Abstract

This study, the impact of budgeting and budgetary control on the performance of
manufacturing company in Nigeria, was conducted using Cadbury Nigeria Plc, as case
study. Since wants are plenty while resources are limited, every organisa-tion tends to find
means by which it can get what it wants with the limited resources at its disposal.
Therefore, firms seek to adopt the concept of budgeting and budgetary control to satisfy
their needs at the least possible cost and at the same time fulfill their stewardship
obligations to the numerous stakeholders. e adopted a descriptive research design with
data gathered through !uestionnaire administered to respondents. Non-parametric tool of
chi s!uare was employed to analyse the data. "ypotheses were tested and analysed on a
#$ level of significance and it was revealed that budgeting is a useful tool that guides
firms to evaluate whether their goals and ob%ectives are actualised. Considering the
changing environ-ment in which firms now operate, it can be concluded that budget, which
is a continous management activity, should adapt to changes in the dynamic business
environment.
Phase 1
Introduction
ants are numerous while resources are limited but there is every tendency to waste or
under-utilise the li-mited resources by the human factor involved in the pro-duction of
goods and services. ith various companies competing with one another, only few that
are able to produce at least possible cost will survive the growing competition in the
market. Therefore, it is paramount for every serious business undertaken to produe at that
poss-ible minimum cost so as to remain in business and also achieve the corporate
ob%ectives of profitability and sta-bility. &n view of this, there is every need to do a realis-
tic planning of the activities of the firm taking into con-sideration the limiting factors and
the long term ob%ec-tives of the firm. &n order to achieve this, budgeting ' a tool of
planning and control becomes indispensable. (udgeting is ubi!uitous and has long been
considered as a necessary tool in managing a company.
) budget has been defined by Chartered &nstitute of *anagement )ccountants +C&*),,
as -a financial or !ualitative statement prepared and approved prior to a defined period
of time for the purpose of attaining a giv-en ob%ective. &t may include income,
e.penditure and the employment of capital/. C&*) also defined budgeta-ry control as -the
establishment of budgets relating the responsibilities of e.ecutives to the re!uirements of
a policy and the continous comparisons of actual with budgeted results, either to secure
by individual action the ob%ectives of that policy or to provide a basis for its revi-sion.
"orngreen +0123, defined a budget as -a !uantitative e.pression of a plan of action and
an aid to coordination and implementation/. The 4.ford )dvanced 5earners dictionary
defined budget as an estimate or plan of the money available to somebody and how it
will be spent over a period of time. (oth "orngreen and the dictio-nary emphasised the
word plan, but planning itself is found in all aspect of human endeavour, hence planning
is a blue print of business growth and a road map for development that helps in
deciding ob%ectives, !antita-tively and !ualitatively. &t involves setting a goal on the
premise of the ob%ectives and keeping of the resources. The process of planning re!uires
that managers of busi-ness to act as if they are fortune tellers and attempt to predict the
future course of action to be adopted. Such prediction of the so-called fortune tellers will
determine whether or not the ob%ectives of the firm will be met.
)dams +3660,, views budget as a future plan of action for the whole organisation or a
sector thereof. (udgets are plans that deal with future allocations and utilisation of
resources to different activities over a given period of time. 7or any organisation to make
progress or achieve its goals, it needs capital and to be able to make profit, it re!uires
planning of its resources, which can only be achieved through budgeting, hence
budgeting serves as a tool for financial planning.
(atty +0123,, defined budgetary control as a system which uses budgets as a means of
planning and control-ling all aspects of producing and or selling commodities or services.
This is true as we tend to prepare revenue and e.penditure variance analysis to be able to
deduce areas of divergencies for which the management needs to watch to avoid
embarassment as any adverse variance will translate into inability to meet the corporate
ob%ec-tive which will eventually lead to disagreement with stakeholders. Pandy +012#,
has observed that although many people will complain about budget and its process,
budgets are indispensable in a large modern organisation as the ben-efit that occurs from
budgets and its control is much greater than the cost involved. &n view of this, the fact
that resources are scarce, coupled with high competition that permeate most businesses,
budgets when rightly applied, would be an effective tool for planning and con-trol,
especially in large corporation as Cadbury Nigeria Plc.
