CHAPTER ONE

INTRODUCTION

1.1 BACK GROUND OF THE STUDY

A budget is a financial and a quantitative statement prepared prior to a defined period of time

for the purpose of attaining a given objective.

A.U. Nweze (2004) explained that, budget is a plan quantified in monetary terms, prepared

and approved prior to a defined period of time, usually showing 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.

Furthermore a budget is an attempt made at the beginning of each financial year to plan the

profit and loss account for the year and to aim for a definite balance sheet. This profit

planning must be a well thought- out operational plan with its financial implication expressed

as both long and short range profit plans.

In any organization where budget is used as a means of profit planning many alternative

plans have to be considered and the most profitable one will be adopted. On the other hand,

budgetary control is the establishment of policies, periodic review or comparison of the actual

result with the budgeted performances either to secure approval for individual action or to

serve as a remedial course of action. Budgetary control is a situation whereby the actual state

of affairs can be compared with the planned results and reviewed by the management, so that

appropriate action may be taken to correct adverse situation that may occur before it is too

late. It can also be used to fix responsibility of departments or managers.

A budget systems serve the needs of management in respect of the judgments and decisions it

is fruited to make and to provide a basis for the management functions of planning and

control. Developing a budget is a critical step in planning any economic activity. This

includes activities of businesses, governmental agencies and individuals. Therefore

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businesses of all types and governmental units at every level must make financial plans to

carry out routine operations, to plan for major expenditures and to help in making financial

decisions. Therefore, every organization has a plan for the future, simply because the success

of any organization depends on the level of plan that is put into the organization.

1.2 STATEMENT OF PROBLEM

Business environment in Nigeria today is tinted which high level of uncertainties and risk.

To this end, Managers and Stakeholders must be ready and prepared to compete positively

and favourably under these rapidly changing conditions. To secure survival under these

environmental challenges, trials, complexities and vagueness, managers and stakeholders of

the manufacturing sector must be armed with sharp tools, tested and trusted management

techniques to forecast the tremendous changes which are likely to impact on the business,

while future direction and dimension is chosen regarding resources required to attain selected

goals. Budgetary control as a pertinent management tool propels organization and enhances

improved performance of the economy in a variety of ways (Baiman& Evans, 1983). It holds

a primary function of serving as a guide to financial planning operators; it also establishes a

boundary for departmental excesses. Admittedly, budgetary control assists administrative

officials to make a careful and reasonable analysis of all existing operations, thereby

justifying expanding, eliminating, restricting or diversifying the present practice (Fisher, et al,

2000). According to Steven (2002), budgeting and control entail a distinct pattern of

decisions in an organization which is capable of determining its objectives, purposes or goals,

and how these goals are achieved by establishing principal policies and plans. However, the

inability to identify the problem concerned and fixing a limit of investigation creates a

bottleneck for the successful implementation and control. Some companies settle for narrow

ranges of alternatives which are occasioned by their past experiences and present scenario,

other management levels even avoid long-term planning and budgeting in favour of todays

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problems thereby making the problems of tomorrow more severe and complex (Hannan, et

al,2006).

From the foregoing problems this research seeks to examine budget and budgetary control as

a tool that can lead to improved organizational performance.

1.3 OBJECTIVES OF THE STUDY

The following are the objectives of the study

- To determine the impact of budget and budgetary control on profitability of

companies in Nigeria

- Practicability of budget and budgetary control in Vita Foam PLC.

- To determine if budgets are more effective when reward penalty is based on goal

attainment.

- To examine the role of budget and budgetary control in evaluation/attainment of

pre/post manufacturing activities and overall objectives of the organization.

1.4 SIGNIFICANCE OF THE STUDY

The study will be significant in various ways to various parties, as will be seen below;

It will present in a precise manner, the importance of the role of budgeting and budgetary

control in achieving organizational goals. To managers and potential managers, the findings

of the research, suggestion and recommendations based on the findings will be a good guide

for future management of resources using budgeting and budgetary control. The outcome of

the study will help widen their horizons on resource allocation and control. Operating staffs

will also be informed on how they can improve their operation through the use of budgets as

guides. The research report will also serve as a reference material to students of accounting,

especially those with a bias in management accounting. The research will also provide ample

information to external auditors on how resources of companies are allocated and managed.

This will certainly enhance their audit planning. Finally, this study is intended to unveil those

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factors that are responsible for poor budget implementation frequently leading to their

failures while also highlighting the control mechanisms required for a successful budget

implementation.

