out
what makes the respondents to work hand in hand to attain
their budgetary goals and how often these goals are attained.
80% work for high pay (i.e for rewards) where as 55% of the
time shows that favourable variance (or the desired goals) is
achieved. Only 34 persons responded to question number 13.
GROUP III QUESTIONS
QUESTION NO. 22
Do your duties conflict with those of other managers?
OPTIONS TO ANSWERS
NO. OF RESPONDENTS (a)
PERCENTAGES OF RESPONSES (A%)
YES 8 20
NO 32 80
TOTAL 40 100
QUESTION NO. 10
If targets were not set for you would you feel any less committed
OPTIONS TO ANSWERS
NO. OF RESPONSES (a)
PERCENTAGE RESPONSES (A%)
YES 8 67
NO 4 33
TOTAL 12 100
QUESTION NO. 20
Do you find yourself in a situation where you take orders
from more than one superior?
OPTIONS TO ANSWERS
NO. OF RESPONSES (a)
PERCENTAGES RESPONSES (A%)
YES 12 30
NO 28 70
TOTAL 40 100
QUESTION NO. 21
Do you find decision taken by another manager at hand affecting your own
department?
OPTIONS TO ANSWERS
NO. OF RESPONSES (a)
PERCENTAGES RESPONSES (A%)
YES 13.5 32.5
NO 27 67.5
TOTAL 40 100
DISCUSSION
The purpose of group III questions is to determine the
extent to which Job definition, responsibility and authority are
met and precisely 70% of persons responding indicate that
they take instructions from one supervisor only 60% of
respondents who take orders from more than one supervisor
say such orders are not contradicting. Likewise, 80% do not
encounter cases of overlapping functions.
4.2 TEST OF HYPOTHESIS
To test the hypothesis, data from each group of section
4.1 are assembled into one simple set of data that I shall call
the chi-square table. The questions are set in rows and
responses which are recorded under the columns “favourable
and adverse. The answers entered under the favourable
column are those that support the null hypothesis are under
the adverse column. There is an additional row for column
total and another column for row totals. The result table of
data is used to test the hypothesis. The actual test is done
step by step
Group 1(one) questions are used to test hypothesis 1 (one).
Group three (111) questions for hypothesis two (II), then
group two (II) questions for hypothesis three (III).
HYPOTHESIS I
STEP I – STATEMENT OF HYPOTHESIS
HO = Budget are an effective guide to business growth.
H1 = Budget are not an effective guide to business growth.
STEP II: CHI-SQUARE TABLE
QUESTIONS RESPONSE
FAVOURABLE ADVERSE
TOTAL
Q.3 38 2 40
Q.4 38 0 38
Q.5 37 3 40
TOTAL 113 5 118
STEP III: DECISSION RULE (OR CRITICAL VALUE)
DF (r-1) (c-1)
= (3-1) (2-1)
2* 1 = 2
where, DF = Degree of Freedom
c = no. of columns
: critical value for a 0.05 level of significance and 2 degree of
freedom is 5.991.
Decision Rule: If calculated (Fo-Fe)2 Is greater than 5.991 Fe
reject Ho.
STEP 4: SAMPLING DISTRIBUTION
Fo Fe Fo-Fe (Fo-Fe)2 (Fo-Fe)2/Fe
38 38.31 -0.31 0.096 0.003
2 1.69 0.31 0.096 0.057
38 36.390 1.61 2.592 0.071
0 1.61 -1.61 2.592 1.61
37 38.31 -1.31 1.716 0.045
3 1.69 1.31 1.716 1.015
TOTAL 2.801
WORKING FOR THE SAMPLE DISTRIBUTION TABLE
Chi-square statistics = (Fo-Fe) 2 Fe
Where, Fo = Observed Frequency
Fe = Expected Frequency
Fo = No. of responses to questions.
Fe = for example Q.3
When Fo = 38
Fe = 40 * 113 = 38.31118 1
When Fo = 2
Fe = 40 * 5 = 1.69118 1
It is necessary to determine a level of significance in a
chi-square a level of significance in a chi-square test, but
there is no specific level that is generally recommended. It is
up to the me the researcher to choose a level of significance
that suits my research situation and which services my needs
for this particular research, the level of significance is
arbitrarily fixed at 5% as much as that is conservative.
