The Effect Of Budgeting And Budgetary Control On Organization Performance

Project and Seminar Material for Accountancy / Accounting

The Effect Of Budgeting And Budgetary Control On Organization Performance


Abstract


The purpose of the study was to carry out a preliminary investigation on budgetary control and improved performance. It also set out the measure of performance on the organizational and determined the inhibiting factors that affect the use of budgetary controls. In this project, Ojo local government was chosen as a case study. The objective was to evaluate the impact of budgeting control in organizations performance, evaluate factors inhibiting effective budgetary control in an organization among others. Data used for the research was collected through well-structured questionnaire using simple random sampling for selecting respondents. Analysis of data was done using frequency percentage and chi-square. Findings from this study revealed that budgets and budgetary controls are factors that can influence the performance of an organization, as they have a very mutual relationship. Concerning how budgets are linked to performance, budgets and budgetary controls mainly form and give every organization the structural support to achieve its goals and objectives, and maximizing performance, through resource allocation and control. Recommendations were then made that all organization must prepare budget and put in place budget control since it has a great impact on organization performance. Also budget control should be made mechanism for resource and control and it should be linked at all times to overall corporate strategies and goals.


Chapter One


Introduction

1.1 Background to the Study

The increasing complexity of business operation and the ever-changing conditions of the business environment-social, economic, technology and political factors make it increasingly difficult for a company to consistently earn a profit that constitutes a fair return on the capital investment. The internal operation of a firm using financial tools has been a very long time; management has to have a plan of action as a means of monitoring profit and financial control.

Budgeting is the accepted basis for profit, planning and financial control. It has been practice effectively and profitably by many progressive companies who generally regard it not simply as a procedure but as one of the more important of process of management. Budgeting is one of the management tools that force manager to perform according to a given level of expectation.

The process of preparing the budget forces the executive to become better administrator. It puts planning in the first key and budgeting primary attention directing because it helps managers to focus in the operating problem early enough. For effective planning or action, budgeting is usually been as an integral of various plans and providing feedback for the actual result. Budgeting has many purposes. The primary purpose of budgeting is conducted under favourable conditions, there is no doubt that a firm which budget will tend to perform rather better than a similar one that does not budget.

Budgetary control is control technique which when the compares of the planned state of affairs with actually state of affairs and the continuous devising of means of correcting the deviation. It involves the use of available technique such as operational research, computer science and so on, to ensure that the budget is realistic as possible. The budget is without doubt, the most widely used control device in both business and government circle. The budget is drawn up for control purpose, that is an attempt to control the direction that the firm taking. Indeed, it is used extensively to many people, the word budget is synonymous with control still, and the preparation of budget originates as a part of planning process. Some companies in other to avoid the negative reaction that are many a time associated with the concept of control. Refer to their budgetary controls as either profit plan or profit path. The aim of budgetary control is to provide a formal basis for monitoring the progress of the organization as a whole of its component parts towards toward the achievement of the objectives specified in the planning budget.

Budget planning budget control is part of the overall system or responsibility accounting within an organization. A vast number of organization and company are getting involved in budgeting and budgeting control in Nigeria, and this is taking different forms, but the one that seems to be gaining more recognition is based on the concepts and ideas developed in budgetary control.


1.2 Statement of Problem

Some problems are identified to why public sector organization make deficit budget.

These problems include:

  1. Inability to evaluate and assess the viability of the organization.
  2. What tools to be employed in comparing organization or actual performance with the planned or future performance and how tools can be implemented a good deviation and control?
  3. What tools to be adopted in assessing the organization performance in terms its fair return on the capital investment?
  4. Going by these problems, the study then consider budgeting and budgeting control on organization performance in local government?

1.3 Objective of the Study

The objective of the appraisal and evaluation of business organization in the following areas:

  1. To itemize the impact of budgeting and budgeting control in local government.
  2. To exemplify by using budgeting and budgeting control by management for planning, control and decision making.
  3. To know what is budgeting and budgeting control and why it is of interest and to whom.
  4. To look into ways of encouraging human support for budgeting control.

1.4 Purpose of Study

The purpose of this study is to identify the effectiveness or otherwise in the presentation of budgeting and its control in local government. Our analysis would however be limited to Ojo local government.

The study also determining ways and means of improving the operation and effectiveness of the system for as much as the success or failure of budgeting and budgeting control depend on the acceptance by the people in the organization. Consequently, consideration is given to why employees react the way the they do, the use, the usefulness of budgets in making budgets more successful and acceptable can be considered within a particular situation facing modern day business circle.


