BUDGET AND BUDGETARY CONTROL

INTRODUCTION

OMERGIC (1999:81) defines budget as a plan of financial operation embodying and estimate in proposed revenue and expenditure as well as the proposed means of financing them for a given period usually one year.

In another development G.C. OBIAGBOSO (1996:25) is of the opinion that budget can be conceptualized as a cost plan relating to a period of time.

Federal Ministry of Finance Publication (2004) defines budget as a presentation of government estimates of its revenue and expenditure for the fiscal year. It describes how the federal government will raise revenue and how this revenue will be directed towards rebuilding Nigeria’s economy, reducing poverty, creating employment and improving the standard of the generality of its citizens. A budge is a plan relating to a period of time expressed in quantitative terms.

However, it has been defined by the Chattered Institute of Management (CIMA) as a plan quantified in monetary terms prepared and approved prior to a define 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 objectives.

The definition above reveals the following characteristics of budget:

A.   A budget may be expressed in terms of quantity or money or both.

B.   A budget is prepared in advance of the period during which it is to operate.

C.   The purpose of budget is to implement the policies formulated by the management for attaining the given objectives.

2.1            TYPES OF BUDGET

Encyclopedia Americana (2001:69) by Grolier incorporation states that, in most cases the quantities in a budget are expressed in money. A labour budget for example may be presented in hours. Other budgets may be presented in unit material such as pounds or yards. But because money is the common denominator in an organization transaction. Encyclopedia Americana (2001:69) list out the following as the type of budgets:

A.    OPERATING BUDGETS: It involves any item in the regular operations of the firm that is, them that normally and regularly appears on the income statement, such as sales expenses, or manufacturing cost. Operating budget usually extend not more than 12 months into the future.

B.    PROGRAMMED BUDGET: This in a way limited types of budget; They are limited to operating expenses that are subject to management’s discretion, such as research and development or advertising. When a programme budget is used, the operating budget is limited to direct material, direct labour and manufacturing over-head items not easily affected by discretionary changes in policy by management.

C.    CAPITAL BUDDGET: This includes all proposal outlays for capital items for a period. Outlays for land, plant and equipment, furniture and fixtures are included. Outlays for small tools, repair and maintenance are excluded.

D.    VARIABLE BUDGET: Is a budget in effect of a development to fix various levels of activities. Comparisons are made between the actual cost and revenue and the budgeted figures for the same level of activity. Only changes in values and efficiency are involved because the actual volume and budgeted volume are the same.

E.    VARIABLE OR STATIC BUDGET: This type of budget is sometimes called forecast budget which are developed for only level of activity. In the comparison of budgeted and actual results. Volume changes are present as well as volume and price changes, and so analysis under fixed budget are clear as under variable budgets.

F.     LONG TERM BUDGET OR ANNUAL BUDGET: generally and as a matter of routine principle, the federal government of Nigeria budgets annually, that is the budget is for one year. Some countries however, have adopted the policy of planned economy and to meet the needs of long term planning, the resorted to long term budgeting preparing the budget for three or more years.

Such budgets may, indeed be better described as long term planning rather than long term budgeting because what is provided for is financial planning over a period of years to finance the plan. The countries involved will spread the estimated plan expenditure over a number of years; the legislature will approve the plan along with its estimated expenditure.

G.   CONTINUOUS OR ROLLING BUDGET: Are special types of short term budgets usually a year or fiscal year, they cover the current month and the following eleven months.

H.   MASTER BUDGET: It co-ordinates and summarizes all sub-budgets of a firm. Sub-budgets cover particular segments or activities of a firm.

I.       APPROPRIATION BUDGET: Usually show the maximum amounts that  may be used for a particular project. In business, they are generally used to control capital expenditure.

2.2            FUNCTIONS OF BUDGET

Pene A. et al (1991:145 -146) considered four primary functions of budgeting which are as follows:

1.     PLANNING: The primary purpose of a budget is to represent and describe the financial ramifications of plans for the future. The budgeting process requires individual to consider possible future course of actions and the resources needed to accomplish the various activities.

2.     COMMUNICATION AND CO-ORDINATION: The budgeting process promotes communication and co-ordination among divisions or departments within a company. In order for the organization or company to function effectively management and other employees must understand the interaction among the departments and how the actions of one department affects another. Then management must communicate their plans to each other in order to co-ordinate the activities of the organization as a whole.

