ABSTRACT
Financial plans of many
organisations are expressed in their budgets.
Every organisation has developed
financial plans that guides in the allocating resources over a planning period.
Budgetary control is an integral part of corporate planning which is calculated
to achieve the objective of every organization including profitability
objective. It is therefore worrisome that some manufacturing companies do not
employ budgets as planning technique but just mere annual routine. Budgetary
control measures set up by manufacturing organisations have a way of
influencing profitability, such that if these controls are not adhered to
profitability might experience a negative trend this suggest the crucial nature
of budget and budgetary control in facilitating the achievement of
profitability.
This research work is carried out
to investigate the relationship between budgetary control and organizations’
profitability and the adoption of unique budgetary control techniques in
manufacturing companies in Nigeria. A survey research design method was adopted
within six manufacturing companies selected randomly. Primary data was used and
analyzed using correlation analysis, under the Statistical Package for Social
Sciences (SPSS). The result shows that there is a positive relationship between
budgetary control and profitability. It also shows that manufacturing companies
adopt unique budgetary control technique. On the basis of the findings, we
conclude that effective and efficient budgetary control techniques enhance profitability
of manufacturing companies in Nigeria. The work recommends that; in order for
manufacturing companies to increase profitability so as to remain relevant in
the open market management must adhere to budgetary control and take corrective
actions in areas where there are variances.
107 Pages
Project Reference Code:
C016
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY.
To remain relevant in the open
market firms need to improve their sales turnover and profitability. It is very
important for manufacturing companies to put into view the necessity of
preparing effective budgets and establishing adequate budgetary controls in
ensuring increase in their profitability. No planning system can be successful
without having an effective and efficient system of control. Budgeting is
closely related to control. The exercise of control in the organisation with
the help of budgets is known as budgetary control (Pandey, 1995). Budgetary
control as a concept is traceable to the bible days, precisely the days of Joseph
in Egypt. It was reported that “nothing was given out of the treasury without a
written order” (Genesis 41 verse 1-57).
An enterprise should be managed effectively
and efficiently. Managing implies coordination and control of the total
enterprise efforts to achieve the organisational objectives. The process of
managing is facilitated when management charts its course of action in advance.
The function of management also includes decision making facilitated by various
managerial techniques, procedures and by utilising the individual and group
effort in a rational way. One systematic approach for attaining effective
management performance is budgeting and budgetary control (Pandey, 1995).
A budget is a plan expressed in quantitative
and money terms (CIMA). Budgets need to be prepared and approved in advance of
the period in which they are to be used. Budgets can include some or all of
income, expenditure, and the capital to be employed. Moreover, a budget can be
drawn up for an entire organization, any segment of the organization such as a
department or sales territory or division, or for a significant activity such
as the production and sale of a specific product.
Once financial goals
are established, the budget is used to check and control operations using a
budgetary control system. A budgetary control system is a system for comparing
actual results with budgeted goals. Variations between actual results are investigated
and analysed. Action is taken to correct these variations while the operations
continue. The budgetary control system covers all phases of business activity;
production, sales, administration and finance Horace and Herrington (1998).
A budget assists managers in
managing and controlling the activities for which they are responsible. By
comparing the actual results with the budgeted amounts for different categories
of expenses, managers can ascertain which costs do not conform to the original
plan and thus require their attention. Budgets are activities within a company
that are coordinated by the preparation of plans for future periods.
No
planning system can be successful without having an effective and efficient
system of control. Budgeting is interrelated with control. The exercise of
control in the organization with the help of budgets is known as budgetary
control. The process of budgetary control according to Duncan (2000) includes:
i.
Preparation
of various budgets.
ii.
Continuous
comparison of actual performance with budgetary performance.
iii.
Revision
of budgets in the light of changed circumstances.
A system of budgetary control should
be flexible so as to provide for individual initiative and drive. Budgetary control
is an important device for making the organization more efficient on all
fronts. It is an important tool for costs controlling and achieving the overall
objectives. Budgetary control relates to the establishment of budgets relating
the responsibilities of budget holders. Budgetary control also relates to the
continuous comparison of actual with budgeted results: it does this to try to
ensure that the objectives of that policy are achieved; or to provide a basis
for the change of those objectives (Duncan, 1996).