1.5 Significance of the Study

The outcome of this study cannot be overemphasized. These are:

  1. The effectiveness of budgeting on achieving their corporate goals.
  2. The study will help in the formulation of corporate policies concerning local government.
  3. It will help management to to understand ways in which budgeting could be a powerful tool for planning, control and decision making.
  4. It will reveal how rational allocation of resources can be ensured.
  5. It will serve as a tool for further research studies.

1.6 Scope and Limitation

The researcher intends to cover budgeting and budgeting control as it relates to the private sector and special consideration been given to in the manufacturing or industrial sector.

The expected limitation form a thorough analysis includes the following:

  • Time
  • Respondents
  • Finance

As a result of these, the researcher will limit the evaluating of budgeting and budgeting control in Ojo Local Government.


1.7 Historical Background of Case Study

Ojo local government was created in May, 1989 under the military administration of General Ibrahim Gbadamosi Babaginda, as the president of the Federal Republic of Nigeria, under the military governor of General Raji Rasaki. Before the creation of Ojo local government, out of the old Badagry local government, the area was adjudged the most popular in the federation going by the National Population Censor conducted in Nigeria in 1991. The population as at that time was put at 1.01 million. Ojo local government was divided into two segments, the revenue and the upland. It is in habited by mainly the Aworis, who are very accommodating and progressives.

In 1996, under the military administration of General Sanni Abacha, two local governments were carved out of the old Ojo local government; Amuwo Odofin and Ajeromi Ifelodun local government. It is on record the administration of Alhaji Jakande as the executive governor of Lagos state, Ojo local government that did not have the backing of the federal government under President Shehu Shagari, was created in 1980 with Alhaji Ajakaiye as the chairman from 1980-1983. However, the military governor of General Muhammaed Buhari and Tunde Idiagbon scrapped the local government when they struck in 1983 and the new council returned to Badagry local government.

Today, two local government have been carved out of the old Ojo local government; Iba local Council Development Area and Oto Awori Council Development Area with this development there were boundary adjustment. As of today, Ojo local government shares boundaries with Oto-Awori on its south west; it is bounded in the East by Oriade local government in the North by Iba local council development and in the south by the lagoon. It also shares boundary with Amuwo Odofin local government between Ojo

Military Barracks and the Trade Fair complex. The local government has a total land mass of 18sq km with about 300/0 of it constituting the Revenue Area. Today part of this Revenue Area is being shared with Oto-Awori Local Council Development Area.

Despite the fact that the indigenous inhabitations are the Aworis, OJ today is natural habit as of the Igbos, who deal in electronics and general materials at the popular Alaba international market created in 1973 within the local government are and the Hausa who deal in rams cows.

The Ojo indigenes are mainly farmers, mat weavers, fisher men, hunters and petty traders. But some of them today are big time businessmen, educationists and great politicians. The hither to sleepy town of Ojo, is today flourishing with business activities that can be compared to major town in Lagos State.

There is no doubt that the fact that revenue Area of Ojo Local Government needs special attention in the area of electricity, a bridge to link the upland with the reverine and other basic infrastructural facilities. Tahe communities include; Irewa, Taffi­-Hausa, Taffi-Awori, Itogbesa, on the other hands, the upland has caught up with the best modern cities in the world with an express road to link neighbouring country, companies, market and higher institutions, the settlement include Ojo, Ira Ajangbadi, Sabo-Oniba, Ilufe, Igbede, Agric, Arufa, Olugbemi, Muwo and others.


1.8 Research Questions

The research intends to test the following research questions in the course of this project.

  1. Does budgeting and budgeting control enhance planning and decision making efficiently?
  2. Does budgeting and budgeting control ensure rational allocation of resources?
  3. Does budgeting and budgeting control a motivational tool for staff?

1.9 Research Hypotheses

The hypothesis would be formulated as null and alternative

  1. Ho: Budgeting and budgeting control does not enhance planning and decision making efficiently
    Hi: Budgeting and budgeting control enhances planning and decision making efficiently
  2. Ho: Budgeting and budgeting control does not ensure rational allocation of resources
    Hi: Budgeting and budgeting control ensure rational allocation of resources
  3. Ho: Budgeting and budgeting control is not a motivational factor
    Hi: Budgeting and budgeting control is a motivational factor

1.10 Definition of Terms

Budget:

A budget IS a summary statement of plans expressed in qualitative term

Budgeting:

This is the process of preparing a summary statement of plans expressed in monetary quantitative terms.

Decision Making:

Involve selection from among alternative course of action or most preferred choice out of many alternative

Budgetary Control:

This IS the control technique of planning In advance of the various functions of a business so that the business as a whole can be controlled.

