The Concept of Budgeting and Budgetary Control

The Concept of Budgeting and Budgetary Control

There is a consensus among authors in order to arrest the business of the future. An enterprise must have vision of where it wants to be in future and accordingly draw up a strategic business plane. This long term plan are further broken down into shorter period and this shorter period set out a detail step by step procedure by which to attain the business objective. The aim and result of the planning is profit, which is also a yardstick for jugging the management performance. Profit planning especially in the short term is carried out by the use of budget by A.W. Wilmore (1973) is of the opinion that budgeting is a service faction assisting management to fill full her function and that budget did replace management but are completely intertwine with the process of management

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Wilmore also observed that planning goes from senior staff to junior staff whereas budgeting formulation flow from line managers to top managers. Isaac Reyold agrees with Wilmore but noted that budgeting is the key to survival in today’s high technical and competitive and changing environment and that failure to plane result in many firm in a business future that might have been avoided by profit planning. He also listed the outcome of the inability to establish and use the formal budget structure as follows;

  1. Lost sale due to underproduction
  2. Excessive inventory cost do to overproduction
  3. Excessive personnel turnover
  4. General lack of control over the outcome of the business operation in term of profit

J.F Weston and E.F. Brigham (1978) are in agreement with Reyold by are quick to submit that the budget is not a means of limiting expenditure but rather it is a method to increase the operation, a toll to obtaining the most productive and profitable use o the companies resources through careful planning and control

Horgena and Foster agree that the budget is not a penny pinching. They also concur with the view of other authors that the budget is an aid to co-ordination and implementation. They went further to observed that well manage organization usually have the following budgeting circle

Planning the performance of the organization as a whole as the well as the unit. The entire management team agrees as to what is expected

  1. Providing o frame work of reference, a set of specific expectation against which actual result can be compared
  2. Investigating variance from planed collective action followed by investigation
  3. Panning again, considering the feed back and change in the condition

All author examine the budgeting has some benefit and are as follows;

  1. Budget force the managers to plane ahead which in turn is the key to business success. The budgeting process also provides the co-ordination and activities of the department management of the organization, so each part of the operation contributes towards the overall plane
  2. Budget clarifies the responsibility of each manager who has a budget and enable management by objective
  3. Budget enable communication between top and middle management regarding the firm objective and practical problem of implementing this objective
  4. Budget set a control framework which help the expenditure to b kept within agreed limits and point out division so that corrective action can be taken
  5. Budget, especially participating budgeting have been proved to motivate middle and lower management by the establishment of clear target against which performance can be judged.

The luccy whilst not disputing the earlier submission has listed some of the typical problem of budgeting.

Variance are just due to the changing circumstances and poor forecasting as do the managerial performance

  1. Budget tend to hide inefficiency by basing estimates on the pat performance which may not be appropriate for the current condition
  2. The existence of well-documented plan may course initial and lack of flexibility in adopting t changes. Hence over budgeting can be cumbersome and expensive
  3. Badly handled budgeting system with the undue pressure or lack of regard to human factor may course antagonism and may lower the moral.
  4. Budgetary goal may come to supersede enterprise goal. Budgetary Scot asset is the use of budget in controlling. in that case budget serve as a yardstick for the executive control of operation to determine the extent to which plane and objective are been attain to arrest off line drift in time while agreeing that budgetary control follows budget preparation, Lucy opine that budget require only not the top management support by that control is assisted as well participation of the budget holders into the investigation of the solution to the problem which arises. B.C. Osisioma (1990) concur with the above view but stated that budget fillfull two basic objective in the overall control process.
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To provide a basis for control at the point of action, that at the decision point

Feed back: to provide measure for the measurement of the effectiveness of the control after the point of action Control promote efficiency and reduce waste. This can do according to S.M. Aditola Odeleye (1991) by ensuring that corrective action are taking where necessary and possible to bridge the gap between budgeting and the actual performance and review the unrealistic budgets.

