THE IMPACT OF BUDGETARY CONTROL ON PROFITABILITY OF AN ORGANIZATION

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THE IMPACT OF BUDGETARY CONTROL ON PROFITABILITY OF AN ORGANIZATION

ABSTRACT

Today, the importance of budgetary control can never be over emphasized. Thus, for survival of any business organization, management needs to embark on budget to effect proper planning and control. In this vein, budgeting can be seen as a process of planning and control. Proper budgeting can never affect efficient plans of organization without control. Control as it were is an important tool which must be priced to keep in check with the plans of the organization and for correction of any deviation from the stipulated plans of the organization in question. Hence, a budgetary control comprises of both plan of operation and means of controlling operation with the scope of plan. In pursuant to this, data were collected by personal interview, questionnaires and through researcher’s observation. Secondary data were also collected from journals and related works. In chapter four, it reviews the response of people, and it was found out through questionnaire that the factor that affects the company’s profitability most is the general economic condition in the country as the people stated and cash budget is the best type of budget. This work also recommends in chapter five that business executives must make use of budgetary control to avoid failure in business.

CHAPTER ONE

1.0 INTRODUCTION

When a person decides to make a motor trip, he usually first secure an up to date road map in order that he may study the various high ways shown on the way, he then selects the route that appears to be the most satisfactory one to reach his desired destination. Before starting his journey he will probably call his local highway department or automobile club to make certain assumptions that the route is reasonably free of detour. Having assured himself that the route is the most satisfactory one, in the light of current highway condition, he will take his map and endeavor to follow the selected route as closely as circumstances permit.

The business which employs system of budgetary control may be likened to the motorist who carefully planned his trip consulted his map and kept in touch with all the highway conditions on route. The budget considered the highway map which shows the road to take to reach his destination. It is rather generally agreed that the successful completion of business activities requires careful plans to be made which should be viewed and carried out.

1.1 BACKGROUND OF THE STUDY

The process of preparing and using budget to achieve management objectives is called “budgeting”. Budgeting is an essential element which is vital to management accounting technique which can benefit all aspect of business if it is understood and properly used. The growing complexity of the business environment and the ever increasing competition among firms in the modern time makes planning /budgeting an inevitable tool for business success.

Successful management is no longer just a matter of flair, skill and determination, a conscious effort is needed to harness available resources towards the achievement of enterprise objectives. Therefore budgeting is one of the tools adopted by management for effective cost planning, control and increase in productivity.

Wildarsky (1984:213) argued that because a budget served diverse purposes, it mean different things to different people, among the various possible interpretations given by him include:

It is a plan

It is a prediction

It is a link between financial resource and human behavior to accomplish policy objectives.

It is a mechanism for making choices among alternative expenditure.

RUFUS WIZON (New York) said without a budget a business may in order aim lessely. It may never know where it is going or where it should go. Even with a budget a business may not reach its planned objectives or destination, but the exercise of budgetary control will note the deviation from the plan and thus provide the opportunity for necessary corrective action. The making of such plans and the continuous review and execution are the essence of budgetary control.

A brief history/achievement of the company

Vita foam Nigeria PLC is a manufacturing firm that manufactures and distributes polyether, foam products, furniture and upholstery products also adhesives in Nigeria. It was incorporated in 1962 and is headquartered in Oba Akran Avenue, Industrial Estate Ikeja, Lagos, under the chairmanship of Chief Samuel Olaniyi Bolarinde. It was listed on the floor of Nigerian stock exchange in 1978. this company offers flexible polyurethane foams for beddings, mattresses, sofas, pillows, cushions and carpet underplays as well as provides special high load bearing foams and super soft cushioning foams primarily under Galaxy, vita supreme and vita super brand names.

The company is one of the major companies that have contributed to the Nigerian economy with turnover of 576 billion during the 2002 financial year, which is expected to be doubled within the few years. The contribution of the company to the economy cannot pass for a drop of iceberg. In the area of employment, the vita foam Nigeria plc has provided for employment too many that would have been left unemployed.

The company established a N40 billion research and development centers to enhance its research activities commissioned in June 17, 2000 and managed by a Nigerian Scientist.

