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THE ROLE OF BUDGETARY CONTROL AS A
TOOL FOR COST CONTROL IN MANUFACTURING COMPANIES IN NIGERIA
ABSTRACT
The study
examined the role of budgetary control as a tool for cost control in
manufacturing companies in Nigeria. The study sought to examine the impact of
budgetary control on cost control. The sample of the study comprised of ten
manufacturing firms registered with Nigeria Stock Exchange (NSE) namely Nestle
Nigeria Plc, Unilever Nigeria Plc, Evans Medical Plc, Beta Glass Plc, 7-UP Bottling Company Plc,
Nigeria Breweries Plc, Nigeria Flower Mills Plc, Dangote Group, Pz Cussons, Glaxosmithkline.
A structured
questionnaire was used, and the study adopted both the purposive sampling and
simple random sampling technique to select190 randomly selected staff of the
manufacturing firms, the study further employed the descriptive survey design
and the ex-post facto design.
The
descriptive statistics and regression analysis were employed to analyze the
data. Findings of the study indicated that Budgetary control has impact on cost
control in selected manufacturing firms in Nigeria; Budget ensures effective
cost control and profit growth in selected manufacturing firms in Nigeria;
There is relationship between planned and actual budget in selected
manufacturing firms in Nigeria.
The study
concludes that budget is an effective tool used by management to control cost
in manufacturing firms in Nigeria.
The study suggests amongst others that, It is
important to develop a budget manual which everyone in the organization can
refer to for guidance, education and information about the budgetary process;
Management of selected firms should introduce adequate accounting system which
will bring about checks and balances; In order for budgeting to achieve its
objectives, it is necessary that budget should not be too restrictive and/or
rigid; The budget set by the management should be the one that is attainable.
CHAPTER ONE
INTODUCTION
1.1 Background of the Study
The changing
complexity of business activities and the ever changing conditions of business
environment- social, economical, political and technological advancements makes
it ever increasingly difficult for an organization to consistently earn a
profit that could be termed a fair return on the capital invested. Budgeting
and budgetary control has for long be a techniques of interest to management
accountants, business experts, and financial evaluators. Experts has
conventionally accepted budgeting and budgetary systems, which are the basic
components of budgetary system, as a fundamental basis for profit planning and
cost control in an organization.
A budget
identifies the planned expenditure for a project, program, or portfolio. It is
used as baseline against which the actual expenditure and predicted eventual
cost of work can be reported. Initial cost estimates can be comparative or
parametric. These are refined, as the feasibility and desirability of the
initiative are investigated and a greater understanding of scope, schedule and
resources are developed. Once approval is given, these refined estimates form
the baseline cost. By allocating costs to the activities in a schedule, a
profile or expenditure is produced.
A budget has
been defined by chartered institute of management accountants (CIMA), as “a
financial or qualitative statement prepared and approved prior to a defined
period of time for the purpose of attaining a given objective. It includes
income, expenditure, and the employment of capital”.
A budget
provides an in depth plan of action for a business over a definite period of
time, by planning, problem can be anticipated before they arise and solutions
can be sought through careful study. The budgeting planning process ensures
that managers do plan for future operations, and they consider how situations in the next year
might change and what steps they should take now to respond to these altered
conditions.
Budgetary
control is derived from the concept and use of budgets. A budget is an anticipated financial
statement of revenue and expenses for a specified period. Budgeting refers to
the formulation of plan for a given period in numerical terms. Thus, budgetary
control is a system which uses budgets as a means for planning and controlling
the entire aspects of organizational activities or parts thereof.
The
chartered institute of management accountants (CIMA), defined budgetary control
as “the establishment of budgets relating the responsibilities of executives to
the requirements of a individual action
the objectives of this policy or to
provide a basis for its revision”.
Batty
(1982), defined budgetary control as a system which uses budgets as a
means of planning and controlling all
aspects of producing and selling commodities or services. This is true as we
tend to prepare revenue and expenditure variance analysis to be able to deduce
areas of divergence for which the management needs to watch to avoid
embarrassment as any adverse variance will translate into inability to meet the
corporate objective which will eventually lead to disagreements with
stakeholders.
Howard and
Brown (1998) sees budgetary control as “a system of controlling cost which
includes the preparation of budgets, coordinating the departments and
establishing responsibilities, comparing actual performance with budgeted and
acting upon results to achieve maximum profitability”. The above definitions
point out that budgeting is an aid to planning and control
Cost is any
monetary sacrifice made to secure benefit. Without cost, there can be no
productive activity that will generate the profitability objectives of the
firm. Empirical results have shown that in many organizations, operating costs
are unnecessarily high, thereby robbing the organization of the profit that would
have been made (Yoshikawa, Innes, Mitchell, & Tanaka, 1993). In order to
ensure that costs are brought to the barest minimum, there is need for cost
control.
According to
Bromwich (2000), cost control is the process of setting standard, measuring
actual result, comparing actual result with the standard cost, and taking
corrective actions where there is deviation. Adeniji (2004) stated that cost
control is the regulation of cost of operating a business and is concerned with
keeping costs within acceptable limits. These limits will usually be specified
as a standard cost or target cost limit in a formal operational plan or budget.
If actual cost differ from planned cost by an excessive amount, cost control
action will be necessary.
Ukpai (1999)
posited that cost control action ought to lead to reduction in excessive
spending, for example, when material wastage is higher than budget or
productivity level is higher than standard. A cost reduction program, however
can be directed towards reducing expected cost level by cutting cost to below
current standard level by purchasing new equipment, changing methods and
techniques of production, and so on. However, standards reflects current cost
and conditions and not necessarily the cost and conditions which will minimize
costs (ukposido, 2002).