There is no position to the assertion made by Brown and Howard that budgetary control enable the management exemption because the management attention is only concentrated on those areas of operation which do not work according to the planes. The above assertion is self-evidence truth and cannot help but agree with them all.


Fixed and flexible budget are the two main types of budgeting that an enterprise can use for its planning and control activities.

A budget is fixed when it has a single plan volume level and is not altered or adjusted, regardless of the changes in volume or other condition during the budget period, cost, material, labour and overhead all are geared toward hat fixed level of activity. There is no analysis of cost into fixed or variable. The major purpose of the fixed budget is at he planning stage when it serves to define the organization objectives. Except actual performance in some of the budgeting. The fixed budget is for the control purposes. Since the level of operation seldom turns out the way it was planed, the fixed budget is falling into disuse. Two major factor account for why the major performance cannot actually be as exactly budgeted. One is the impact of the external influence over the firm and over which the form has little or not control development in the economy and the competitive development in the firm own industry. The second element that is controllable by the firm is the level of efficiency at a giving volume of sale. It is the recent level of management to build sufficient flexibility into the planning the budgetary model so as to react fast enough to the unfolding events.

Hence the tendency of the modern management to opt for flexibility in the management, budgeting and continuous budgeting. A budget which by recognizing different behavior of the fixed and variable cost in relation to fluctuation in output, turnover or other variables factor such the members of the employees is design appropriately to change with such fluctuation is the terminology definition of a flexible budget. In word, flexible budget is geared towards different level of output at relevant stages. In deed, the flexible budget is a series of fixed budget that is set up say at a five percent interval. The flexibility of budget recognizes that certain expenditure will vary at different level of output. Hence a firm may have an alternative level of outlay budgeted at different level of operation – high, medium flexible budget can be useful before and after a specific period and also at the end of the period. When managers are trying to analyze the degree of and extent to which each item is affected by change ion the volume of production. This process of analyzing cost into there variable and flexible element of item is so that the budget may be fixed according to the actual activity attained flexible budget is very good as a control device but the effectiveness depend on the accuracy of the production cost – behavior pattern. Ryold noted that many well-managed company prefer flexible budgeting because it provides that management with the basis of analyzing and controlling the varies between the budget and the actual cost which is accomplished by comparing the actual expenditure with the previously set amount adjusting for the varying level of production. Continues and rolling budget is a type continuous flexible budgeting but is more updated

Owler and Brown define the following budget as the continues updating of the short time budge by adding say further mount and quarter so that the budget can reflect the true condition at any point in time. A twelve mount budget is available and the quarter expired in the last mot is giving or of the future is added to the budget. The disability of the budget continues to own to the fact that it continuously forces the management to look at the future to keep the track of change in the operational environment.


The first step in budgeting is determination of the principal budget factor. The principal budget factor is that factor which at any given time effectively limits the activities of any organization. It is usually customers demand, but Nwoko argues that for companies in developing countries like Nigeria, production capacity is the limiting factor. However, the limiting factor can change over time because as a constraints to the, another will occur. After the termination of the principle budget factor, a forecast is made of how it is expected to behave during the budget period

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The budget schedule derive from are tight to the limiting factor are it observed pattern. Forecasting if very important activity because the effectiveness of the budget depends on accurate forecast.


This is a manual that is meant to inform and guide employees about the budgetary process. Content of the budget manual vary from company to company but generally it tell what to do, how to do it and in what form to do it. It also state who should do it . in fact, the manual is to educate responsible staff on the budgetary process and therefore to motivate.


The committee is charged with the responsibility to guide the work of budget preparation and administration. Membership varies between organization, and it id mainly consisted of persons from various unit of the company. The committee, which is service by a budget officer, work within the bounds of a statement of the begetting premises, which also is, disseminates to the departmental managers. The statement contain executive management instruction based on the observed friend in the relevant external factors and the committee is to provided technical assistant and data to coordinate the separate budget prepared by the various organizational units, resolve the differences among them on the one hand, and between and cooperate policies on the other, and submit a draft budget to the board for approval.


