Impact Of Budgetary Control On Organizational Profitability (A Case Study Of Samsung Electronics, Port Harcourt)

Project and Seminar Material for Accountancy / Accounting

Chapter One

Introduction

1.1 Background of the Study

The word “budget” was derived from the French word “bougette” which means a small bag. It connotes a small bag which embodies the financial proposals of an organization for a given period of time usually one year. The organization could be government, business enterprises or family. Initially, business firms used the appropriation type of budget adopted from the government. The purpose was to limit the expenditure on some items such as advertising and research and development, which were considered as luxury item. But this is in contrast with what is obtainable in the present day economics. Going by the volume IV of International Edition of the Encyclopedia Americana [1988], “a business unit employs a budget to carry out its financial planning or forecasting. A business budget is a formalized quantitative presentation – a set of figures of a firm’s coordinated plans”. Budgeting is essentially, a process of planning and control. A well-prepared budget provides management with a planned program based upon investigation, study, and research on the part of the entire organization. In addition, a well-prepared budget provides complete co-ordination of the marketing, production and financial activities of a business. Budgeting alone, however, does not bring realization of the plans. Control over operations is necessary in order that deviations from the plans may be noted and corrected so that the business may be kept on the planned course. Budgetary Control originated in the 1920’s as a means of planning and control. Businessman wanted to see the possible outcome of their plans and forecasts, and budgets were prepared for this purpose. Hamilton [1961] rightly indicated that, “modern budgetary control comprises both a plan of operations and the means of controlling operations within the scope of the “plan”. He further pointed out that: “Budgetary Control by itself is not a wonder-working device; neither should it be regarded as a mere accounting procedure. It is a powerful tool of good business management. Effective use of this tool requires sound organization, proper accounting classification and records, adequate research, and the enthusiastic support of all employees from top down”. Budgetary Control is very useful in the making of business plans. Every organizational activity can be expressed in terms of budgets. With the operation of a budgetary control system, business expenditure can be made to match with the economic realities of the organization. In recent years, budgetary Control has been frequently examined to find its relationship with profitability of Industries. The existence of many industries as at present can only be justified in terms of their profitability. Therefore, to such industries, anything, which improves their profitability, is worthwhile. Profitability may mean different things to different organization under different conditions. Most organization takes it to mean ability to realize a return over and above the cost of resources put into the organization’s activity. However, to some other organizations, anything, which reduces the cost of operation, is profitable. The use of budgetary control in profit planning is tremendous. It can be used in matching expenditure and income in order to make some profits. And to the extent that budgetary control is frequently applied in profit planning, its contribution to the realization of profits cannot be doubted.

1.2 Statement of Problem

Budget is a guide to a particular objectives and it is obvious that without a guide to a particular objective it will be very difficult to achieve that objective economically. However, many organization today do not make good budget about their organization and where they do, they do not control their performance vis-a-avis their budget very well to control the controller able factors in their budget to enable them to achieve their plan. Budget, which is one of the tools that could be used by business organization to achieve their profit plan unfortunately, is not being used properly by many business organizations. In essence, many business organizations have failed in their profit plan due to lack of budgetary control in their organization.

1.3 Objectives of Study

The aim of this study is to find out the impact of Budgetary Control on the profitability of business organization.

This study has been designed:

To determine the impact of budgetary control on the profitability of business organization.
To carry out a comparative analysis to show how budgetary control could be used to achieve profit plans.
To determine how budgetary control could be used to improve business performance.

1.4 Research Question

What is the impact of budgetary control on organizational profitability?

1.5 Research Hypothesis

In this work, the following hypotheses are formulated:

Budgetary control increases the profitability of business organization.
Budgetary control helps to achieve a profit plan.
Budgetary control impacts business performance positively.

1.6 Scope of the Study

The research covers the three related Business organization that deals on oil, viz, Envoy Oil Industries ltd., Golden Oil Industries ltd., and ALMB Milling Oil ltd. The period, 2004 – 2008, covers the aspect dealing with our data for statistical analysis. Some difficulties were encountered in the course of obtaining the necessary information. For instance, the problem of picking the three Business organizations for case study in this project work was not a small one. Also, on numerous occasions, it was impossible to get in touch with the officers who should supply the needed information. Moreover, when these officers were reached, it was sometimes impossible to obtain the needed data which most of the officers in these Business organization considered as being very confidential. The huge financial implication as regards my case – studying three related business organizations was also a constraint. Obviously, all these problems had some effect on the information collected and probably, the conclusions reached.

1.7 Significance of the Study

There is presently a high incidence of Industrial failure due to world-wide economic recession. For a country like Nigeria, the problem has become a daunting one. The pegging of exchange and interest rates are invariably increasing the cost of operation of these three related Business organizations, hence decreasing their profit. Therefore, it is very necessary for every organization to plan its expenditure and ensure costs and still operate profitably in terms of having a return over and above cost of operation. It is the determination of the contribution of budgetary control in this regard that comprises the significance of this study.