The
important of cost control program within a company cannot be overemphasized.
Companies that are losing money, need to increase profit, or must become more
competitive. They need to cut down expenses in order to succeed. Knowing how to
implement effective cost control strategies can be determining factor in the
survival of a business.
Cost control
is simply the prevention of waste within the existing environment. The
environment is made up of agreed operating methods for which standards have
been developed. These standards may be expressed in a variety of ways, from
broad budget levels to detailed standard costs.
Cost control
is defined as the regulation by executive action of the course of operating an
undertaking. Cost control aim at achieving the target of sales. Cost control
involves setting standards. The firm is expected to adhere to the standards.
Cost control emphasis is on the past and present. Cost control is applied to
things which have standards. It seeks to attain lowest possible cost under
existing conditions. Cost control is preventive function.
Cost control
is exercised through a variety of techniques which includes inventory control,
standard costing, budgetary control, labor cost control, material cost control
etc. Cost control helps to improve profitability and competitiveness, it is
indispensable for achieving greater productivity. Cost control may also help a
firm in reducing its costs and thus reduce its prices and in the absence of
cost control, profits may be drastically reduced, despite a large and
increasing sales volume. If the prices of the products are reasonable, it can
maintain higher sales and thus employment of work force.
1.2 Statement of the Problem
Every
company has primary duty of achieving the objective of profit maximization of
the company through budgeting which is the comparison of performance against
plan or target. Due to the state of our economy, and government policies, this
goal is much hindered during the period of economic depression which features
low capacity utilization, high interest rate shortage of foreign exchange to
buy the need raw materials and so on.
Likewise,
due to the economic problem, organizations using budgetary control as a measure
to check its expenses often find it very difficult to comply with the
stipulated budget because the rising cost of doing business in the country has
been of utmost concern to most businessmen and the entire citizens at large.
This has even accounted for capital flight and closure of some businesses and
the movement of manufacturing companies to neighboring countries, where cost of
doing business is relatively low compared to what is happening in Nigeria.
Likewise,
managers may overestimate costs so that they will not be blamed in the future
should they overspend. The use of effective budgetary control on cost control
system is needed to arrest the situation and this is what the study aims at
achieving.
1.3 Research Questions
The
following research questions are listed below;
What are the cost control techniques used
in manufacturing companies in Nigeria?
Does
budget help to ensure effective cost control and profit growth?
What relationship is between planned and
actual budget?
What are the effects of budgetary control
on cost control in manufacturing companies?
1.4 Objectives of the Study
The main
objective of the study is to analyze the impact of budgetary control on cost
control in manufacturing companies in Nigeria. The specific objectives are;
To evaluate the cost control techniques
that are being used in manufacturing companies in Nigeria
To know if budget help to ensure effective
cost control and profit growth.
To evaluate the relationship between
planned and actual budget.
To determine the effect of budgetary control on cost control
in manufacturing companies in Nigeria.
1.5 Research Hypotheses
Hypothesis
1: Budgetary control has no impact on cost control in manufacturing companies
in Nigeria.
Hypothesis
2: Budget does not ensure effective cost control and profit growth.
Hypothesis
3: There is no relationship between planned and actual budget
1.6 Significance of the Study
This
research work intends to help ascertain how budgetary control can be useful
tool in evaluating cost control in manufacturing companies. It will help management in assessing their
performance in profit, planning and control. The research work will also help
to evaluate the cost control techniques that are used in manufacturing
companies.
The research
work will help to examine whether manufacturing companies can reduce costs as
well as maintain a high quality of their products and services
The
significance of the research work is to provide both theoretical and practical
lasting solutions to problems encountered by manufacturing companies in
enhancing their profitability through budgetary control.
The research
work will also identify how a good budgetary control as a tool for cost control
will lead to the growth and expansion of the manufacturing companies in
Nigeria. Another significance of the research work is that it shall establish
the fact that budgetary control gives standards by which the organizational
actual performance is ascertained.
Lastly, the
work will also intend to add to the
existing literature to help future researchers interested in the subject
matter and as a basis for further reference.
1.7 Scope of the Study
The study
will be limited to cost control as a dependent variable and budgetary control
as an independent variable. It will take into consideration manufacturing
companies in Nigeria. The scope of this study is to investigate and evaluate
budgetary control as a tool for cost control in the manufacturing industries in
Nigeria.
The analysis
to be made in this study will be based on data made available to the researcher
by the company’s staff and head of departments in the questionnaire that will
be administered
1.8 Definition of Terms
Budgetary
control: This is a control technique whereby actual results are compared with
budgets. It is the process by which budgets are prepared for the future period
and are compared with the actual performance for finding out variance, if any.
Any differences (variances) made the responsibility of key individuals who can
either exercise control action or revise the original budget.
Manufacturing
company: This is a commercial business that converts raw materials or
components into finished goods or products. A manufacturing company is any
business that uses components, parts or raw materials to make finished goods.
These finished good can be sold directly to customers or to other manufacturing
businesses that uses them for making different product. Manufacturing companies
in today’s world are usually comprised of machines, robots, computers and
humans that all work in a specific manner to create a product.
Cost
control: It is a tool of management executives to regulate the working of the
manufacturing concern. Under the globalize economy, mere planning is not
enough. Efforts are constantly made to scrutinize the results of the workings.
If so, out of control situations may be find out and eliminated immediately,
with the help of cost control, the executives can limit the costs within the
planned levels.
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