BUDGETING AS A TOOL FOR PLANNING AND CONTROL IN A MANUFACTURING INDUSTRY

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BUDGETING AS A TOOL FOR PLANNING AND CONTROL IN A MANUFACTURING INDUSTRY

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Budgeting is one of the ways of controlling cost in manufacturing organisations. Cost control is a systematic review of the resources a company uses to achieve its primary objective of profitability; therefore, it can also be referred to as cost management. For cost to remain within reasons, it is desirable to compare expenses against industry benchmark which is a good indicator of competitive standing. Arnold (1987) believes in performance measurement through the comparison of various indices. However, it is a clear fact that enterprises are in business to make profit. The worth of the firm at the end of the year is determined through the financial statement prepared by the management. Such financial statements show a combined summary of the effect of social constraints, management policy decisions and risk return trade-offs characteristics of the firm (Ogunjimi: 1980).

One of the benefits of cost control is the ability of a company to keep cash flow at necessary levels of operations, that is, with cost control, excessive amount of cash are not too tied up in inventory, it prevents over supply of stock or over staffed departments and this keeps cash available for other purposes including navigating economic waves, expansion needs or repairs and maintenance of equipment. Many manufacturing companies use outside assessments to analyse their efficiency including the result of cost control effort, this does not only bring new viewpoints to the process, but also provide important internal review. Sometimes it is difficult to be objective when you deal with management of a business on a day to day basis, but professional analysts can bring a broader scope to operations resulting in improved cost control strategies.

Budget requires coordination throughout the organisation. Each department or unit within the organisation is responsible to prepare its part of the budget, which is then coordinated with the overall company budget. Budget assigns responsibility to the management in each unit. Budgeting is an integral part of planning process. Successful companies plan for their futures through the discipline of preparing an annual business plan, stipulating their financial and quantitative goals and strategies.

Cost control is a continuous process that begins with the annual budget. As the fiscal year progresses, management compares actual result to those projected in the budget and incorporates into the new plan the lessons learnt from the evaluation of current operations. Through the standard costing and budgeting process of cost control, management establishes overall objectives, defines responsibility centres and defines specific objectives for each responsibility centres and design procedures and standards for reporting and evaluation. For cost control to be effective, management has to construct budget because it lays out a road map to guide management’s effort in accessing the effect of cost control techniques on revenue expected. It also states the number of assumptions about the relationship and interaction among the economy, market dynamism, the ability of its sales force and its capacity to provide the proper quantity and quality of products demanded.

The need for the efficiency and effectiveness in the allocation of the resources of an organisation gave rise to the need to make a budget. A budget can be defined as a qualitative statement prepared and approved prior to the period of time of the policy to be pursued for the purpose of achieving a given objective. Budget is an instrument used by an organisation in the achievement of its purpose of matching plans with resources available. The primary function of budget is to provide management with a projection of the activities necessary to reach the established goals. Budget also serves as a control device. A budget is a detailed plan for acquiring and using financial and other resources over a specified period of time. It represents a plan for the future expressed in formal quantitative terms. The act of preparing a budget is called budgeting. The use of budgeting to control a firm’s activities is called budgetary control.

Budgeting according to Perin (1958) in Omolehinwa (2001) originated from the French word ‘Bougette’ meaning little bag. It was described as a leather bag, which the Chancellor of the Exchequer carried to the Parliament of Great Britain. The major historical function of budget both in government and private sector was to set limits for the expenses of expenditure in order to control expenditure within those limits. Cost control is exercised through a variety of techniques such as inventory control, quality control, material cost control, labour cost control, production control, budgetary control, standard costing, etc. The advantages of cost control are as follows:

(a) It helps in utilising the resources to the full extent.

(b) It helps in reduction of prices which are benefited by customers.

(d) It increases the profit earning capacity of the business.

(e) It increases the goodwill of the business.

An average individual progress by using budgeting strategies but do not recognise this due to lack of formal awareness. However, it is widely believed that ‘he, who fails to plan, plans to fail’. Hence, this has posed the need for effectiveness in strategic planning. Planning is one of the key managerial roles in the decision-making process. It is a process of establishing goals and objectives and course of action to be attained. The relevance of planning is to enhance corporate performance. It is important to note that planning is an aspect of control, since control starts from the planning stage.

Despite the measures that have been put in place in order to ensure that budgeting performs planning as well as control function, budgeting has still not been able to achieve all it has been designed for. This has therefore placed a challenge to the researcher on the need to identify the strengths and weaknesses of budgeting as an effective tool for cost control and to improve its performance and effectiveness in the Manufacturing companies. This project work is centred on budgeting as a tool for planning and control in a manufacturing industry.

1.2 Statement of the Problem

The sole aim of any business organisation is to make profit and most business owners believe that the best way to make profit is to increase sales and this brings up another conundrum. In order to increase sales, there must be a corresponding increase in cost because of the increased amount of work involved. These increased costs are what need to be curtailed. Since the emergence of stewardship accounting as an emerging role in which most business organisations are operated, there has been need for management to minimise input, utilise available resources and maximise profit in the interest of the stakeholders of business organisation through budgetary control techniques. Before the adoption of budgetary control system by manufacturing companies, a lot of arguments and criticisms have been made against the efficacy of budgetary control techniques. The problem lies in the fact that:

i. Whether there is a significant impact of budgetary control on the profitability of manufacturing firms in Nigeria.

ii. Whether there is a relationship between planned and actual budget.

iii. Whether there is a relationship between cost reduction and quality of products.

This study is therefore meant to show the impact of budgetary control on cost control in manufacturing companies in Nigeria.

1.3 Objectives of the Study

The main objective of this study is to examine budgeting as a tool for planning and control in a manufacturing industry. Specific objectives include;

i. To evaluate whether budgetary control contributes to the profitability of manufacturing companies.

ii. To determine the deviation gotten from planned budget in manufacturing companies.

iii. To find out if manufacturing companies can reduce cost and maintain high quality products.

1.4 Research Questions

i. Does budgetary control contribute to the profitability of manufacturing companies?

ii. What is the deviation gotten from planned budget in manufacturing companies?

iii. Can manufacturing companies reduce cost and maintain high quality products?

1.5 Research Hypotheses

H01: Budgetary control does not contribute to the profitability of manufacturing companies.

H02: There is no deviation gotten from planned budget in manufacturing companies.

H03: Manufacturing companies cannot reduce cost and maintain high quality products.

1.6 Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.7 Scope of the Study

This study is on budgeting as a tool for planning and control in a manufacturing industry, the study will be centered on Nigeria breweries Plc.

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.

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