5ucey +3606,, in support of the C&*)s definition de-fined budget to be a plan !uantified
in monetary terms, prepared and approved prior to a defined period of time, usually
showing planned income to be generated or e.-penditure to be incurred during the period
and the capital to be employed to maintain the given ob%ective. 7rom this definition, we
can as well state that budget is an aid to making and coordinating short range plan8 a
device for communicating plan and ob%ectives to various re-sponsibility centres and a
basic evaluation of perfor-mance.
Therefore, it can be said that budget is a parameter which measures the actual
achievement of people, de-partments, ministries and firms, while budgetary control ensures
that actual results are positively or negatively in accordance with the overall financial and
policy ob%ec-tives of the establishment.
1.2 Literature Review
"istorically, the scripture made us to believe that budget originates as far back as the stone
age period, when the early man failed to get all his needs he was forced to plan and
manage the little he had in terms of foods and other essential things. "e rationed his food
over a period of time so as to prevent himself from being starved, though his wants as
compared to what the modern man will re!uire are very small, he still could not get all he
needed to the level of his utmost satisfaction. "e pre-served the fruits he plucked during
their seasons for the period of glut, when they are not in plenty, so as to avoid starvation
during that period. "e also preserved the e.cess bush meats, as he was not sure he
would be able to get animal killed on daily basis. )s far as the early man plans for the
future because of uncertainty that per-vades the future, he is said to be involved, directly
or indirectly, in primitive budgeting.
*odern day budgeting started during the 9gyptian and :oman civili;ation periods
around 3#66(C and #66(C respectively. Then the merchants belief in drafting all
e.pected e.penditure against e.pected income in respect of their businesses so as to be
able to know the kind of venture that would be profitable. 7ormal presentation and
preparation of budget started during the middle age in 9ngland when the Chancellor of
the 9.che!uer, brit-ish e!uivalent of our *inister of 7inance, used to pre-pare his
annual account to be read to the parliament in a scroll, usually put in a bag. <uring the
time for discus-sion on the finances of the state he used to open his bag containing the
statement of accounts to be read to the parliament. The name of this bag is called the
budget, which has its original word in french +boguette,. ith time, the financial
statement took over the name of the bag, hence todays statement of finance for
governments on yearly basis is referred to as the budget.
&t is the same =reat (ritain that firstly adopted the prac-tice of an annual national budget
in 0>2>, the parliament adopted the Consolidated fund )ct which provided for a single
general fund for receiving and recording all reve-nue and e.penditure. This laid the
basis for a modern budget system, by 0233 the chancellor of 9.che!uer had adopted the
practice of presenting an annual budget statement to account committee for respective
review of che!uer and )udit )ct provided an independent post audit. The ?nited State
adopted the system by 0103, as the federal budget system was set up by the budget and
accounting )ct of 0103 and by 02@0, the 7rench parlia-ment controlled the details of
appropriation.
Currently, much attention has been given to the strenghtening of budget and
planning and their interrela-tionship in developing countries including Nigeria. The
advocacy for this has come from prominent international agencies as ?nited Nation,
&nternational *onetary 7und, orld (ank and ?nited State )gency for &nternational
<evelopment. )ll these agencies are all interested in encouraging developing and
underdeveloped nations to improve their budget practice. )ll these show the im-
portance attached to budget as a management process.
1.2.1 Concepts of Budget
)s mentioned in our introduction, budgets are statements of estimated resources set apart
for e.ecution of planned works or activities over a specified period of time. &t is a blue
print of the outcome of the organisations operation in a financial year. &t indicates the
!ualitative parame-ters of an organisations performance, while budgetary control,
according to Terry, is a process of finding out what is being done and involves the act of
comparing the actual result with the budget to verify accomplishment or remedy the
differences.
<imock is of the view that budget -is a financial plan summarising the financial
e.perience of the past, stating the current plan and pro%ecting it over a specified period of
time in future/. Therefore, a budget is a keystone of financial administration and the
various operations in the field of public finance are correlated through the instru-ment of
budget. ) budget is a financial report of state- ment and proposals which are periodically
placed before the legislature for its approval and sanction. &t is the report of the entire
financial operations of the govern-ment and gives us a glimpse of future fiscal policy. &n
order for us to have a gainful understanding of the con-cept budget, we need to consider its
purpose.