3.     RESOURCES ALLOCATION: Organization operates with limited resources which therefore, requires some types of allocation. Budgeting aids resources allocation by ensuring that information is available to help managers determine which activities should be limited, resources of the organization. In addition, trough budgeting process, organization can analyze activities to determine if they add value to the company.

4.     EVALUATION AND CONTROL: Finally, a budget serves as a useful benchmark against which to evaluate and control actual performance. The evaluation process consists of comparing actual performance results to the budge to determine what deviated from planned activities and whether to take corrective action. When actual and budgeted results do not match, the financial and operating activities of the organization may need to be revised.

2.3            LIMITING FACTORS TO BUDGETING

OBIAGBOSO G.C. (1996:27) said limiting factors to budgeting are those factors whose influence must to an extent be assessed in order to ensure that budgets are reasonable and capable to ensure a favourable fulfillment. These factors include:

1.     FINANCE: The financial position of the financial resources of each firms, organization or department must be of keen interest and must be taken into consideration when preparing the firms budget. This has to do with how the firm is going to generate its fund in order to achieve its objectives, here the question of where to get these fund come to mine, is it through subvention or through revenue so that, on the long run there wouldn’t be a problem in the implementation of the budget.

2.     RAW MATERIALS: This is another limiting factor to budgeting; it is applicable to a large extent in a manufacturing organization where raw materials play a sensitive role in production. Here proper consideration should be given to availability of raw materials, the supplies and lead time.

3.     PRODUCTION CAPACITY: The production capacity of each department must be taken into consideration such that the budgeted output from each department will be seen as a burden to such department i.e. the management should ensure that the production capacity is not exceeded so as to prevent possible breakdown of machines.

4.     GRADE OF LABOUR: The execution of budget depends on it to a large extent on the work force of that organization. Therefore, the caliber of workers or employees must be such that can put in their best so as to achieve the set goals. But in a situation where lazy workers are employed, the budgeted output cannot be met and when this happen, the accomplishment of the budget is already in future.

2.4            APPROACHES TO BUDGETING

According to OBIAGBOSO G. C. (1996:27) there are three approaches to budgeting namely:

1.     MASTER BUDGET: This is a single summary statement which incorporates functional or supporting budget. Functional or supporting budgets includes all income and expenditure for individual functions of a business such as sales budget, production budget, direct budget, etc. the master budget is usually, direct budget etc. The master budget is usually presented in form of budgeted operating statements, budgeted trading balance sheets. The master budget supported by the subsidiary budgets so presented to the top management. For example, when presented to the tope management for approval, if approval is given, the master budget becomes the financial summary of the agreed plan for the budget period being considered usually for the year ahead. 

2.     CASH BUDGET: This form a budget plans receipts and payment. It is prepared to show the expected receipts of cash and payment during the forth coming financial year. Receipt of cahs may be in form of cash sales, payment to debtors, the sales of fixed assets, the issues of new shares of stock. The main function of cash budget is to show the budget cash balance at various points in time throughout the budgeted period. It shows the effect of budget activities like selling, buying, paying wages, investing in capital equipment etc. they form the cash flow of an organization or firm.

3.     CAPITAL BUDGET: This plans the capital structure and liquidity of an enterprise for a long period of time. It is concerned with liabilities, fixed and current budgeted working capital, liabilities, fixed and current budgeted working capital, budgeted fixed asset, budgeted equity and loan capital etc capital budget quit often though not always related to a period of time excess of one year.

2.5            BUDGETING TECHNIQUES (SYSTEM)

Public finance in Nigeria by Ugwu Monday J. of Okereke (2003) discussed about budgeting techniques or system. Budgeting control techniques are now a result of continuous comparison of actual results with operations. In addition, budget estimates need checking and revising when necessary. Successful budget control requires careful analysis of both actual result and budget estimates in the business organization, budgeting techniques represents the mechanism adopted in budget preparation. Among these techniques or system are:

1.     ZERO BASE BUDGETING (ZBB): This is a techniques of budget preparation where all activities of the business is prepared i.e. it assumes that references are not made to past or previous data. In zero budgeting everything starts newly, meaning that nothing of the past activity exists. This can be seen in a newly established industry.

2.     PLANNING, PROGRAMMING BUDGETING: This is a method of budget preparation that lays emphasis on a particular program to be executed for the period of before its budget preparation.