Control:

The process of setting goal and objectives In advance and determining ways to achieving it.

Plans:

A set of things to do in order to achieve something usually done in advance.

Planning:

This is the process of setting goals and objectives in advance and determines way of achieving it.

Responsibility Accounting:

This is the term used to describe a system of decentralization of authority with performance of the decentralized units measured in term of accounting results.


Chapter Five


Conclusion, Recommendations and Recommendations

This chapter considers the summary of findings, conclusion and policy issues of the study. The findings are what the researcher found out during the study based on the responses given and interviews conducted. This also includes the conclusion of the whole work .


5.1 Summary

The first objective of this study was to identify the effect of budgeting and budgetary control on organiza tion performance. Findings from the study show that budgetary control has a strong relationship with organizational performance, because, budget itself forms the basis for decision making, foundation for sound planning, measure for performance of an organization, budgetary controls provide structural support for performance and it also acts as a tool for resource allocation and control (see table 4.2.4).

The above findings strongly suggest that budgets are greatly linked to performance of an organization, hence, it should not be neglected. The study also revealed that budgets and budgetary controls have a greater link to the performance of an organization because, it provide structural support for performance. If the power of budgetary controls are not fully utilized or recognized by an organization, performance may not be fully maximized, as resources may be allocated and channelled to un-profitable projects/ventures.

The second objective of this study was to identify the problems associated with budgetary controls in an organization. The study revealed that the biggest challenge facing budgetary control is that the organization’s managers do not fully understand or appreciate the importance of budgets/budgetary controls in the organization (see table 4.6). other problems identified are: inadequate/in-complete financial records, lack of integration with overall organization’s strategy, kacj of financial experts, and overestimation of cost (see table 4.2.6). If these problems persist for long, it could lead to the organization performing below expectation. Losses may realised in the long run if organization do not address budgetary control problems effectively. The third objective of the study was to identify ways of improving the performance of an organization.

Findings revealed that in actual fact, the performance of an organization can be improved (see table 4.2.9). The study also revealed that the performance of an organization can be improved if budgets are linked with the overall organizational strategies. Keeping proper and complete financial records will also improve performance. Others are: using budgets as bench marks, getting more experienced and skilled financial analyst, revising and debating on past, current and future budgets, and creating an enabling environment for effective and efficient budgetary control. All of these solutions will go a long way in improving the performance of an organization if adopted.


5.2 Conclusion

This study conducted a preliminary investigation of budgetary control and performance of an organization, using Access bank plc as a case study. The researcher reviewed previous literature and contributions to this study, the problems associated with budgetary control, various ways to improve performance through budgetary controls, various ways to improve performance through budgetary controls in previous and recent times, among other salient issues relevant to the subject of study. The researcher found out that the performance of some organization in Nigeria leaves much to be desired, as a result of the various problems associated with budgets and budgetary control systems in some organization. However, an empirical investigation was undertaken, using the descriptive research design, to aid easy understanding of the layman who is also expected to maximize the advantage of the result-oriented budgetary control system. Following our findings, the researchers hereby advise mangers and business operators to pay more attention to their budgetary control systems, while those without any should endeavour to ensure the set-up of a result-oriented system as it goes a long way in repositioning businesses and organizations from their creeping performance level to an improved and high capacity utilization point.


5.3 Recommendations

After a preliminary investigation of how budgetary control are linked to the performance of an organization, the researcher through her findings and analysis, came up with the following recommendations to help organizations maximise performance:

  1. First, organizations must recognize that budgets and budgetary controls are heavily linked to organizational performance. Managers should endeavour to fully utilize the budget resource, since it has the power to completely transform the organization. Organizations without budgetary control systems should endeavour to put it in place in their organization.
  2. Second, organizations must at all times link their budgets to their overall corporate strategies and goals. Budgets/budgetary controls must always be prepared in a strategically manner to fit into the organization’s goals and aims. Budgets should not be prepared as a mere formality or function.
  3. Third, accurate and complete financial records must be always kept by the organization. Without proper financial records, organizations may not be able to achieve maximum performance. Budgets will never be a useful tool for improved performance if financial estimates and records are in-complete or in-accurate.
  4. Fourth, budgets/budgetary controls should be used as an internal control measure to check and measure performance in an organisation. As observed by the study, budgets/budgetary controls form an integral part of an organization’s internal control, hence, it should always be used to control most of the organization’s financial operations and activities.
  5. Finally, budgets/budgetary control should be made the sole tool and mechanism for resource allocation and control. All resources needed for a project should be authorized by the budget of the organization, as this will enhance greater accountability and transparency in the organization.

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