Impact of Budget and Budgetary Control on an Organization

Impact of Budget and Budgetary Control on an Organization

The environment in which management (budgeting) decision must be made continue to be ever changing and ever more complex budgeting is pervasive with significant impact on individual firms and government paper and Engene F. Brighten (1979).

According to Bhatta (1977) the word budget is derived from the French word budget which means a small bag containing the financial proposal of an organization for a particular period. The use of the word budget in financial statement dates back to 1733

According to Adiele (Ay3) in a lecture delivered at an annual national conference of the institute of chartered accountants of Nigeria (ICAN) the word budget is used today in its English version which as cost it original meaning it was corrupted during medial England from the word Bougette meaning a small bag or pouch. At that time the special leather bag in which carried the seal of the court of exchequer later the chancellor of the exchequer started carrying in his bag also government proposal of income and expenditure for an ensuring period and when these are presented to the parliament the chancellor is described as having open this budget

2.1     BRIEF HISTORY OF THE ORGANIZATION

In 1990 after considering fertilizer as the major problem of agriculture the sector in recent fine could not produce enough food for local consumption talk less of exporting some

The agents for the purchase of these were grounded because of the problems faced by them in effort to revive this sector and the exodus of the rural youth to the industrial sector the federal military government in 1991 established Morris fertilizer company in Minna Nigeria state and commenced business the same years.

The purpose of the company was to produce NPK fertilizer there by boosting the agriculture development in Nigeria and to reduce the amount of fertilizer being imported into the country. Morris fertilizer plant at minna is major chemical mixing complex and has a capacity designed to produce 100 tones of NPK fertilizer per day

2.2     USES AND PURPOSE OF BUDGETS

Usually or in general a budget serve the following purposes:

• It lay down the standard with which to compare the submission of annual account of an organizaiton
• It serves as an instrument of resources department to the various department of an organization.
• It sits objective to be achieved and select best alternative plan with which to attain them bearing in mind the resource constraints of the organization.
• It organizes coordinate and control action which are necessary for he implementation of a given project.
• It serve as a device for communicating management plans & objective to the various department with in a given enterprises.
• It relates actual achievement against objective and revises plans and objectives when necessary in the light of experience as well as carries out consequential changes in the actual place.

Also Read: Budgeting and Budgetary Control as a Means of Achieving Organizational Objectives.

• TYPE OF BUDGET

Budget are usually classified in several ways and this budget estimate are presented to indicate he manner in which the budget will be affecting the economy. it has to be noted that a budget is either of along term nature or a short term nature. The following types of budgets are hereby recognized.

1. LEGISLATIVE BUDGET: This type budget is prepared and adopted by the legislature directly o through its committee.
2. THE EXECUTIVE BUDGET: This is a budget by the executive branch of the government and this is normally passed and adopted by the legislature but the initiative comes from the executive arm of government

INCREMENTAL BUDGET

These are budget whose request must be a compares by a statement of what incremental activities or changes would occur cover the budget cover increased or decreased by a given amount of percentages

FIXED BUDGET

This is the budget which is desired to remain in changed irrespective of volume of output or turnover attained. It is also know as STATIC BUDGET and is not adjusted or altered regardless of changes in volume or other condition during the fiscal year.

CONTINUOUS OF ROLLING BUDGETS

These are master budget that add an mouth in future as the month just ended is dripped. It help managers to have in mind specifically the perspective of the forth coming twelve months and this maintain a stable planning horizon.

FLEXIBLE OR VARIABLE BUDGET

This is a budget which is usually adjusted for changes in volume. It recognizes difference in behaviour between fixed and variable cost in relation to fluctuation in output. He flexible budget is based on the knowledge of how revenue and cost behave over a range of activities.

MASTER BUDGET

Master budget is overall budget of an organization comprising of profit and loss budget balance street and all other financial and operating budget.

