|
INTRODUCTION
1.1 BACKGROUND OF STUDY
Budgeting
is a familiar activity to many as it is practiced in our private lives as
well as in business, government and voluntary groups. Ordinarily, one could
say that satisfaction is best maximized when available alternatives, future
opportunities, potential hazards, and targets or aspiration are considered
before decisions or choice are made. In business the choices are much
difficult and the outcomes far less certain. However, a budget should always
be a realistic expectation and not just a hope. The reason is simple; it
would be foolish for an average man to budget for a very big luxurious house,
so would it be absurd for a producer to budget for what he cannot make or to
produce what we cannot sell.
What then is this act of budgeting?
A good
number of authors have attempted to define the term ‘budget’ we shall however
consider some of these definitions in the later part of this work but for the
purpose of this introduction, we shall consider the general definition
Briefly defined, a budget could be seen as a plan showing
how resources will be required and used over a specific period of time. It
represents a plan for the future expressed in quantitative terms. This
definition however may seen over simplified, but it contains a general idea
of the budgetary system. However, a more comprehensive definition of a budget
will be considered in order to have an insight into the actual meaning of the
term.
The terminology of cost accounting published by the
Institute of Cost and Management Accountants (ICMA) defines budget (1999;105)
as
“A plan quantified in monetary terms prepared and
approval prior to a defined period of time, usually planned income to be
generated and or expenditure to be incurred during that period and the
capital to be employed to attain a given objective”.
Individuals
draw up household budgets for the entire family showing the sources of the
family’s income and their day to day expenditure. In the same way, business
be it an oil industry, manufacturing, serving and even government draw up
their own budgets showing expected revenue and proposed expenditure for a
given period of time.
No
business remains of future events accurately need to be made. At least, part
of what is to come can be foreseen. This should insure against any serious
disasters that occur. Even if a forecast is wrong, at least it provides a
basis for necessary adjustments hence budgets are kept flexible to
accommodate change. A properly constructed operating budget is not a plan
that show that will happen to achieve certain profit results. Such a plan
breaks down the business into each unit, big enough to influence the total
creating figure. It measures these units individually and regulates their
actions and interactions to the profit goal.
The
management of an organization normally sets objectives or goals, so that the
organization clearly identifies what it wants to achieve in a future time
period. These targets or goals may be quite different from different
organizations. Budgeting therefore involves the setting of targets and
monitoring of actual performance against the anticipated performance. It is a
technique, which is highly used in business and which involves all levels of
management and all functions of the organization.
Traditionally,
budgeting was seen as a way of limiting expenditure, hence a great part of
management’s time was usually spent on the allocation of fund. However, it
has been expressed that budgeting today merely shows expected revenue and
project expenditure.
The
implies that a budget protects and controls the way management reacts to proposals
brought before it, it must look present future cost as well as benefits of
that proposal. In doing this it must not loose sight of the environment in
which it operates. The same principles go with the preparation of a budget.
In preparing a budget, management must realize that it is just a part of the
economic system and as such can influence as well as be influenced by even is
and activities within the economic system.
A
number of controllable and uncontrollable factors do influence business in any
company and management must study these factors in drawing up its budget. But
because the uncontrollable aspects of these factors do not live within the
hands of management, provisions must be made in the budget to allow for
favourable and adverse factors depending on the state of the economy at any
given time. It is this provision that inputs flexibility in budgeting
flexible budget in the ICMA terminology as quoted by Joseph Baggot (1976:213)
is
“One which by recognizing the difference in
behaviour between fixed and variable cost relative to fluctuation in output
and turnover is designed to change appropriately with such fluctuations”
Whereas a fixed budget still is
ICMA technology as quoted by JoesphBaggot (1976:214) is one, which is
designated to remain unchanged irrespective of the output or turnover
actually attained’.
There
are common budgets in every organization; capital and cash budget. This does
not however, rule out the fact that other forms of budget do exist. Every
organization has its own way of classifying the budget that it prepares some
organization prepare sales budget, production budget, general and
administrative budget, research and development budgets to mention but a few.
These budgets could be short term, intermediate or long term.
The
capital budget as the name implies indicate the naira amount of funds the
company will devote to capital project for the subsequent year. It details
the projects assets and activities in which the company will invest these
outlays. The capital budget answer these four questions for management
a.
What are the long-lived asset needs of the firm?
b.
What capital fund will the firm need during the
coming year?
c.
Who will be responsible for the expenditure?
d.
What optional sources of funds are available to
the firm?
In
capital budgeting, the profitability of each project has to be carefully
evaluated, various techniques can be used to determine the profitability of a
project, which include the net present value method, rate of return on
investments, benefit/cost ratio method, etc. The technique used should be
objective and capable of clearly indicating whether the project should be
accepted or not.
The
cash budget is a detailed financial forecast presented in a schedule showing
cash flows (inflows and outflow) for a firm over a specific period according
to J. Batty (1968:86) it is
“The
estimation of cash receipts and payment for a future plan after due
consideration has been given to expected condition and the overall budget
plan”.
The
cash budget rather than being a budget in itself is derived from other
budgets. It gives the financial highlight and takes into account the timing
of receipts and payments. The important aspect of cash budget as indicated
above is tuning. This is because management might not have tune to rally row
for fund when there is liquidity problem and if management funds tune to seek
for fund it may encounter the problem of cost and choice.
A
decision not to plan cash inflow and outflow early enough for prudence could
result to up limited choice of financial sources and high interest rate or
opportunity cost of money.
The
essence of any budget is to control expenditure and enable management carry
out projects in order of importance; hence the budgeting process is seen as a
way of improving management efficiency and performance in operations.