3.     TRADITIONAL BUDGETING: This is the most common method used in budgeting preparation, this techniques makes preference from past data or an activity, which believes that previous data exist, it becomes a basis for the next budget preparation.

4.     performance budgeting: This method lays emphasizes on the performance of a particular periods before embarking on a new budget. For example, a firm budgeted for a profit of eight million naira with expenditure proposal of 4.5 million naira. If this is achieved, he can now decide to improve on the performance by budgeting for twelve (12) million naira. These techniques emphasize that budget are prepared based on the performance of previous budgets.

5.     sum – set Legislation: This is a system were by law are made to stop further expenditure on certain programmes that have outline their usefulness pending a reconsideration of the important for further implementation. It is similar to zero base budgets based on rotation and emphasize on cordial relations between the legislature and the executive.

2.6            BUDGETING AS AN INSTRUMENT OF PLANNING AND COORDINATING

A comprehensive budget enhances planning at all levels and specifies the target to be achieved as well as resources committed to their execution. It is through planning that the best method of achieving set goals within given quantum of resources is realized. As an instrument of coordination, a well prepared budget enhances better coordination of all activities contained in the budget. It is expected that they are made logical to enhance easy and successful implementation or execution.

2.7            BUDGETARY CONTROL PROCESS

DAVE N. and ROB D. (1993:420-428) These two people looked at budgetary control as techniques of looking into an organization’s future in order to anticipate what is going to happen and the n trying to make it happen. It is considered to be a system of responsibility accounting because it puts an onus upon managers to reform in a way that has been outlined for items, and ts success will depend p\upon the quality of information provided. In addition budgeting control involves the establishment of quantitative and financial statement showing the effect of following a given policy objectives during aspecified period and then comparing the actual results with the previous estimate. As an instrument of control a comprensive budget makes for easy and effective control of resources made for execution of any project. It is an avenue by which a variable quantity is made to conform to a prescribed norm or value. Budget accounts are usually maintained by the treasury departmet of government in accordance with the revene and expenditure that have been  voted. These accounts are audited towards the end of the year and the audit report made available to the legislature and the public. The audit report highlights mismanagement of resources or misappropriation as well as punishment for offenders which limit a non repaeat of past mistakes. Budget as an instrument of control specifies government expected income and expenditure over a given period of time and government cannot add above, what it has budgeted for in the budget. For effective budgeting control system, the following process should be noted:

1.            ESTABLISHMENT OF OBJECTIVES: Overall and dimensional objectives must be established on the basis in which budgets are prepared.

2.            BUDGET CENTERS: The budget centres are the divisions, departments, sections, or units within an organization. The centres are to use the budget manual or guidelines given to them by the budget committee to prepare their budgets.

3.            BUDGETS COORDINATION: The estimates made by the various budget centres on cost, various project and programmes and the revenue to be generated are to be complied by a responsible officer (a budge officer) are presented before a budget committee for consideration. The budget holders and chained by a high ranking officer. The committee is to resolve differences and submit final comprensive budget for approval.

4.            BUDGET APPROVAL: After the committee’s deliberations, adjustments and notifications on the compiled budget, approval is to be brought from highest ruling body in the organization. Budgets are summarized into a master budget consisting of a cash flow statement and a budgeted balance sheet.

5.            BUDGET IMPLEMENTATION: The approval budget is implemented in order to achieve the aims and objectives of the organization.

6.            MEASUREMENT OF ACTUAL PERFORMANCE: Budget implementation is subject to monitoring and supervision to makes sure that things are going according to plan. At the end of the budget period, actual result performance is to be measured for comparison against initial plan. Where there are variances, it should be investigated to ascertain the causes before reacting to conclusion on whether they are adverse or favourable. 

7.            FEEDBACK ACTION: After  taking a decision on favourable nature of a budget variance, appropriate actions (in form of reward or punishment of different dimensions) are to be taken on the feedback for future planning and control.