Budget education is all about nugget. Holders knowing what is expected of them in the budgeting process. They should receive a copy of the statement of the budgeting premises, participate fully in the begetting ant be informed of any revision made into eh budget submits to them. They are also entitled to receive a copy of the final approved budget. Many of these purposes are saves by the budget manual and the budget director. But in addition, employees can be educated on the budget through the method of seminars, conferences, and lecture etc. budget education motivates employee’s commitment to a successful budget implementation.


It is usual to look at a budget as a single complete unit. Although it represent a single coordinated plane, it is really an assemblage of units with separate major budget for sale reduction, expenses and finance together with such sub-division of this as may be thought necessary. A single complete budget for the enterprise is called master budget, and the assembling of the components budget into this whole is the budget director responsibility. In a typical manufacturing organization, the master budget consists of;


(a)              Operating budget

(b)             Financial budget and

(c)              Capital expenditure budget


Otherwise called quantity budget, the operating budget deal with planning of the enterprises, activities of the production, sale, purchase and all the supporting schedules.

The budget are made out in unit or quantities and thereafter converted to cash as a common measure. The operating budget is made up of a programme. The budget chose the estimated revenues and cost, product-by-product, of the major programme an organization planed to execute.


The financial budget is the operating budget quantifying the monetary terms. The financial budget is composed of the capital budget, cash budget, budgeted balance sheet and budget statement of changes and financial position. As far as the manual budget is concern, the cash budget is by far the most important part of the financial budget. The cash budget is the timing of the cash inflows and outflows, by installing periods, for a specific time spame. This forecast of the cash flow lays the basis for preparation of a financials budget.

The cash budget, for instance, the cash budget shows the need for and external financing and at what point in time this needs occur; it is also show the profitability for surplus cash. The essence of the financial budget is to reflect the projected, performance, income statement.


Capital budgeting, which is a top management excise, is the planning of a long-term investment in their financial implication. The project which come within the rage of capital budgeting include decision to expend plane capacities, add more factories or new products to acquire the new business etc. capital budgeting decisions  are particularly difficult because of the feature uncertainties, huge money outlay, long term, scale and decision cut across all the faces of the enterprise. Many investment appraisals, techniques exist for project selection but non-is a panacea to the intrinsic problem of after budgeting. However, next present value and normal raise of retune are preferred because they recognize the time value of money as a critical factor. The decision having long time term. Both methods discount expected future cash inflow to a co moon point in time so as to provide an appropriate basis for the comparison.

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The follow up of budget is at least as important as budget preparation. Horndfen most aptly captured the need for budget administration in the quotation below.

Budget help managers, but budget need help. Manage your budget; don’t let your budget manage you.

Budget should not be prepared in the first place if they are ignored, berried in files or improperly interpreted. In other words, there must be a enthusiastic management support for the budget, hence, the appointment of the budget committee and the writing of the budget manual. The committee serves to supervise and direct the budget and to ensure that the budgeting system is participating. On the other hand, the manual serves to educate staff personnel, which is very vital to good administration of the budget.

The achievement of budget goals takes plenty of intelligent administration to archive in practice. This will call for a price and clear organizational structure with definite and distinct lines of responsibility. In addition to budget preparations, the budget director ensures that admire budget are published and distributed to all responsible managers. Any revision made in the department budget should be disused with the manager. In this way budget serve as a means of communicating plane and objective downward.

Budget administration lead to responsibility, accounting which is a system that measures the performance of the responsible managers. The responsibility report, a budgetary control statement, is speedily prepared usually monthly to furnish the managers with figure, which compares his actual performance with his budgets. The report shows the budgeted amount, the actual amount and the variance. Variances are immediate investigated so that operation may be align with the plane. In this way, the budget provide feed back on the progress made towards meeting the plane. Budget administration should not be rigid. Manager should be allowed decision-making description. Change condition called for changes in plane. The changes in plane coupled with the experience of operation and other observed difficulties are fed to the budget committees so that budget planning is continually refined.


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The Concept of Budgeting and Budgetary Control

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