A decision rule (or critical value or chi-square value) is
stated prior to the test. A decision rule is the yard-side for the
test. Before we appropriate degrees of freedom for the test is
found. In chi-square test, the appropriate degree of freedom
is calculated using the formula : Df = (r-1)(c-1)
where; Df = Degree of freedom
r = number of rows in chi-square table
c = number of columns in the chi-square table.
The decision rule for the appropriate level of significance
and for the appropriate degree of freedom is found using the
chi-square distribution table.
STEP 5: DECISION
Since the chi-square statistics 2.801 is less than the
critical values 5.991, then the null hypothesis cannot be
rejected. Therefore, based on the sample evidence collected,
it is assumed that budgets are an effective guide to business
growth.
HYPOTHESIS II
STEP 1: STATEMENT OF HYPOTHESIS
Ho: Budgets are a means to control and synchronize
Organizations personnel and function
H1: Budgets are not a means to control and synchronize
organizations personnel and functions.
STEP 2: CHI-SQUARE TABLE
QUESTIONS RESPONSE
FAVOURABLE ADVERSE
TOTAL
Q.20 28 12 40
Q.21 8 4 12
Q.22 32 8 40
Q.10 27 13 40
TOTAL 95 37 132
STEP 3 : DECISION RULE.
DF = (r-1)(c-1)
DF = (4-1)(2-1)
DF = 3*1 = 3
critical value = 7.815
Decision rule: If calculated (Fo – Fe) 2 is greater than 7.815 Fe
then reject Ho
STEP 4: SAMPLING DISTRIBUTION
Fo Fe Fo-Fe (Fo-Fe)2 (Fo-Fe)2/Fe
28 28.79 -0.79 0.624 0.022
12 11.21 0.79 0.624 0.056
8 8.64 -0.64 0.410 0.047
4 3.36 0.64 0.410 0.122
31 28.79 3.21 10.304 0.358
8 11.21 -3.21 10.304 0.919
27 28.79 -1.79 3.204 0.111
13 11.21 1.79 3.204 0.286
TOTAL 1.921
STTEP 5: DECISION
Since the chi-square statistics 1.921 is less tan critical
value 7.815, so the information from the sample collected
supports the claim that budgets can be used to co-ordinate
and synchronize the efforts of workers in the organization.
HYPOTHESIS III
STEP 1: STAEMENT OF HYPOTHESIS
Ho: Budgets are more effective when reward penalty is
based
on goal attainment.
H1: Budgets are not more effective when reward penalty is
based on goal attainment.
STEP 2: CHI-SQARE TABLE
QUESTIONS RESPONSE
FAVOURABLE ADVERSE
TOTAL
Q9 32 8 40
Q.13 32 12 34
Q16 33 7 40
TOTAL 95 37 132
Degree value = (r-1)(c-1)
Df = 2*1 =2
Critical value: 5.991
DECISCON RULE; If calculated (Fo – Fe) 2 is greater than fe
5.991 then reject Ho
STEP 4: SAMPLING DISTRIBUTION
Fo Fe Fo-Fe (Fo-Fe)2 (Fo-Fe)2/Fe
32 30.53 -1.47 2.161 0.049
8 9.47 1.47 2.161 0.821
22 25.95 -3.95 15.603 0.601
12 8.05 3.95 15.605 1.921
33 30.53 2.47 6.101 0.200
7 9.47 -2.47 6.101 0.646
TOTAL 4.27
STEP 5: DECISION
Since the chi-square statistics is 4.275,991 is less than
5.991. So the budgetary goals can be attained all the more
when attainment of budget targets serves as yardstick for
employee promotion and remuneration.
CHPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION.
5.1 SUMMARY OF FINDINGS
We have tried to discuss the foregoing chapters. Some
of the major problems militating against budgeting and
budgetary control in business organizations.