1.8 Limitations of the Study

The demanding schedule of respondents at work made it very difficult getting the respondents to participate in the survey. As a result, retrieving copies of questionnaire in timely fashion was very challenging. Also, the researcher is a student and therefore has limited time as well as resources in covering extensive literature available in conducting this research. Information provided by the researcher may not hold true for all businesses or organizations but is restricted to the selected organization used as a study in this research especially in the locality where this study is being conducted. Finally, the researcher is restricted only to the evidence provided by the participants in the research and therefore cannot determine the reliability and accuracy of the information provided.

Financial Constraint:

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time Constraint:

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 Definition of Terms

The following operational variables are defined in the context of this research study:

1. Budget:

It is an economic plan, quantified in respect of a period of time, which related an organization’s operating ability and objectives with its financial resources;

2. Budgetary Control:

This is the process of controlling performance and costs by setting target, measuring performance, apportioning responsibilities for costs as shown in budget statement and reports and acting upon deviations from plan.

3. Profitability:

This is the state of minimization of costs or the realization of some returns over and above costs in relation to a company.

4. An Organization:

Is a group of individuals working together to achieve some specified goals.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Summary

The analysis of the collected data has properly given us insight into the budgetary control practices ofsamsung electronics, port harcourt. generally, the research objectives have been realized, and the hypothesis tested. But more specifically, the following were found out:

Budgetary preparation involves some problems such as difficulties in obtaining the necessary information to carry out the task as well as those of coordinating the various budgets.
It is possible to control the actual performance of an organization by defining cost responsibilities, avoiding excesses, and reporting deviations from the budget provisions. These would involve some negligible clerical and administrative cost further; it has been found out that the selected business organization maintain control over operating cost by defining cost responsibilities for managers, receiving feedbacks from those managers about the actual costs conditions, and that, by carrying out some adjustment of their opening procedures.
Budgetary control has some relevance in business organization’s ability to anticipate changes n the cost and procedure of operation. As a result of this, the business organizations will be able to prepare for such changes.
Profit-planning is greatly facilitated by the employment of budgetary control techniques.
Budgetary control has a significant impact on business organization’s profitability. It found out that the degree of application of budgetary control in small way improves the operations performance of business organizations and as a result increases profitability.

5.2 Conclusion

Throughout this research we have attempted to determine if a business organization can implore its profitability by using the technique of budgetary control. Some problems were identified, especially in the present unstable nature of the Nigerian economy which called for a critical research to ascertain the implications of budgetary control for business organizations. As a result, some hypothesis were formulated which were subjected to some methods proof. To enable a logical proof to be avoided at, some existing relevant literatures were renewed, thus giving a springboard for a comfortable selection and collection of data. The collected data was statistically analyzed to form a basis upon which some findings were made about the case studied business organizations. The findings of the research and embodied in the final part of chapter four have greatly afforded us the opportunity to draw some conclusions about the research. Therefore, the following conclusion can be made concerning budgetary control and profitability of business organizations:

Particularly, the following research hypothesis holds;
1. Budgetary Control increases the profitability of business organization;
2. Budgetary Control helps to achieve a Profit Plan;
3. Budgetary Control impacts business performances positively.
It is possible for an organization especially business organizations to control its actual performance through the use of budgetary control.
When budgetary control is continuously practiced by business organizations, it is always easy to anticipated operational changes and reacts quickly for them by making some adjustments.
Arising from the observed direct relationship between the practice of budgetary control and the profitability of the selected business organizations, it can be logically asserted that the technique is useful in profit-planning.
Budgetary Control is not the only factor that influences profitability of a business organization. Other factors include: price level efficiency of operations, general economic condition, marketing activities, to mention but a few.
Despite the undisputed importance of budgetary control in profit-planning and profit-rating, some clerical and administrative forms includes, and reports which are used in reporting and correcting deviations from budgets.
Budgetary Control may be harmful to business organization if not properly understood by the management and staff. It its objectives are allowed to supersede the over all organizational goals, the whole exercise could be counter-productive.

5.3 Recommendations

It is now very obvious that budgetary control is of tremendous importance to business organizations such establishments can easily survive if the budgetary control technique is properly implemented in its routine operations. However, budgetary control is not a substitute for the individual performance of the entire staff. Obviously, it has some shortcomings, although those may be minimal. Therefore, the process of implementing budgetary control in business organizations should: Ensure that subordinate is carried along when formulating the budget.

Ensure that the budget is tailored to the organization for easy monitoring and control.

Attempt to revise budget standards when circumstances change to such dimension as to warrant adjustments in operating procedures;

Ensure that the budget is not too mechanical to allow positive creativity.

Ensure that those who have responsibilities for preparing the controlling budgets do not abuse the privilege. They shouldn’t be allowed to use the power given to them to victimize individual employees or departments.

Try to involve mangers, who have responsibilities for major activities, in the preparation of budgets. This will eliminate or at least minimize the problem of obtaining relevant information for the preparation of budgets as well as problems associated with coordinating the budgets. For the benefit of scholars who may wish to conduct subsequent researches concerning the topic of this research work, it will be necessary for them to:

Seek information mainly from key officers involved in the preparation of the business organizations budget. This, however, does not imply the neglecting of the opinions of the ordinary employees of the company. In order to know the officers concerned, it may be helpful to go through some reports [if any] published by the business organization.
Administer both formal and informal interviews on the randomly [or systematically] selected staff in addition to the questionnaire given to them.

Project Material Download