The
foundation of a firm’s financial plan is a sales forecast or budget. The
sales budget provides the source of information and guidance for drawing up
other budgets. This is because the sales revenue shows how well a firm is
performing or is expected to perform now and later. A good sales budget
allows management enough financial caution for other expenditure of
management on external sources of fund. Moreover, a good study of the pattern
of sales revenue receipts will enable the firm draw up its cash budget for
the purpose of liquidity and capital projects.
In
drawing up a financial plan, management must set a standard for comparing
actual performance with what was budgeted the idea behind this is to control
the performance both in terms of production and cost incurred. This is what
is called budgetary control; that is the use of budget to control firms
activities. The terminology of the Institute of Cost and Management Accountants
(ICMA) defines budgetary control (1999:124) as:
“The establishment of budget relating the
responsibility of executives to the requirement of a policy and the
continuous comparison of actual with budgeted result either to be secured by
individual action the objective of the policy or to provide a basis for it’s
revision”.
It is
essential to compare at regular intervals, actual with budgeted results or
standard set to ensure that deviations from planned results are kept down to
a minimum and that the necessary corrective actions re taken as soon as
possible after investigation of such deviations. In some circumstances, it
may be necessary to revise the target or goals set, but this should only
occur in exceptional circumstances.
Conclusively,
the basic concept of budgeting and budgetary control however entails the
establishment of a goal by management that will guide it drawing up its
budgets. It also involves the comparison of actual performance with the
established standard or goal, and if any deviations occur, corrective actions
will be taken after investigation into the cause, and then channeled onward
as a corrective measure for future planning.
1.2 STATEMENT OF PROBLEM
Planning
and control is the essence of profit planning in any business organization
and the budgeting system provides an integrated picture of the firm’s
operation as a whole. All companies require for their successful operation
and continuity in business, effective financial planning and control. Budget
represents planning and control devices that involves management to
anticipate changes and adopt them.
Business
operations in today’s economic environment are complex and are subject to
heavy competitive pressures. In such an environment many kinds of changes
take place. The rate of growth of the economy as a whole, fluctuates and
these fluctuations affect different industries in a number of ways.
A
government owned company like the Nigerian National Petroleum Corporation
(NNPC) which prepares budget for production, sales, capital expenditures,
research and development etc is faced with these changing situations which
are likely to affect its budget. These changing situations as related to the
oil industry includes; fluctuations in oil price and production quota as regulated
by the organization of Petroleum Exporting Countries (OPEC) and in fact
government financial policies e.g. S.F.E.M.
How
then do these companies adapt to these changes? This is one of the problem
areas to be addressed by this research work.
The
central feature of budgetary control is that of variance and this is the
responsibility of individuals within the organization.
-
Does government own companies in the design of
their budgets report variance to officers who have responsibility for them?
-
How are actual performances compared with
established standards and are corrective actions taken after investigation
into the cause of deviations (if any)?
-
Do government owned companies adhere to budgeting
principles and requirements in the preparation of budgets?
-
Is there any relationship between budgeting and
budgetary control in government owned companies?
-
Does budgetary control contribute to managerial
efficiency and high productivity in government owned companies?
These
are some of the questions this research work tend to answer.
1.3 OBJECTIVES OF THE STUDY
In carrying out this research
work, the research intends to achieve the following objectives.
1. Whether the attainment of organisational goal
(rendering effective services) is a direct result of proper budgeting
and budgetary control practice in
NNPC.
2. The importancc of budgeting and budgetary control in
the activities of a NNPC. This includes the importance of the above in
decision making.
3. The implication
of annual budgets in NNPC.
4. Examine
the relationship between budgeting and budgetary control in government owned
companies.
5. Study
the benefit of budgetary control in government owned companies.
6. Examine
the budgetary system and the realization of their policy objectives.
It is
believed that an adherence to the recommendation as may be seen later in the
study based on the findings of this research will act as a guide or tool and
suggest polices aimed at rectifying the negative effects of the existing
budgetary system on the general development of government owned companies.
1.4 SIGNIFICANCE OF STUDY
In
general the study will be of great significance to lecturers, students,
managers and financial analysts and particularly to the government and the
general public. The government can basically, with the outcome of the study
restructure and encourage effectiveness and efficiency of budgeting and
budgetary control as a tool for managerial appraisal in its companies. This
would reduce the cumulative effect is would have had on the nation’s troubled
economy as is currently experienced.
The
public individuals and institutions will on its part be relieved of the
problems inefficient or ineffective budgeting since it is true that they
constitute the major sources of these funds, if nothing it places the
shareholders of commercial venture that seeing their investments being well
utilized, budgeted and accounted for by management. The citizens and
institution will regard their investment in the form of taxes paid to
government as disbursed by offices at the help of affairs.
1.5 SCOPE OF STUDY
Budgeting
and budgetary control is a vital issue in every organization whether profits
oriented or otherwise. However, the researcher intends to study Budgeting and
Budgetary Control of Government Owned Companies: A Case Study of NNPC.
1.6 RESEARCH HYPOTHESIS
The following Iiypothesis will be tested ill this stildy.
I. Null Hypothesis (H0): That
budgets are efective means of planning organisational activities.
AlthernativeHypothesis (H1): Budgets are not effective means of planning organisational
activitics.
2. Null Hypothesis (H0): Budget controls and aids
management in decision making.
Alternative
Hypothesis (H1): Budget does not
controls and aids management in decision making.
3. Null Hypothesis (H0): Department heads are not
properly educated on the budgeting and budgetary control system.
Alternative Hypothesis (H1) That Departmental heads
are properly educated on the budgeting andbudgetary control system.
|
Comments
Post a Comment