1.2.2 Purpose of Budgeting
(elow are some of the essence of budgeting for the fu-tureA
a, To improve planning and control with ultimate in-tention of increasing the profit and
financial position of the firm8
b, To find the most profitable course of action through which the efforts of the business
may be directed in meeting its primary ob%ectives8
c, To assist management in holding the business as nearly as possible on the survival
course8
d, To force management to focus attention on particu-lar operating and financial
problems so that effec-tive planning would be made for them
e, To translate the ob%ective of an organisation into action8
f, To coordinate the various factors of production with a view to satisfying all stakeholders8
g, To communicate the organisational ob%ectives across the firm8
Since we have highlighted the various purposes of pre-paring the budget it is necessary for
us to restate the var-ious steps involved in the preparation of budget.
1.2.3 Steps In Budget Preparation
The following steps are to be established to prepare a !uality budgetA
a, !istence of a budget "anua#A the manual shall contain the standing instructions
governing the re-sponsibilities of persons, procedures, forms and records relating to
the preparation and use of the budget8
b, Constitution of the budget co""itteeA the com-mittee consists of the chief
e.ecutive officer and representatives of functional areas as finance, pro-duction,
marketing, selling, engineering etc. The committee is to formulate the program for the
prepa-ration of the budget8
c, Identif$ing principa# budget factorAthe factor that limits the level of activities +such
as shortage of skilled labour, inade!uate raw material or machine capacity, the e.tent
of which should be firstly as-sessed before preparing the functional budgets8
d, Appoint"ent of a budget officerA normally an ac-countant who is charged with
the responsibility of issuing budget instructions to various departments8 receiving and
checking the budget estimates8 pro-viding historical information to departmental
man- agers to help them in their forecasting8 ensuring that departmental managers
prepare their budgets in time8 preparing the budget summaries8 submitting budgets
to committee and furnishing e.planation on particular points8 discussing difficulties
with man-agers and coordinating all budget works8
e, stab#ishing the budget periodsA budget could be established into control periods
which could be weekly, monthly, !uarterly or even yearly8
f, Preparation of the "aster budgetA this is the con-solidation of various functional
budgets +sales budg-et, produduction budget, production cost budget, plant
utilisation budget, capital e.penditure budget, selling and distribution budget and
cash budget,. *aster budget can be summarised into (udgeted Statement of
Comprehensive &ncome and (udgeted Statement of 7inancial Position. (oth the
master budget and cash budget can be described as the fi-nancial budget. )ll these
budgets, master and func-tional, can be further classified
1.2.% C#assifications and t$pes of Budget (udgets can be classified intoA
a, Short term budget8 b, 5ong term budget8 c, 7i.ed budget8
d, 7le.ible budget8
e, Bero (ased (udget +B((,8 f, :olling budget8
g, )ctivity (ased (udgeting8 h, &ncremental budgeting8
i, Planning, Programming (udgeting Systems +PP(S,
1.2.%.1 Short ter" budget
(udget established for use over a short period of time, usually a year, which the
responsible officer is to use for control purposes. This is commonly in use in
manufacturing industries due to the comple. and dy-namic environment in which they
operate.
1.2.%.2 Long ter" budget
This is a long term plan, also called develop-ment plan. &t is normally for a
minimum duration of # years and is sometimes called the strategic plan of the
organisation. =overnment prepares # years <evelop-ment plan, which can be rolled
over for every five year as manufacturing companies also prepare # years strate-gic plans,
which is sometimes broken into yearly budget rolled over from one year to the other.
1.2.%.3 &i!ed budget
C&*) defined fi.ed budget as budget set prior to a control period and not subse!uently
changed in re-sponse to changes in any activity costs or revenues. &t may serve as a
benchmark in performance evaluation.
1.2.%.% &#e!ib#e budget
C&*) defined fle.ible budget as a budget designed to change in accordance with the
level of activity attained. This budget recognises the e.istence of fi.ed, variable and semi-
variable costs and is designed to change in relation to the actual volume or output or
level of activ-ity in a period.
1.2.%.' (ero Based Budgeting.