It summarizes the planed activities of all sub-unit of an organization like sales production distributions financial and quantities target for sales purchases production not income and cash position. The master budget is a co-ordinated set of detailed schedules and statement it comprises of operating and financial budgets

OPERATING BUDGET

The operating budget focuses on income statement and its supporting schedules some refer to it as the profit plan. It comprises the following:

1. Sales Budget: This is usually the first type of the operating budget to be prepared because most other activities of the business are related to sales. It is normally prepared from the last year sales data and the expectation of the business condition of the following years
2. Production Budget: This type of budget is usually prepared by manufacturing companies he entire budget looks at the total limit needed the sum of desired enduring inventory plus the quantity needed to fulfill the budgeted sales. The total used with by partially met by the beginning inventory, the reminder must come from planned production this type of budgeting also come the following schedules.
3. Direct Material Assuage And Purchases: While the usage will depend upon the level of actual production the purchase are influenced by both expected usage and inventory level.
4. Direct Labour Budget: This is prepared to show the last of direct labour for the planned production. It usually depends on the types of goods produced and the labour or rate and methods that must be used to obtain designed level of production. It is normally in the cost of goods manufacture and sold budget.
5. Factory Overhead Budget: This budget would generally contain a separate line for every major item of overhead cost are it depend upon the behaviour of the cost incurred in relation to anticipated level of production.
6. Cost Of Goods Sold Budget: This is another type of operating budget it is responsible for the cost that will be incurred in the process of selling up the budget forecast for the period.
7. Operating Expenses Budget: This comprise of the administration expenses budget which cover expenses incurred by the organization that are not directly connected with selling and distribution process. Among the expenses are with selling and distribution that are the directly convicted clerical staff salaries office rent rate etc. although these may be appointment according to the facilities occupied by the each arm of the organization and selling expenses like that of advertising distribution salesman salaries and commission.
8. Purchase Budget: This budget is normally prepared by non- manufacturing companies in place of production budget. It calculated from the formula below:

Budgeted unit of purchase       =       (desired closing stock and unit of sales)-

(desired opening stock)

1. Financial Budget: This budget focuses on the effect that opening budget and the other plans such as capital expenditure and repayment of debt will have meanings. It comprises of;
2. Capital Budget: This is the long-range expectation for specific progress. It is the estimate that covers these items which are in the nature of acquiring and disposing of capital cases. This kind of project requires large sum of money and have long-term implications for the first. Capital budgets are usually different to prepare because estimates of the cash flows was a long period have to be made which involves a great degree of uncertainty. The capital budgets are generally prepared separately from the operating budgets. In some large organization, this is always a separate budget committee per capital item.

ii        Cash budget: Cash budget shows the planned cash receipts and disbursements. It is heavily offered by the level of operating in the budgeted income statement. It clearly shows among other things, the cash balance. It is in the budget that a flow of fund to and from organization, actual payment and so on are shown inclusive of funds, which are not owned by the organization.

iii.      Budget Balance Sheet: This is the last step in preparing a master budget and in it item is prospected according to business plan as expected in the previous schedules. It reflects what is expected to be overall position of the organization at the end of the relevant period and management can consider all the major statement as a basis for charging the course of events.

• PREPERATION OF A BUDGET MANUAL

This is defined by institute of cost and management according to England and Wales as a document, which set out, interalia the routine of and the forms and records required for budgetary control. Knight and Wennwarum (1964:50)

The budget manual is produced to provide guidance information to everyone within the organization about the budgeting processes and it aids in improving communication. It usually contains the following information:

1. Description of the system and its objective
2. Procedure to be adopted in operating the system.
3. The reports and statement required for each budget period
4. Definition of responsibilities and duties
5. The amount code in use
6. Dead line dates by which data are be submitted.

• CHARACTERISTIC OF GOOD BUDGETING SYSTEM

Before looking at what characteristic that spell out a good budgeting system it is wise to first of all taken a look at some of the causes of ineffectiveness of a budget system

It takes a long for any organization to install a good budgeting system and this is result of the following:

1. The budget as a management tool must be understood by all offices in the organization
2. The staff many feel reluctant on the grounds that it is impossible to accurately predict the future.
3. It is always easy to clarify the existing management responsibilities to the extant necessary for a budgetary system to operate effectively.
4. The integrated managerial action required when budgetary control is practiced may be a new experience for many officers.

It can be observed from the above reasons that united application of a budgetary system may be undertaken for example preparing only administrative budget or a production budget. The limited application is justifiable as a stage installation of a more complete system but it should be noted that the total benefit system but it should be noted that the total benefit of budgetary control system cannot be obtained until comprehensive budget is undertaken now the following are factors that a good budgeting system characterized by:

1. A good must create rooms for all the level of management to participate actively in its preparation and administration
2. A system that should be both understandable and attainable in term of particular operating factors for which they apply.
3. Flexibility which is inbuilt in the system in both its planning and control phases is also characteristic of a good system on the other hand tuernton in knight and Weiniourn (1964;51) has out lined that good budget system is characterized by:

1. A clear establishment of objective
2. Top manageemnt supporting the operating of the system
3. The use of correct choice of budgeting period.
4. The use of available techniques to ensure that budgets are as realistic as possible
5. The recognition of responsibility for control in the establishment of budget centers
6. The assessment of the budgeted level of attainment
7. A clear instruction to executives to assist them in their jobs of preparing budget
8. The scrutinizing and discussion of submitted budgets and where necessary explanation given on changes made
9. The use of approved budget as an essential further of the manageemnt control process against the plan and control system that ensures that where actions is necessary manager are advised so that action will be taken promptly
   • OTHER BUDGETING CONCEPTS

1. PLANNING- PROGRAMMING BUDGETING SYSTEM (PPBS)

planning- programming budgeting system is one of systematic analytical techniques developed for management to deal with the problem of choice the element of choice in management division making arises because there are alternative uses for limited resources to meet any set of stipulated but often vague objective. This definitions underlines he three special characteristics of PPBS which are:

1. Planning- programming budgeting system analysis is input- output oriented.

As such decision situation are analyzed from a programme to goal viewpoint rather the firms function one. Problems are treated within the whole context of carrying out a specific programme.

2. Planning: Programming budgeting system emphasis effectiveness as opposed to technical economic efficiency in the allocation of resources. In technical sense resources are allocated efficiently when an increase in one output can be obtained only at a sacrifice of another output or with an increase input. Where as effectiveness measures in terms of the objective the comparative desirability of alternative efficient allocations.
3. PPBS analysis is desired to yield solution that are uniquely responsive to particular problems. It deals with problems which are ill-structured and which have objective that are less precisely defined thus the metrology of PPBS cannot be et forth as a set of standard procedure but a sequence of general steps which constitute and approach to a solution.

The step in the sequence are:

1. Definition of objectives
2. Identification of alternatives
3. Selection of effectives of measures
4. Development of cost estimates
5. Selection of decision criterion
6. Creation of models relating cost and effectiveness

2.5     LIMITATION OF THE PPBS

1. Definitional Problems: We have said that PPBS is objective and out put oriented. But form some objectives and output may be difficult to define with some precision. For instance how do you define the output of ministry of education? Is it by the number of schools built? Is it by student environment? Is it by performance at ferial examination? It may not be easy to agree on a parameter like the example illustrated
2. Measurement Problem: It may be difficult to measure the out put of some programmes yet in some other it may be easier to measure the intermediate output than final output.

iii.      Definition of Objective and Establishment of Priorities is not Scientific:         In most political system irrespective of the budgeting technique involved the decision of what to produce I a political one. What this means is that the setting of the objectives is political the role of the economist is to look for the most efficient way of achieving the stated objective. Even after the cost benefit analysis the choice of method irrespective of the predications of the analysis is still a political one

iv       PPBS is Centered on the Executive:          A very high percentage of the budgeting process using PPBS rest with the executive the legislature comes in at the stage of approval of estimates. By the time it reaches the legislature much technicalities must have been involved in the preparatory process. Members of the legislature may not be equipped enough to understand those technocrats and experts ban boozles he legislature. But it is he legislature that represents the people. And so excusive concentration on this techniques is budgeting removes the political aspect of the budget.

1. Budget cut Across Existing Structure: In implanting PPBS one may run into some problems in terms of relating the budget with existing structures. This is because project cut across ministries and parastatals. And so PPBS may involved comparing organization together. The leadership of the different organization may kick against this is an attempt to protect their empires

2.5.1  ZERO BASED BUDGETING

Zero-              based budgeting is a short-cut for doing zero- based review. In zero based review a systematic plan is drawn for reviewing all aspects of the operations an organization over a period of years. A schedule is prepared for an intensive study of each on- going activities during the period.

In contrast to a budget review (e.g. our annual budget committee)   which take current level of spending and activities as the starting point zero base review starts from scratch and attempts to build up a fresh the resources that would be required by each activity or project the need to have the activities all may even be challenged especially if cost constraints are building.

Zero-based budgeting take current level of activity and spending as even for each establishment a decision package is prepared.

The decision package includes:

1. Purpose of the activities
2. Analysis of cost
3. Alternative causes of action
4. Measures of performance
5. Benefits
6. Consequences of not performance the activity

The activities are ranked in order of importance against on going for new activities. Decision on whether to include or exclude on going activities to include or exclude new activities is then based on their rank orders.

2.5.2 ADVANTAGES OF ZBB      

According to John Orjih financial management vol. III the followings are the advantages Zbb.