All manufacturing companies have one
common characteristics and this is that, they involve in the mechanical or
chemical transformation of materials or substances into finished products.
These products are now delivered to the end users as finished goods. In the
process of converting the raw materials into finished goods certain direct and
indirect expenditures must be incurred, it is in this view that the firms
should take into consideration the importance of developing budgets and most
significantly establishing effective and efficient budgetary control measures,
in order to cover for the unforeseen liabilities, as it may want to negatively
affect the profitability of the organization. Based on the above, this project
is embarked upon to investigate the relationship that exists between budgetary
control and profitability.
1.2
STATEMENT OF THE PROBLEM.
Failure to
plan, either formally or informally, can lead to financial disaster. The
primary motive of any business venture, manufacturing inclusive is profit
making. Profitability depends on many factors among which is the efficient use
and management of budgets and budgetary control techniques. It is the
researchers belief that belief that some of the failures observable in the manufacturing
sector of the economy could be attributed to the neglect of this very important
aspect of their operations hence, the need to investigate what the effects of a
sound and well articulated budgetary control system (or lack of it) will have
on the profitability level of a typical business organisation.
1.3 PURPOSE OF THE STUDY.
1.4
RESEARCH
QUESTION
1.5 RESEARCH HYPOTHESIS
1.6 SCOPE OF THE STUDY
1.7 LIMITATION TO THE STUDY.
1.8 SIGNIFICANCE OF THE STUDY.
1.9 ORGANIZATION OF
THE STUDY
1.10 DEFINITION
OF TERMS
REFERENCES
CHAPTER
TWO
LITERATURE
REVIEW
2.1 INTRODUCTION
This
chapter is divided into the conceptual and the theoretical frameworks. We cover
the literature reviews of authors of relevant materials in this chapter in
order to familiarise the researcher with previous works done in this area and
to also help the researcher align the study appropriately.
2.2 CONCEPTS OF BUDGET
Several
admonitions where given in the bible which stressed the importance of budgeting
as an integral part of daily living; one of which is found in Luke 14 verse 28
where it says “ for which of you, intending to build a tower, sitteth not down
first, and counteth the cost, whether he have sufficient to finish it? .
According to CIMA (Chartered Institute of Management Accountants, 1993) a
budget is defined as “a quantitative statement for a defined time which may
include planned revenues, expenses, assets, liabilities and cash flow. A budget
provides a focus for the organisation, aids the coordination of activities and
facilitates control, planning is achieved by means of a fixed master budget
whereas control is generally exercised through the comparison of actual cost
with a flexible budget”. It may be drawn up showing the incremental effects on
former budgeted or actual figures, or be compiled by zero-based budgeting.
According
to Akintoye (2008), budgets were first introduced in the 1920’s as a tool to
manage costs and cashflows in large industrial organisation. Akintoye defines
budgets as “an operational and management tool that looks at the future and
lays down what is to be achieved.
Weetman
(2003:626) defined budget as the detailed which sets out, in money terms, the
plan for income and expenditure in respect of a future period of time. Hence it
s prepared in advance of that time period and is based on the agreed objectives
for that time period, together with the strategy planned to achieve those
objectives. Omolehinwa (2005) defines a budget as “a plan of dominant
individuals in an organisation expressed in monetary terms, and subject to the
constraints imposed by the participants and the environments indicating how the
available resources may be utilised to achieve whatever the dominant
individuals agreed to be the organisation’s priorities”. Budgets are short term
financial plans to guide managers in achieving the objectives of the firm.
Pandey (2003).
Lucey
(2003) in his recent definition of budget defines it as “a quantitative expression
of a plan of action prepared for the business as a whole for departments, for
functions such as sales and production or for financial resource items such as
cash, capital expenditure, manpower purchase, etc. The process of preparing and
agreeing budget is a means of translating the overall objectives of the
organisation into detailed feasible plans of action”.
Budgets
are monetised expressions of targets to be accomplished in a given year by an
individual, organisation or nation. It is a deliberate attempt to achieve
superior targets overtime with available and expected resources. Such targets
are influenced by the experiences of the past and expectations of the future.