The list is by no means exhaustive, but we tried as far
as possible t discuss the major problems of budgeting so as
to enable the reader of this research work form an informed
Judgment of the problems of budgeting and budgetary
control in business organization. This chapter will proceed
with the suggestions, recommendations made conclusions
based on the result of the investigation.
5.2 CONCLUSION
The most prominent goal of any reasonable firm is for a
credible budget both in the production and exchange of goals
and services.
To restore the integrity of the budgetary process, a
manager must control deficit finance, streamline expenditure
with realistic income profile and ensure that budget become
an ultimate and effective instrument in controlling the
financial system of their firm.
Based on all these facts given in this project work, we
can see that budgetary control can be as harmful as it is
beneficial depending on how the system is administered. At
best it helps management to decentralize responsibilities
while it centralizes control. By means of efficient planning,
effective communication, motivation ,and if human relations
are strained and uncertainties which can result from the
presence of variables in budget are not effectively provided
for, budgetary control technique can constitute a grave
deterrent to the achievement of management objectives.
5.3 RECOMMENDATIONS
The findings strongly indicate that the company has a
good budgetary system. However, the findings reveal some
weakness; the ways these weaknesses may be overcome are
outlined below,
1. Management appears to set standards for Junior
managers that are too difficult to attain- There is the
danger of frustration, distrust and deliberate to take
individual managers to take individual managers ability,
education and aspirations into account in setting
targets. When the ability has been assessed,
management should set stewards that are only
attainable when the manager given his ability and
education, is working under efficient conditions.
2. It is dangerous for managers in an organization to
compete among themselves in a situation of inter-
dependency. It means, for instance, that one manager
can withhold vital information that another manager
needs to make a good decision. This competition
obviously is because reward is tied to goal attainment
and no manager wants to assist another to get ahead of
him. All in one, corporate goals lose out to managers’
self- interest, and the work environment is suffered with
tension, management can encourage team work among
the managers by stressing group reward above
individual reward, for all manager at a level when each
managers achieves the standards or is at a reasonable
range of its attainment.
3. Vague and conflicting instructions can impede effective
actio0n and answerability to more than one supervisor
can introduce confusion and make control difficult. This
can happen when certain functions are duplicated. The
organizational structure of libraries should be
overhauled. Jobs should be thoroughly scheduled and
duties precisely defined and described. The supervisor—
subordinate relationship needs to be assessed so that a
situation does not arise where a subordinate is
answerable to two or more supervisors. A management
consultant firm could be engaged to carry out the
overhead.
BIBLIOGRAPHY
Aljian, G. W.(1984):Purchasing Handbook: Mograw- Hill publications ,3rd Edition,
Batty, J. (1971): Theory and Practice of Investment: Heineman
Ltd, London, 4th Edition.
Bhatia, H. L. (1993): Public Finance: Vikas Publishing House Ltd, MasjidRoad, Jangpure, 17th Edition.
Brigham, E. F. (1986): Fundamentals of Financial Management: The Orghan Presshold, Rinehait and Winston Saunders College Publishing, London. 5th
Edition.
Brown, J. L. and Howard, L. R (1975): Principle and Practice
of Management Accounting: Mac Donald & Evans Ltd, London. 2nd Edition.
Burkhead, J.(1965): Government Budgeting: John Wiley and Sons Ltd, 3rd Edition.
Drury, C. (1996): management and cost of accounting: pitman
Publishers London sixth edition. Lucy, T. (1989): Costing An Instructional Manual: DP
Publication Ltd London, 6th Edition.
Nweze, A.U.(2004), Profit planning
Oshisani, K. and Dean, P. (1984): Financial Management in Nigerian Public Sector: Pitman Books Ltd, London. 4th
Edition.
Owler, L.J. and Brown J.L. (1984):Wheldon’s Cost Accounting:
Mac Donald and Evans Ltd, London. 2nd Edition.
JOURNALS AND UNPUBLISHED BOOKS OR WORKS
Nwoko, C.(1992): “Control Theory in Accounting” Unpublished
Lecture Notes Dept. of Accountancy, University of Nigeria at Enugu,.