1.5 RESEARCH QUESTIONS

The following research question will bring clarity to the proposed research study.

1. Is there any relationship between budget and budgetary control and profitability

of companies in Nigeria?

2. To what extent is budget and budgetary control Practicable in Vita Foam PLC?

3. Are budgets more effective when reward penalty is based on goal attainment?

4. Does budget and budgetary control enhance evaluation/attainment of pre/post

manufacturing activities and overall objectives of the organization?

1.6 RESEARCH HYPOTHESES

The following hypotheses were tested in the course of the research work

They are:

1. Ho: There is no significant relationship between budget and budgetary control and

profitability of companies in Nigeria

H1: There is significant relationship between budget and budgetary control and

profitability of companies in Nigeria

2. Ho: Budgetary control is not practicable by Vita Foam Nigeria PLC.

H1: Budgetary control is practicable by Vita Foam Nigeria PLC.

3. Ho: Budgets are not more effective when reward penalty is based on goal attainment.

H1: Budgets are more effective when reward penalty is based on goal attainment.

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1.7 SCOPE OF THE STUDY

The study of budgeting and budgetary control as a tool for profitability could have been

extended to cover the whole of the accounting and financial areas of the business

organization in all the states of Nigeria and abroad. But because of some limiting factors, the

scope of the study will be limited to only the facts on the budgeting and budgetary control as

a tool for profitability in general and with special reference to Vita Foam PLC budgeting

system.

Therefore, this study will be restricted to Ibadan branch. This proposed research work will

consider the budget and budgetary control systems of Vita Foam PLC with a view to

ascertain the impact of budget and budgetary control systems on the profitability of the

company, as well as its usefulness in achieving the firms stated objectives.

1.8 DEFINITION OF TERMS

BUDGETARY CONTROL: According to the Chartered Institute of Management

Accountants (CIMA). Budgetary control is the establishment of budgets relating to

responsibilities of executive to the requirements of a policy and the continuous comparison of

actual with budgeted results, either to secure by individual action the objectives of that policy

or to provide a basis for its revision.

RESPONSIBILITY CENTRE- According to Colin Drury in his management and cost

accounting sixth edition (pg653). Responsibility centre is a unit of a firm where an individual

manager is held responsible for the units performance.

BUDGETING- According to Ugwu Chukwuma Collins in his understanding cost accounting

(2009) page 234. Budgeting is the act of preparing a budget.

BUDGET- According to Terry Lucey in his costing sixth edition. A budget is a quantitative

statement, for a defined period of time, which may include planned revenue, expenses, assets,

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liabilities, and cash flows, which provides a focus for the organization, aids the co-ordination

of activities and facilitates control.

PLANNING -planning is the activity where the manager analyses present condition to

determine ways of reaching a desired future state.

FORECASTINGThis is the procedures and techniques for predicting condition or event

that are expected to prevail in the future.

1.9 OUTLINE OF THE STUDY

This study was divided into five chapters. The first chapter, which is the introduction, shall

presents the background to the study, statement of the problem, objectives of the study and

significance of the study among others. Chapter two shall review existing literature on budget

and budgetary control as a tool for profitability of companies in Nigeria. Chapter three shall

explain the research methodology to be applied in the study. Chapter four shall focus on the

data presentation and analysis while the concluding part of the study is chapter five where in

a nutshell, the summary of the findings, the conclusion, and recommendations shall be

presented.

REFRENCES

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 Baiman, S. & J.H. Evans (1983). Pre-decision Information and Participative

Management Control System. Journal of Accounting Research 21(2), 371-391

Drury, C. (1996): management and cost of accounting: pitman Publishers London

sixth edition (pg653).

Fisher, S., Frederickson, J. & Peffer, S. (2000) Budgeting: An Experimental

Investigation of the Effect of Negotiation,The Accounting Review 76 (January) 93-114

Hannan, R., Rankin, F.W. & Towry, K.L. (2006). The Effect of Information Systems

on Honesty in Management Reporting: A Behavioral Perspective, Contemporary

Accounting Research 23(4)885-919

Nweze, A.U.(2004), Profit planning

Lucy, T. (1989): Costing An Instructional Manual: DP Publication Ltd

London, 6th Edition.

Stevens, D. (2003). The Effects of Reputation and Ethics on Budgetary Slack, Journal

of Management Accounting Research 14, 153-171

Ugwu Chukwuma Collins (2009). Understanding Cost Accounting. Page 234.

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