This is also called Priority based budgeting. &t is a tech-ni!ue which seeks to eliminate the
drawbacks of tradi-tional incremental budgeting by taking the budgets for service of
overhead centres back to minimal operating level and then re!uiring increments above this
level to be !uantified and ad%usted. B(( was introduced in the early 01>6s in the ?S by
Phyrr, 4. and gained prominence because of its practicability. President Carter then di-
rected all ?S governments to adopt the techni!ue. The techni!ue is concerned with the
evaluation of cost and benefits of alternatives and implicit in it is the concept of opportunity
cost. &t is applied in three stages ofA
a, The decision unitA i.e subdividing the organisation to discrete sub-units where
operations can be mean-ingfully and individually identified and evaluated8
b, The decision packagesA each decision unit manager submits no less than three budget
packages namelyA the lowest level of e.penditure8 the e.penditure re-!uired to
maintain levels of activities and the e.-penditure re!uired to provide an additional
level of service or activity8
c, )greed packages will form the budget.
1.2.%.) Ro##ing Budget
This is also known as continous budget. &t is a system of budgeting that involves continously
updating budgets by reviewing the actual results for a specific period in the budget and
determining a budget for the corresponding time period. ?nder this peiod, instead of
preparing a budget annually, there would be budget every three or si. month so that as
the current period ends, the budget e.tended by an e.tra period.
1.2.%.* Activit$ Based Budgeting
This is also called activity cost management which is defined as -a method of budgeting
based on an activity framework and utili;ing cost driver data in the budget setting and
variance feedback processes. &t is a part of planning and controlling system which tends to
support the ob%ectives of continous improvement and it also a form of development of
conventional budgeting system. &t is characterised by the followingA
:ecognition of activities that drive cost with the aim of controlling the causes of cost
directly :ather than the cost themselves8
<ifferentiates and e.amines activities for their value
adding potentials8
The department activities are driven by demands and decisions which are beyond
the control of budget holder8
9ncourages immediate and relevant performance measures re!uired than are found
in conventional budgeting systems.
1.2.%.+ Incre"enta# budgeting
This is the traditional approach that uses the current year estimates of income and
e.penditure as the basis for determining the budget for the year. &t is normally used in
public sector and it has the misfortune of carrying over the inade!uacy of yester-years
into subse!uent year budgets as it only increases the current periods figure with what
the establishment thinks is the inflationary premium for ne.t year financial period.
1.2.%., P#anning- Progra""ing Budgeting S$ste" .PPBS/
This system analyses the output of a given programme and also seeks for alternatives to
find the most effective means of reaching basic programme activities. &t in-volves the
preparation of long term corporate plan that clearly establishes the ob%ectives that the
organisation has to achieve. &t aims at achieving the following ob%ec-tivesA
a, 9nabling the management of a non profit making organisation to make more
informed decision about the allocation of resources to meet overall ob%ectives of the
organisation8
b, 9nables the management to identify the activities, functions or programmes to be
provided thereby es-tablishing a basis for evaluation of their worthiness and
c, Provides information that will enable management to assess the effectiveness of its
plans.
PP(S was developed in North )merica in state and fed-eral government activities, based
on system theory, out-put and ob%ective oriented with a substantial emphasis on resource
allocation based on economic analysis. &t is not based on traditional organisational
structure and divi-sion, but on programmes of activities with common ob-%ective of the
organisation sub divided into programmes. These programmes are e.pressed in terms of
ob%ective to be achieved over the medium to long term, say @ to # years. The
programme is ob%ective related and spread across several conventional departments.
1.2.' Prob#e"s 0f Budgeting
(udgeting problem can be classified into !uan-titative and non-!uantitative as
belowA
1.2.'.1 1uantitative Prob#e"s
(udget is concerned with the future and as such the data that goes into its preparation
must be future-oriented but
on past events. Nevertheless, there is always a technical problem in forecasting accurately
the future in a world that is dynamic in nature. &t should also be noted that since budgets
are set by human %udgement, they are sub-%ected to the same feasibility which attends all
human activity. Therefore, the dynamism of the future would definitely raise variance
between the actual and the budgeted results.