Osiyemi (2005)
Budgets
are key components of the organisation’s planning and control system, providing
the mechanism to translate organisational goals into financial terms. More
specifically budgets are forecast of future revenue and expenditures. Once
established, budgets provide a control tool to ensure that organisational
members work to achieve the goals that create value (McWatters, Morse and
Zimmerman, 2001).
The
Tennessee board of regents (2006) defines budgeting as “the process whereby
plans of an institution are translated into itemized, authorized and systematic
plan of operation, expressed in monetary terms for a given period”.
A
budget is a plan expressed in quantitative and money terms. Budgets need to be
prepared and approved in advance of the period in which they are to be used.
Budgets can include some or all of income, expenditure, and the capital to be
employed. Moreover, a budget can be drawn up for an entire organisation, any
segment of the organisation such as a department or sales territory or
division, or for a segment activity such as the production and sale of a specific
product (Duncan Williamson, 1996).
According
to Hilton (1999), a budget is a more comprehensive plan, which can be expressed
in quantitative terms, that shows the way resources will be got and made use
of, within a certain period of time. This shows that a budget of essence is a
plan of resources such that it fits into the stipulated year such resource is
meant to be exhausted. Budget could be defined as a future plan of action for
the whole organisation or a section thereof. Budget can be defined as a financial
and or quantitative statement prepared and approved prior to a defined period
of time of the policies to be pursued by the organisation in order to achieve
organisational goals and objective.
A
budget is an approved financial and/or quantitative statement of the proposed
plan to be pursued during a defined period for the purpose of attaining a given
objective. A budget is a financial or non-financial expression of an
organisations plan of action for a specified period; it identifies the
resources and commitments required to achieve the organisations goals for the
period identified, Blocher et al (2008).
2.2.1
FUNCTIONAL BUDGETS
2.2.2
MASTER BUDGET
2.2.2:1
Cash Budget
2.2.2:2
Sales Budgets
2.2.2.3
Production Budget
2.2.2.4
Direct Materials Budget
2.2.2:5
Direct Labour Budget
2.2.2:6
Manufacturing Overhead Budget
2.2.2:7
Selling and Administration Expenditure Budget
2.2.2.8
Capital Expenditure Budget
2.2.3
TYPES OF BUDGETS
2.2.3:1
On the basis of type of Expenditure
2.2.3:2
On the basis of level of activity
2.2.4
ALTERNATIVE APPROACH TO BUDGETS
2.2.4:1
Incremental Budgeting
2.2.4:2
Zero Based Budgeting (ZBB)
2.2.4:3
Activity Based Budget (ABB)
2.2.4:4
Program Planning and Budget System (PPBS)
2.2.5
FUNCTIONS OF BUDGETS
2.2.6
ESSENTIALS OF BUDGETING
2.2.7
THE BUDGET ADMINISTRATION
2.2.7:1
Budget Committee
2.3
BUDGETARY CONTROL IN ORGANISATIONS
2.3.1
IMPORTANCE OF BUDGETARY CONTROL
2.3.2
OBJECTIVES OF BUDGETARY CONTROL
2.3.3 BUDGETING PROCESS
2.3.4
BENEFITS OF BUDGETING AND BUDGETARY CONTROL
2.3.5
PROBLEMS OF BUDGETING AND BUDGETARY CONTROL
2.3.6
PREREQUISITES FOR BUDGETARY CONTROL TECHNIQUES:
2.3.7
IMPACT OF BUDGETARY CONTROL SYSTEM
2.3.8
LIMITATIONS OF BUDGETARY CONTROL SYSTEM
2.3.9
BEHAVIOURAL ASPECTS OF
BUDGETING AND BUDGETARY CONTROL
2.4 BUDGETARY
CONTROL AND PROFITABILITY
2.4.1
EFFECT OF BUDGET ON PROFITABILITY
REFERENCE
CHAPTER
THREE
RESEARCH
METHODOLOGY
3.1
INTRODUCTION
This chapter represents the methodology
adopted in this study. Research methodology is more or less the blueprint of
research. It is concerned with the structuring of an investigation for the
purpose of identifying the relevant variables and their relationship to one
another. The discussion covers the following topics and sub-topics: research
design, types and sources of data, instrument of data collection, actual field
work, method of data presentation and method of data analysis employed.
