Budgeting and Budgetary Control as a Means of Achieving Organizational Objectives

Budgeting and Budgetary Control as a Means of Achieving Organizational Objectives

Meaning of Budgeting and Budgetary Control – A budget is a quantitative plan of action prepared in advance for the period to which it relates. Budget may be prepared for the business as a whole, for departments, for functions such as sales and production or for financial and resource items such as cash, capital expenditure manpower purchase etc.

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It is well recognized that an enterprises should be managed effectively and efficiently. This should be done by means of controlling and coordination activities of the organization in order to achieve its stated objectives. The process of management is enhanced when management is able to predetermine its course of action in advance. The function of management is basically centered on decision making which is facilitated by various management techniques, procedure and by utilizing the individual and group efforts in a coordinate and rational way. The statement approach to attaining effective management performance is budgeting. Budgeting therefore, is the process of preparing and using budget to achieve management objectives.

According to the Institute of Cost of Management Accountants (ICMA), budgeting is “a plan quantified in monetary term prepared and approved prior to a defined period of time usually showing the planned income to be generated and for / or expenditure to be incurred during that period and the capital to be employed to attain a given objective”.

There can be not control without objective and plan as this predetermine and specify the desirable behaviour and set out the procedure which should be followed by members of the organization to ensure the firm is operated in desired manners. Historically, budget controls were used as a device to control expenditures in relation to the revenue so the whole array of budgeting control systems in an organization normally provide target to be pursued, means for the revision of the budget in the light of difference in result between in the actual and expected performance.

While a budget is an action plan and budgeting is the process of preparing an action plan, budgetary control is a management techniques use to plan, execute and control operation and activities aimed at achieving set target within a stipulated time frame budgetary control involved the following steps:

 

 

  1. Preparation of a budget or a detail action plan.
  2. Identification of responsibility centre in the organization to execute or carry out specific activities forming part of the action plan.
  3. Adaptation of mutually agreed target of achievements to serve as other indication of progress in the action plan, both in financial and physical terms.
  4. A system for periodical monitoring of performance of every segment or responsibility centre involved.
  5. Careful comparison of the actual performance and outcome with the corresponding part of the plan.
  6. Assessment of deviation and variance in actual performance and activities in relation to the plan and identification of such deviation.
  7. Initiation of corrective action aimed at ensuring that the planned activities and action are adhere to as far as possible.

It become obvious for the above description of the term budgetary control that is technique encompassing the entire process starting for preparation of the budget or action plan covering, monitoring and reviewing and culminating in corrective action. Its main purpose is to enable management to plan, carry out, project operations or activities with efficiency and effectiveness in the use of resources.

Drucker (2000) distinguished between ‘Control’ and ‘Controls’. “Control is the function which makes sure that actual work is done to fulfill the original intention and controls are used to provide information to assist in determining the control action to be taken”.

Controls encompasses all the methods and procedure which direct employee towards achieving the organizational objective. Control I whatever direction is not only achieved by formal means but also that pressure exerted by individual over one another. Also, Drury (1987) defined budgetary control as “the process of ensuring that firm’s activities confirm to its plan and that its objectives are achieved”.

  • PURPOSE OF BUDGETARY

The budgeting process is required to achieve different purposes within an organization. In addition to aiding planning, coordinating and communication activities of an organization, they also used as controlling and motivating devices.

The purpose served by the budgeting process include?

  1. It provides a financial blue print that enables a firm coordinate all its activities.
  2. It forces managers to re-examine past performance, which may enable them discover and correct inefficient out model methods and operation.
  3. The budget enables managers to implement the planning and control functions i.e. to state the firm’s expectations in clear formal terms, to avoid confusion and to facilitate their attainability.
  4. It provides a means of measuring and controlling the performance of individual and units and to supply information of the basic of which the necessary corrective action can be taken.
  5. Finally, it communicates expectation to all concern with the management of the firm so that they are understood, supported and implemented.

THE SCOPE OF BUDGETING

Budgeting is essentially concerned with:

  1. Establishing a plan of performance which coordinates all the activities of the business.
  2. Recording the actual performance
  3. Comparing the actual with planned performance
  4. Calculating differences and analyzing the reasons for them.
  5. Acting immediately if necessary to remedy the situation.
    • HUMAN FACTORS IN BUDGET PLANNING AND CONTROL

In a height budget, maximum revenues and minimum costs are combined to produce an idea budget. While this type of budget would be theoretically be achieved, the also not allow for the human factors that normally prevents the achievement attainable. For this reason such a budget is not considered an effective device for motivating employees.

The desired goals should be in budget that is fair to both the firm and its employees. A certain amount of cost efficiency due to human factor such as illness, personal disability should be built into the budgeting process. A budget that is reasonable to both employees and the firm can operate as an effective control mechanism that reward exemplary performance and identifies mediocre performance.

  • PREPARATION OF BUDGETS

The preparation of the budget should originate at the, lowest level, of management and be refined and coordinated at higher levels.

This approach will enable managers, to participate in preparation of their budget and increase the probability that they will accept the budget and strive to achieve the budget target. The first step towards preparing a reliable budget is to have a sound organizational structure. This involves creating responsibility centre with duties and authorities spelt out. Each responsibility centre must have its own budget showing the costs that are controllable by managers of the department.

BUDGETING PROCESS

In large organizations, budget preparation is normally the responsibility of a budget committee with the chief executives as the chairman. Membership of the committee should be made up of preventative of the major departments of the organization with s senior member of the finance staff acting as the budget officer. When the committee formulates the general programme for the preparation of the budget, the budget officer (who will be responsible for operating the system) will

(a) Issue instruction to various departments to prepare their estimates.

(b) Provide historical information to departmental officers to them in their forecasting.

(c) Reserve and check estimates of the department

(d) Suggest possible revisions

(e) Discuss difficulties with the officers

(f) Ensure that officers prepare their budget in time

(g) Prepare budget summaries

(h) Submit summaries to the committee and coordinate all budget works.

BUDGET COMMITTEE

Effective budgetary requires data input from each department. The chief financial officer is often responsible for organizing and administering the budget programs. He ensures that the committee receives all appropriate budget estimates, and that each estimate is raised according to any additional information obtained by the committee.

  1. Selecting budget policies compatible with organizational goals and objectives.
  2. Reviewing budget estimates submitted by section heads.
  3. Revising the budget estimates when necessary
  4. Approving budget estimates
  5. Analyzing budget report and recommending changes.

BUDGET PERIOD

No specific period of time can be formulated as being the best budgeting period. A detailed budget for each responsibility centre is normalizing prepared for one year. The annual budget may be divided into 12 it may be broken into months. The budget period depends on the type of business concerned. Most organization prepares budget once a year covering the coming fiscal year.

Finally, the purpose for which a budget is established has a major bearing upon the length of the budgets period, and there is nothing to prevent a concern from choosing different period for different purpose.

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic

BUDGET AND BUDGETARY CONTROL AS A MEANS OF ACHIEVING ORGANIZATIONAL OBJECTIVES

(A CASE STUDY OF RANCCOR FOOD AND PACKAGING NIGERIA LTD).

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