Odetola Odeleye, J.M. (1991): “Managing the Budgetary Process within the Context of Planning Economic Monitor” Vol. 6, No. 3.
Okoye, F.T.(1991):” Budgeting and Budgetary Control Practice
and As HDC”: Unpublished Thesis, Department of Accountancy University of Nigeria) .
Pogue, G.A. (1986):”Budgeting as an Aid to Management Performance” Student Newsletter, ICMA London.
APPENDIX
Department of AccountancyCaritas University,Amorji-Nike,EnuguJuly, 2010.
Dear Sir/Madam,
I am a post graduate student of the above named
University, carrying out a research report work on Budgeting
and Budgetary Control in Business Organization.
I will be pleased, if you can respond to the questions
contained in the questionnaire attached for this letter. Your
response will aid me in achieving the objective of this
research work.
All information given will be used purely for academic
work and will be treated confidentially.
Thanks for your understanding.
Yours sincerely,
AGU CHIKA E.
QUESTIONNAIRE
Tick the boxes (√) as appropriate. Only one box may be
ticked for each question.
No need to write your name.
(1) Which type of budget do you use?
Static ( ) Flexible ( ) None ( )
(2) Who is responsible for preparing a budget for your
particular department?
Budget Committee ( ) Yourself ( )
(3) Why does your company use budget?
(a) To plan profit ( )
(b) To keep proper Accounts ( )
(c) No idea ( )
(4) Why do you think that Budget help to achieve target
profits?
(a) Motivates employee ( )
(b) Targets are low ( )
(c) It makes managers relax ( )
(5) Are your Opinions sought before a budget for the
company is prepared?
(a) Yes ( ) (b) No ( )
(6) Do you involve your subordinates in your department
budgeting?
(a) Yes ( ) (b) No ( )
(7) Do you sometime see the targets set for you and your
department as unrealistic?
(a) Yes ( ) (b) No ( )
(8) Are the unrealistic targets too high or too low?
(a) Too high ( )
(b) Too low? ( )
(9) Why do you feel committed to achieve the targets set
for you?
(a) High pay ( )
(b) Personal Satisfaction ( )
(c) Fear of punishment ( )
(10) Do you find decision taken by another manager at
your hand affecting your own department?
(a) Yes ( ) (b) No ( )
(11) How often do you receive performance reports?
(a) Monthly ( )
(b) Quarterly ( )
(c) Bi-annually ( )
(d) Annually ( )
(12) How soon after the period to which they relate do you
receive performance reports?
(a) One week ( )
(b) Two weeks ( )
(c) Three weeks ( )
(13) Which type of variance occur more often in your
department?
(a) Favourable ( ) (b) Adverse ( )
(14) Under what conditions may you revise your budget?
(a) Change in government policy ( )
(b) Unanticipated rise in costs ( )
(c) Budget goals not being met ( )
(d) Increased competition ( )
(15) What do you think are the causes of variance in your
department?
(a) Faulty forecasts ( )
(b) Adverse changes in the environment ( )
(c) Uncooperative staff ( )
(d) Specify -------------------------------------------------------
(16) Do variance determine whether a manager should be
rewarded or not?
(a) Yes ( ) (b) No ( )
(17) When variance occur in your department into what
percentage range does it often fall?
(a) 0 – 5% ( )
(b) 5 – 10% ( )
(c) Over 10% ( )
(18) Which of the following problems do you encounter in
budgetary control?
(a) Uncooperative staff ( )
(b) Managers do not understand budget goal ( )
(c) Managers pursue individual goals instead of
corporate goals ( )
(d) Specify -------------------------------------------------------
(19) Recommend budgetary controls that can be used in
controlling variance in your department
(i) -----------------------------------------------------------------
(ii) ----------------------------------------------------------------
(20) Do you find yourself in a situation where you take
orders from more than one supervisor?
(a) Yes ( ) (b) No ( )
(21) If targets were not set for you would you feel any less
committed?
(a) Yes ( ) (b) No ( )
(22) Does your duties conflict with those of other
managers?
(a) Yes ( ) (b) No ( )