1.2.'.2 2on31uantitative Prob#e"s
These are the behavioural problems of budget. They arise as a result of the behaviour of
human factor that is unpredictable. )n average human being changes like weather with
situation to his best advantage. &t is this same human being that is e.pected to supply the
infor-mation on which the formulation of budget would be based. "e is also e.pected to
use the budget to achieve the organisational ob%ective. "e may decide to be enthu-siastic or
indifferent about it. "e may even consider it that his employer wants to reap where he has
not shown at his e.pense, he may therefore bring in wide variables into the budget, most
especially where he is informed that the budget would serve as a reference point in de-
termining his efficiency of performance. )lso, e.ecu-tives and employees are e.pected
through education to have a very good understanding of what the budget is all about where
this education and conse!uently the under-standing is lacking, failure and collapse of the
budgetary process is unavoidable.
7rank ood +0122, has noted that many people look at budgets not as a control tool but as
a straight %acket. Too much rigidity in the pursuance of the budget could al-ways be
detrimental to the realisation of the ob%ectives of the budget. "orngen and 7oster +012#,
observed that the budget helps managers but that budget itself needs help. To this end, top
management and indeed the work force must be in support of the budget. here this
support is however lacking, there is bound to be problem in the actualisation of the
ob%ectives of the budget. This is in line with 7rank ood +01#2, who noted that the more
managers are brought into the budgetary process, the more successful the budgetary
control is likely to be. ) manager whom a budget is imposed rather than actively
participating in it formulation is more likely to pay less attention to the budget and use it
unwisely in the control process. *iller and 9arnest +01CC, summarised the need to secure
the actualisation of the budget through partici-pation by saying that Dparticipation tends to
increase the commitment, commitment tends to heighten motivation, motivation which is
%ob oriented tends to make managers work hard and more productive work by managers
tends to enhance the companys prosperity, therefore participa-tion is good
1.2.) Concept of Contro#
The goal of control is ensure that operations and per-formance conform to plans.
Controlling includes all activities that ensure that the actions of
the organisation are directed toward the stated goals.
Eoont; et al +01>1, defined control as the regulation of work activities in accordance
with predetermined plans, such as to ensure the accomplishment of the organisa-tions
ob%ectives. Control operates through standard and also measures the work performance
according to these standards and correct deviations from the standard. &t presumes that
there is a standard or plan against which performance is compared. 5ucey +366@,, in
support of the above, opined that control concerns itself with the efficient use of
resources to achieve a previously deter-mined ob%ective, or set of ob%ectives contained
within a plan.
Steps involved in control includeA
a, 9stablishing plan, goal or ob%ective decision rule8 b, :ecording of actual
performance of activity8
c, Creation of a mechanism to compare the above two steps8
d, 9.traction of variances, that is, the difference be-tween the first two steps8
e, &nvestigation of the causes leading to the variances8 f, Correcting the variance or
taking appropriate action
on the variances.
ith this as background information we can now con-veniently look at budgetary
control in greater perspec-tive.
1.2.).1 Budgetar$ Contro#
5ockyer, E +012@, was of the opinion that ones a budget has been drawn up, it can be
used as an instrument of control by continually comparing actual with budget
performance. Since all activities are ultimately capable of being e.pressed in financial
terms, the breath of con-trol possible is very great. "ence budget control is part of the
overall system of responsibility accounting within an organisation, as costs and revenues
are analysed in accordance with areas of personal responsibilities of the budget holders
through permitting financial monitoring.
(udgetary control relates e.penditures to the personnel responsible for the various
e.penditures at the various cost centres so that each manager is held responsible for the
cost by which he has control.
The terminology of C&*) +366C, defined budgetary control as the establishment of
e.ecutive the re!uirement of policy and the continous comparison of actual with
budgeted results, either to secure by individual action, the ob%ectives of that policy or to
provide a basis for its revision. Suffices to say that budget is not an island on
its own, emphasis is placed on control which is done in form of comparing action with
budgeted plan.
5ucey +3662, defined budgetary control as the process of comparing the actual results with
the planned results and reporting on the variations called variance. This accord-ing to him,
sets control framework which helps e.pendi-ture to be kept within an agreement limits,
deviations are noted all along for corrective actions. &n some circum-stances, it may be
necessary to revise goal but this should not be a normal occurence but only in e.ceptional
circumstances.
Practically, budgetary control involves departmental or sectional or functional heads in the
organisation, receiv-ing a copy of budget relating to his activities. 9ach month he will
receive a copy of budget report showing visibly where he has over or under spent his
budgeted allowance. 7rom this he will be able to decide on the corrective step to take.
