Budget And Budgetary Control As A Tool For Effective Decision And Planning

BUDGET AND BUDGETARY CONTROL AS A TOOL FOR EFFECTIVE DECISION AND PLANNING IN MINISTRIES AND PARASTATALS (A CASE STUDY OF MINISTRIES AND PARASTATALS IN IMO STATE)

The environment in which managerial (Budgeting) decision must be made continuous to be even changing and more complex-budgeting is pervasive with significance impact on individuals, firms and Engene F. Brigham (1979).

2.2     BUDGETS

According to J.L. Brown and L.R. Howard (1975): a budget is a predetermined statement of management policy during a given period which provides a standard for comparison with the results actually achieved here the fundamental principles in a budget can be stated as

 

  1. Establishing a plan or target of performance which co-ordinate all the activities of the business.
  2. Recording the actual performance
  3. Compare the actual performance with that planned.
  4. Calculate the difference, or variance and analysis the reason for them.
  5. Act immediately, if necessary, to remedy the situation.

Fremgen M. James (1973) equally agrees that a budget is a comprehensive co-cordinated plan expressed in financial forms for the operation and resource of an enterprise for some specific period in the future.

Also Read: Impact of Budget and Budgetary Control on an Organization

The chartered institute of management accountants (CIMA) has this to say of the budget, a financial or quantitative statement prepared and approved prior to defined period of time and for the purpose of attaining a given objective.  Institute of management accountants should contain statements, which are backed by monetary evaluations.  The budget should be future oriented, meaning that it should be prepared and approved earlier than the time it is expected to be operational perhaps, that is why J. Wald (1984), in his Big cost Accounts, has this to say Before a system can be developed three main aspects required definition; the budget period, the budget structure an what factors limit the business activity.

 

In all, the budget period is crucial to the implementation of the budget because it is an authority to spend and if it is not completed before the succeeding year, it would mean that no expenditure would be incured.  Therefore it is imperative to define the budget period an to ensure the early completion of the budget before the next fiscal year.  Wald also noted that it was necessary to define the budget structure simply master (static) budget with its components.  The operating budget, financial budget and capital budget.  Operating budgets relate to the planning of the activities or operations of the enterprise, such as production, sales and purchases.  Operating budget is composed of two parts of a programme activity budget and a responsibility budget.  Financial budget on the other hand are concerned with the financial implication of the operating and operating results.

 

The important components of financial budgets are: cash budgets, perform a balance sheet and income statement and statement of changes in financial position.  Capital budget than involves the planning to acquire worthwhile projects, together with the timings of the estimated cost and cash flows of each project.  Such projects require large sum of fund and have long-term implications for the organization.

 

According to PANDEY (1979), A budget center is a responsibility center where the manger is responsible only for costs expenses incurred in the sub-unit”.  The budget structure is not only important because the operating financial and capital budgets can be broken down to budget centers, but it goes to establish the existence of responsibility accounting.  Responsibility accounting is the concept where each level or department of an organization is responsible for the attainment of a specified objective.  It therefore follows that where the budget is fully defined, and in the end, related to organizational structure, each level or department will be aware of the objective for which it is set to achieve.

 

The final aspect singled out for definition by Wald was the limiting factor can be in the nature of customer demand, shortage of productive resources, like plant capacity an dthe availability of raw mateials or management may deliberately impose limiting factors, for example, by restricting production in order to keep up prices.  What ever the cause, the limiting factor must be taken into considerations when budgets are prepared.  This considerations have the advantage of facilitating the integration of all sectional budgets into the master (static) budget and for ensuring that all functional or operating budgets are capable of being attained.

 

CHARLES T. HORNGREN (1984), also agrees that a budget is a quantitative expression of a plan of action that budgets also aid co-ordination and implemtnation.  For co-ordiantion of the budget to be effective, there should be a budget committee.  This committee which is equally a management committee, is responsible for the provision of general guideline for preparing budgets, suggesting changes and reconciling divergent views.  The committee equally cordiantes budgetary activities, approve the budgets with or without revisions and finally to scrutinize budgets report later on.  This committee normally has the accountant as the budget officer or controller.  According to PANDY, the budget director is the overall in change of the committee.”

 

For the budget to be implanted with the discipline it requires top management support.  A budget system will be an utter failure if it is not initiated and supported by top management.  Top management must:

 

  1. Understand the nature and characteristics of budgeting.
  2. Be convinced that this particular approach to managing is preferable for their situation.
  3. He must be willing to devote the effort required to make it operative.
  4. He must support the programme in all its ramifications.
  5. View the results of the planning process as performance commitments.

 

Given that the budget is represented as an authority to spend and as limit not be exceeded, it follows logically that the realization by managers that the budget has top management support will make them believe that they must not exceed the spending limit without authority and where it is exceeded there must be good reasons for that.

But H.L BHATTA (1977), would like us to see the futurist aspect of budgeting through his emphasis on future, in his definition of a budget.  He says that a budget is, an estimate of future source of income and expenditure including station of future intentions within a given period of time.  The futuristic aspect of budget has its origin from the fact that there is a budget period during which a budget should be prepared in readiness for the next fiscal year.

 

The future orientation of budget carries with it elements of uncertainty and for casting.  For the fact that the future is uncertain, the figures budgeted are likely to be more or less than the actual performance this then gives rise to both favourable and unforourable variances from the budget.  Forecasting does not only require one to understand the past to a reasonable extent but also to have a logical estimate of the future in budgeting for instance, an organization might make a sales forcast which might be affected by demographic, political legal and social factors.  Although this is not a discussion on forecasting, the future orientation of budgets, there are elements of uncertainty and forecasting.

Budgets are planning tools and should have some qualities for them to be good.

KNIGHT AND WEINWURLLM (1964) who wrote on the characteristics of good budgeting said that, A good budgeting system is characterized by:

  1. An active participation by all levels of management in the preparation and administration of budget.
  2. A clear understanding of budgets and set standard that can be attainable.
  3. Flexible built in to the planning and control processes.
  4. Assignment of authority and responsibility for a sound organization structure.
  5. Adaptation of the accounting system facilitates the planning and control process.
  6. Provide education for employee in order to achieve a meaningful participation and involvement.

 

Regardless of the above characteristics of a good budget, men would not classify a budget as good unless that budget has something to do with their welfare.  Therefore the budget that increases the rate of inflation, the rate of unemployment and the misery as a good budget by any standard.

 

2.2     BUDGETARY CONTROL

Budgets fall under the realm of planning.  To follow up planning there should be element of control.  Budgetary control is therefore the element of control applied to Orjih John (2001), budgetary control is used for assigning responsibilities, planning and controlling performance, guiding managerial and other activities of the firm towards the achievement of organizational objectives.  If control to be effected in any organization, it should pervade targets of performance in sectional divisional and departmental budgets and also ensure that activities of the organization, good congruence and managerial effort are achieved.

 

The terminology of the chartered institute of management accounting (CIMA) also has its definition of budgetary control as the establishment of budgets relating the responsibility of executives to the requirements of a policy, and the continuos comparison of actual with budgeted results either to serve by individual action the objectives of that policy or to provide a basis for its revision.  This definitions is all embracing for it does not only suggest that work should be divided according to the hierarchial structure of an organization, but also that the work should be tied to management policy (budget) it does not not end there; it went further to state that there should be continuous comparison of performance with plan.  This comparison makes variances from the budget inevitable as echoed by SCAPENS (1985)” outcomes will not necessarily equal the original estimates, even if the estimate were accurate and the process has been under control.  Some variation around the estimate expected outcome is inevitable”.

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