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BUDGETING AND BUDGETARY CONTROL IN BUSINESS ORGANISATION

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.

1.1.1    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;

Þ  PLANNING - To produce detailed operational plan for the different sectors and facets of the organization.

Þ  CO-ORDINATION-To bring together and reconcile into a common plan the actions of the different parts of the organization.

Þ  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.

Þ  MOTIVATION- To influence managerial behaviour and motivate managers to perform in line with the organizational objectives

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.

Þ 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 (pg653). Responsibility centre is a unit of a firm where an individual manager is held responsible for the units performance.

BUDGETING: 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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