2.8            ADVANTAGES OF BUDGETARY CONTROL

OmorgeGie (1999) points out the following as the advatanges of budgetary control:

i.                   Budgetary control focuses attention upon the organizational structure and necessitates the assignment of responsibility.

ii.                 It emphasizes the ened for early planning of future policy.

iii.              Efficiency or inefficiency is spotlighted in periodic reports.

iv.              All the management members in all management level hierarchies are made to participate in the fixing of targets.

v.                 As a motivating factor the executive will strive to achieve budget target which has been set with his full cooperations, his success or otherwise in the organization solely depends on his achievement to a great extent.

vi.              It provides a yard stick against which actual results can be compared.

vii.            It shows managements where actions needed to remedy the situation.

viii.         It aims at maximization of profits through careful planning and control.

ix.              It compels managers to think ahead to anticipate and prepare changing conditions.

x.                 IT assists in delegation of authority and assignment of responsibility.

2.9            CONSTRAINTS TO BUDGETING CONTROL

There are so many contributory factors to the failure of budgetary system, but my reason will focus on some few, which are considered to be the principal weakness of budgeting control;

i.       LACK OF FLEXIBILITY: Some budgets are prepared without adequate flexibility to caution unexpected situations which may arise during the operations of the budget, because they are fixed and tight, they become an end to themselves rather a means to an end.

ii.     RESISTANCE TO CONTROL CONTRO: Many managers regard budgetary control as unnecessary and an indirect way of curtailing their authority and as a witch hunting exercise. They adopt a protective stance on their budget center and resist anything which help to bring it into harmony with other center.

iii.  Budgets are developed around existing organizational structure which may be inappropriate for current condition.

iv.  Badly budgetary system with under pressure or lack of regard to the behavioural factors may cause antagonism and lower moral.

v.     Variances are just as frequent due to changing circumstances and forecasting / management performance.

2.10       REQUISITE FOR A SUCCESSFUL BUDGETING CONTROL

For every budgetary control to be successful, there are some requisite which must be adhered strictly. Among these requisite are the following:

A.   SUPPORT OF TOP MANAGEMENT: If the budget system is to be successful, it must be fully supported by every member of management and the impetus and direction must come from the top management. No control system can be effective unless the organization is convinced that the top management considers the system be committed to the budget idea as well as the principles, policies, and philosophy underlying the system.

B.    BUDGET FIGURES SHOULD BE REALISTIC AND REPRESENT REASONABLY ATTAINABLE GOALS: The responsible executives should agree that the budgets are reasonable.

C.   COST OF SYSTEM: The budget system should not cost more than it worth, since it is practicable to be calculating exactly what budget system is worth, it only implies a caution against adding expenses refinements unless their value clearly justifies them.

D.   There must be proper co-ordinating by the budget officer usually the accountant.

E.    CLEARLY DEFINED ORGANIZATION: In order to derive maximum benefits from the budget system well defined responsibility centers should be build up within the organization. The controllable costs for each responsibility centers should be separately shown.

F.    PARTICIPATION BY RESPONSIBLE EXECUTIVES: Those entrusted with the performance of the budgets should participate in the process of setting the budget figures, this will ensure proper implementation of budget programmes. 

2.11       NATIONAL BUDGET PREPARATION

The Nigerian financial years runs from 1^st January and ends on 31^st December, of the same year. Then executive’s preparation of the budget for a new year commences same months to the end of the present financial year. The new budget proposal is expected to be sent to the national assembly for deliberation, during the civilian regime, the provisional ruling council and national council of sate deliberate upon the national budget proposal. However, proposal is expected to be completed before the commencement of the new fiscal year. The director of budget prepares the national budget request, each federal government ministry or department to submit its budget proposals for the new fiscal year. The budget office then examines each ministries budget proposal to see that, it is in conformity with the presidents planned programme, after the compilation of the various ministries, budget proposals, the president studies it putting into consideration the prevailing economic condition and the revenue projections presented to him by his adviser on economic matters, the central bank, the ministry of finance etc. however, the various ministries will be called upon to defend their proposals as listed out in the budget before final acceptance. In these circumstances, the president has examined the revenue and evaluates them in consonance with the stabilization policy of the government. The prepared budget by the executives is then sent to the National Assembly for consideration and approval. The two houses of the National Assembly could give independent consideration on the proposed items of government expenditure in the budget. The national assembly may decide to include more items in the appropriation bill or increase the expenditure vote of a particular item, once the appropriation bill is passed as approval, it is sent back to the president for his assent, he has the option to sign the appropriation bill, but once signed he can then present the budget to the nation. In presenting the budget, the president first states the major policy outlines of the government and summarizes the major points contained therein. Secondly, he gives detailed estimation or the government and finally give a careful analysis of selected aspects of the budget. 

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