1. Properly carried out it should result in a more efficient location of resources to activities to departments
2. ZZB focuses attention on value of money and makes explicit the relationship between the input of resources an the out put of benefits.
3. It develops a questioning attitude and make it easier to identify inefficient obsolete or less cost effective operations.
4. The ZBB process leader to a greater staff management knowledge of the operations and activities of the organization and can increase motivation.

2.5.3 DISADVANTAGE OF ZBB

1. It is a time consuming process which can generate volume of paper work especially for the decision package.
2. There is considerable management skill required in both drawing up decision packages and for the ranking process. The skill may not exist in the organization.
3. It may emphasis short turn benefit to the detriment of the longer term one which is the end may be more important
4. ZBB is not always acceptable to management and staff of trade unions who may proper the cases status quo and who see the details of alternative cost and benefits as threat not a challenge.

2.6     BUDGET PROCESS      

According to brown and Howard (1973) “A budget is predetermined management policy during a given statement of management policy during a given period which provide a standard for comparison with the result actually achieved.

Here the fundamental principles in a budget process are:

1. Establishment of plan or target of performance which co-ordinates all activities of the business it should be noted that the budget cycle of a government established organizaiton are very complex.

LAST YEAR TITLE YEAR NEXT

1. Recoding the actual performance
2. Compares the actual performance with that planned
3. Calculated the difference or variance and analyze the reason for them.
4. Act immediately if necessary to remedy the situation.

The chartered institute of management accountants (CIMA) has this to say that budget should contain statement which are backed by monetary evaluation. The future budget should be future oriented meaning that it should be prepared and approved earlier then the time it is expected to be operational.

These budgets can still be broken down into various budget centers requirement of the organization.

According to PANDEY (1979) “ A budget center is a responsibility center where he manger is responsible for cost expenses/ incurred in the sub-unit

Budget are planning tools and should have some qualities fro them to good knight and Weinwure (1964) who wrote on the characteristic of good budgeting said that a good budgeting system is characterized by:

1. An active participation by all level of management in the preparation and administration of budget.
2. A clear understanding of budget and a set standards that can be attainable.
3. Flexibility built in to the planning and control process.

 BUDGET CONTROL

Budget fall under the realm of planning. To follow up planning there should be elements of control. Budgetary control is therefore the element of control applied in conjunction with budgets. According   to NORMAN THORNTION budgetary control is the technique which embraces all activities of the business and serves to support the key aspect of the management control process.

The terminology of the chartered institute of management accountants (CIMA) also has its definition of budgetary control as “the establishment of budget relating the responsibility of executive to the requirements of a policy and the continuous comparison of actual with budgeted action the objectives of that policy or to provide a basis for its revision. All this definition is saying here is that budget should be tried to management policy.

Budgetary control tends to take a much more specialized approach. According to Oshisami budgetary control can be regarded as encompassing this functions of:

1. Fund Control: This is the management of legislature appropriation to ensure that they are used for the purpose for which they were intended that they are used economically and efficiently the commitments and expenditure do not exceed accounts approved or made available and that activities not approved by government are not pursued or prosecuted with approved funds.
2. Expenditure Control or Vote Control: Relates primarily to control on amount expended.   The ultimate responsibility for the control of vote rest with the managing Director of the organization.   They are entrusted with the expenditure of funds falling into the organizaiton.
3. Revenue Control:           This deal with the timely collection of revenue due to the organization ensuring that amount gets into the coffers as required. Revenue monitoring also help to improve the collection effort and to reduce cost of collection.

• THE PLANNING AND CONTROL PROCESS

The planning process in to its from involves two things:

1. Determining the goals for an organization &
2. Determining how to achieve them

The planning process is present at all level of organization structure therefore should be harmonized to achieve the goal of the firm both in a profit seeking or non- profit seeking organization.

In the planning and control process control puts up where leaves off. In the control process four things are required: there are:

1. Putting the plans (budget) to work
2. Observing those plans (budget) at work and gathering information on how well they are performing the information collected to asses the performance of the plans (budget) the performance of the plans (budget) is often returned as FEED BACK (c) if the attain plans (budget) are not on track attaining the goals. They are supposed to achieve as determined by the feedback management must determine what kind of action is necessary to get those plans on frock.

PLANNING    

This article was extracted from a Project Research Work Topic

“IMPACT OF BUDGET AND BUDGETARY CONTROL

(A CASE STUDY OF MORRIS FERTILIZER COMPANY MINNA, NIGERIA STATE)”

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