This is in tandum with the fact that variances are the responsibility of departmental or
sectional heads and everyone of them has to e.plain the variance and act in time to stop
future occurence of ad-verse variances. Professor Pogue underscores this prac-tical aspect
of budgetary control, when he states that if the actual sales as compared the budget always
results in adverse variance, provided it is realistic and attainable, it is not advisable to
revise the figure %ust because they were not attained. Therefore, it can be concluded that
budgetary control on its own controls nothing but rather it is management acting on the
information received by way of results that e.ercise control, in short, manage-ment holds
the control yardstick.
(atty +01C@, budgetary control is a system which takes budget as a means of producing and
or selling commodi-ties or services. The same (atty +01>6, went further to state that
budgetary control aims at the performance of three primary functions of planning,
corporation and control aided by feedback and corrective action. (ut (uyer and "olmes
+012F, considered budgetary control as a means of control in which the actual state of
affairs is empowered with that planned for, so that the appropri-ate action may be taken
with regards to any deviations before it is too late.
1.2.).2 0b4ectives of Budgetar$ contro#
The ma%or ob%ectives of budgetary control can be sum-marised asA
a, Combination of ideas of all levels of management in the preparation of budget8
b, Coordination of various activities in business or-ganisation8
c, :evelation of where an organisation needs to rem-edy a situation8
d, Planning and controlling of all income and e.pendi-ture to achieve ma.imum benefits
for the organisa-
tion8
e, Provision of yardstick against which actual result can be compared along with
predetermined result8
f, Channeli;ation of capital e.penditure in most prof-itable manner.
1.2.).3 Conditions for ffective Budgetar$ Contro# S$ste"
The under-listed conditions are necessary to be in place for a budgetary control to be
effectiveA
a, &nvolvement and support of top management8
b, Clear cut information of long term corporate ob%ec-tives within which the budgeting
system will oper-ate8
c, :ealistic organisation structure with clearly defined responsibility8
d, =enuine and full involvement of the line managers in all aspect of the budgeting
process8
e, )ppropriate accounting and information system which will includeA the record of
e.penditure and performance related to responsibility8 prompt and accurate reporting
system showing actual against budget8 ability to provide more detailed information or
advice on re!uest8
f, :egular revision of budget and targets, where neces-sary8
g, To be administered in a fle.ible manner. Changing in conditions may call for
changes in plans. :igid adherence to budgets which are clearly inappropri-ate for
current conditions, will cause the whole budgeting system to lose credibility and
effective-ness.
Phase 2
State"ent of Prob#e"
The decision as to how to distribute limited financial and non-financial resources, in an
effective and efficient manner, is an important challenge in all organisations. &n most
large and comple. organisations, this task would be nearly impossible without budgeting.
ithout effec-tive budget analysis and feedback about budgetary prob-lems, many
organisations would become bankrupt. Some of the problems arise from inade!uate
data to for-mulate and implement a proper budget8 and non e.is-tence of well defined
structure, which leads to overlap-ping of duties. These deficiences can therefore be ad-
dressed through the use of budgeting techni!ue. There-fore, this study traces the e.tent
by which budgeting can used as a good planning and controlling tool in a manu-facturing
company.
1.% Research 1uestions
The study was guided by the following research !ues-tionsA
a, hat importance does budgeting techni!ue serve in a manufacturing company in
NigeriaG
b, "ow does budgeting aid the planning of a manufac- turing compnay profit in
NigeriaG
c, "ow does budgetary control affect the working per-formance of employees in a
manufacturing company in NigeriaG
d, hy do manufacturing companies in Nigeria lack ade!uate skill for planning and
controlling policy formulations and implementationsG
e, &n what way do inade!uate data and records create problems for manufacturing
companies in formulat-ing effective budgetingG
1.' Research 5$pothesis
7or the purpose of analysing the data, the following hy-potheses were testedA
a, 5o16 There is no significant relationship between budgetary planning and control on
organisation per-formance8
b, 5o26 9ffective budgetary control does not influence the result achieved8
c, 5o36 (udgeting techni!ue is of no importance in a manufacturing firm8
d, 5o%6 (udgetary control does not affect the working performance of an employee in
a manufacturing concern.