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THE ROLE OF
BUDGETING AND BUDGETARY CONTROL IN A BUSINESS ORGANIZATION
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.
CHAPTER ONE
INTRODUCTION
1.1 BACK
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.
1.2
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:
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.
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.
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.
1.3
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.
RESPONSIBILITY
CENTRE- According to Colin Drury in his management and cost accounting sixth
edition (pg 653). 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.
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