However, in 2002, it remained the leader in their traditional business of foam manufacturing and this position is complemented by the steady development of their foam business. Recently vita foam has embarked on a re-engineering exercise with corporate rebranding company and commissioning of new products. The exercise is aimed at improving productivity, profitability and ensuring greater returns to shareholders.

1.2 STATEMENT OF THE PROBLEM

Most often budget and budgetary control research concentrated on its impact in the Federal Government budget and its attempt to control the use of public fund. There is no doubt that some other write-ups on budget and budgetary control has concentrated greatly on profit oriented organization, the issue failed to emphasize on the issue of budgetary control which is the bedrock for which budget implementation could be more effective and plans realization efficient.

Budgets are attention directed and forward looking on financial statement. Budget tends to ensure goal congruence and elicit managerial efforts which are both wrapped up in motivation. Budgets relate to objectives and policies to managerial responsibilities, and facilitate accountability. In profit seeking organization budgetary control provide relevant information relating to what the organization wants to achieve and the measure it would adopt to translate its plans into reality. Time has come to direct our searching eyes of budgeting to budgetary control in our manufacturing companies.

1.3 PURPOSE OF THE STUDY

The objective of the study is based on the statement raised in the proceeding paragraph. They are:

To ascertain that budgetary control is implemented and to consequently determine how the actual performance can be used to match the budget provided.

To determine whether budgetary control is practicable by vita foam Nigeria plc.

To determine whether the cost of instituting budgetary control is matched with its benefit.

To determine if administrative cost is incurred when trying to control actual performance.

1.4 RESEARCH QUESTIONS

The following questions are considered pertinent for the purpose of this study and will emphasize on the best answers and solutions to these problems.

Does the manufacturing company see the impact of budgetary control schemes as the stepping stone towards organization success?

Will adequate budgetary control schemes bring a necessary impact on the profitability of a manufacturing company?

Does efficient motivation on the part of the management and subordinate improve the firm’s performance towards achieving the budget control goal?

Are they effective?

1.5 STATEMENT OF HYPOTHESIS

In order to draw conclusion and make recommendations some hypothesis were developed and tested.

Ho – The budgeting process does not motivate management to look ahead and become more effective and efficient in administering the business operations.

H1 – The budgeting process motivates management to look ahead and become more effective and efficient in administering the business operation.

Ho – Budgetary control does not develop in atmosphere of profit mindedness and cost consciousness.

H1 – Budgetary control develops in atmosphere of profit mindedness and cost consciousness.

1.6 SCOPE AND LIMITATIONS OF THE STUDY

This study covers only selected workers of vita foam plc within Aba branch, although they were still other workers in other branches in different state, but the research was restricted to Aba branch.

One of the major problems encountered in the course of this study was difficulty in obtaining data from the management body of the organization due to fear of disclosing their management strategies to competitors. Time constraints were also a problem in the course of this research work.

1.7 SIGNIFICANCE OF THE STUDY

It is the major way in which the organizational objectives are translated into specific plans, tasks and objectives related to individual manager and supervisors; it should provide clear guidelines for current operations.

It is an important medium of communication for organizational plans and objective and of the progress towards meeting these objectives.

The development of budgets helps to achieve, co-ordinate the various departments and functions of the organization.

Performance at all levels is systematically reported and monitored thus aiding the control of current activities.

1.8 ASSUMPTIONS OF THE STUDY

This will help us to understand that budgetary control should be precise in format and simple to understand. It should be flexible and not rigid in application.

This will hide inefficiencies instead of revealing them where a proper evaluation system is lacking.

Management should use budgetary control with intelligence and foresight along with other managerial techniques.

The adequacy of budgetary control, thus depend upon the adequacy of managerial judgment.

1.9 DEFINITION OF TERMS

PLANNING –

According to Darton Mc farland defined planning as the activity where the manager analyses present condition to determine ways of reaching a desired future state.

FORECASTING–

This is the procedures and techniques for predicting condition or event that are expected to prevail in the future.

BUDGETING–

This is a formulation of plans in a given period in numerical term.

BUDGET–

This is defined as a future plan of action for the whole organization or a section there of, which is expressed in monetary term.

BUDGETARY CONTROL –

This is the establishment of budget, relating to the responsibility of the executives to the requirement of the policy and the continuous comparison of actual performance with budgeted level so as to secure either by individual or collective action the objective of such policies.

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