3.2
RESEARCH DESIGN
The research design is the basic plan
that guides the data collection and analysis. It spells out the information to
be gathered, the source of data and the procedure to be adopted in gathering
the data required. The research method that will be used for this project is
the survey research method. This is
because it is a research method that collects the views, perspectives or
opinions of respondents regarding a particular issue or research interest and
it involves the use of questionnaire.
The
sample technique to be used by the researcher is the probability sampling
method precisely the simple random sampling. According to Adeleke (2009),
Probability sampling technique ensures that bias is not introduced into
research studies through who is included in the survey or experiment. According to Wikipedia, the free
encyclopedia, “A simple random sampling is a type of probability sampling
technique, it is a subset of individuals (a sample) chosen from a larger set (a
population)”. Each individual is chosen randomly and entirely by chance, such
that each individual has the same probability of being chosen.
3.3
POPULATION OF STUDY
In economics, population is the total
number of people living in a geographical area at a point in time. But in
research, population is the set of all participants that qualify for the study.
Population is the totality of the observation with which we are connected. The
number of observation on the population is defined as the size of the
population. For the purpose of this study the population is made up of the
totality of all manufacturing companies in the industry, which are above 50. It
is not possible to include all members of the given population in the
investigation. This is because the population members are too large to be
reached due to geographical coverage. According to ISI Emerging Markets below
are the total numbers of employees in each of the selected manufacturing
companies:
Unilever Nigeria Plc = 1091
Cadbury Nigeria Plc = 2429
Guiness Nigeria Plc = 507
WAPCO Nigeria Plc = 683
Dunlop Nigeria Plc = 1200
WAMCO
Nigeria Plc = 1400
3.4
SAMPLE SIZE AND SAMPLING TECHNIQUE
3.5
SOURCES OF DATA
3.5.1
INSTRUMENTS FOR DATA COLLECTION
3.5.2
DESCRIPTION OF QUESTIONNAIRE
3.5.3
VALIDITY AND RELIABILITY OF INSTRUMENTS
3.5.4
ADMINISTRATION OF INSTRUMENTS
3.6
ACTUAL FIELD WORK
3.7
METHOD OF DATA ANALYSIS AND PRESENTATION
3.7.1
CORRELATION
REFERENCE
CHAPTER
FOUR
DATA
PRESENTATION AND ANALYSIS
4.1
INTRODUCTION
This chapter is designed to show the
presentation, analysis and interpretation of data collected through the
questionnaire. The data is analysed and presented in accordance with the
objective of the study, research questions, hypotheses on which findings, conclusions
and recommendation will be based.
4.2
DATA PRESENTATION
120
questionnaires were distributed to employees in some manufacturing
organizations in Port Harcourt state and 106 responses were collected. These
responses will act as the basis for the analysis and presentation of data.
4.3
Data Analysis: Section A
4.4 Data
analysis: Section B and C
4.5
Interpretation of Hypothesis
4.5.1
Hypothesis one
REFERENCES
CHAPTER
FIVE
SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1
INTRODUCTION
5.2
SUMMARY OF WORK DONE
5.3
SUMMARY OF FINDINGS
5.4
CONCLUSION
5.5
RECOMMENDATIONS
5.6
SUGGESTIONS FOR FURTHER STUDY
BIBLIOGRAPHY
Adeniji,
A. A. (2004). Management Accounting 3rd Edition Lagos, Value
Analysis Consult, Nigeria.
Agbonifoh,
B.A, Agbadudu, A.B & Iyayi, F.I.O (2005) Management; A Nigerian Perspective
Lagos: Malt house press ltd.
Akintoye
2008, “Budgetary control for improved performance: A consideration of selected
food and beverages company in Nigeria”,
Euro journals, Inc, 2008.
.
.
Sridhar,
M.S. ‘Budgetary Control System in Service Organisation’, retrieved on February
22 2012, from http://www.google.com.
Terry,
(nd) Lesson 38: Techniques of Strategic and Evaluation Control. Retrieved on from
www.rocwraifoundation.org/management/bba/Bus.strategy/
Weetman
P. (2003), Management Accounting: An Introduction, 3rd Edition,
England, Pearson Education ltd.
QUESTIONNAIRE
Project
Reference Code: C016
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