Budgeting As An Instrument Of Internal Control In A Manufacturing Organization
(A Case Study Of Ama Breweries Enugu)
Budgeting serves as a vital instrument of internal control within a manufacturing organization by providing a framework for planning, monitoring, and regulating financial activities. Through the establishment of detailed financial plans, including revenue projections, expenditure forecasts, and capital allocation strategies, budgeting enables management to set clear targets and objectives. By regularly comparing actual financial performance against budgeted figures, variances can be identified and investigated promptly, allowing for corrective action to be taken as necessary. Additionally, budgeting facilitates resource allocation efficiency, ensuring that funds are utilized effectively to support operational activities and strategic initiatives. This structured approach to financial management enhances transparency, accountability, and decision-making processes within the organization, ultimately contributing to improved operational performance and profitability.
An efficient budgeting control system is one that produces the desired result. A balanced budget is the one that produces no variances but to achieve this, we are left to contemplation rather than a reality. This has become the problem of most of our manufacturing concerns in Nigeria. This study investigated the budget control and execution in manufacturing concerns in Nigeria with a view of appraising their efficiency. Out of a population of one hundred and fifty six drawn from the manufacturing concern, seventy eight were selected as the sample size using statistical sample tools (Taro Yamani). A questionnaire was designed and distributed to elicit information from the sample population; also data was sourced through primary and secondary sources. These data collected were presented and analyzed by means of tables and percentages. The hypotheses adduced were tested using such tools as chi-square. It was observed that manufacturing concerns do plan their profit so as to minimize losses though the procedure is not religiously carried out. However, it was discovered that the procedure is inadequate and inefficient. An inadequate budget procedure and execution causes a high accumulation of inventory thereby tying down the capital which could have yielded greater profit to the organization. Therefore there is need for the proper control of budgets in manufacturing concerns as to minimize losses and maximize profits.
Approval Page ii
Dedication iii
Acknowledgement iv
Abstract v
CHAPTER ONE:
INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problem 3
1.3 Objective of the Study 4
1.4 Research Question 4
1.5 Hypotheses of the Study 5
1.6 Significance of the Study 6
1.7 Scope of the Study 7
1.8 Limitation of the Study 7
1.9 Definition of Terms 8
References 9
CHAPTER TWO:
REVIEW OF RELATED LITERATURE
2.1 Definition of Budget Manual 10
2.2 Reasons for Budgeting 11
2.3 Budget and Budget Planning 12
2.4 Fixed and Flexible Budget 13
2.5 Master Budget 14
2.6 Cash Budget 17
2.7 How to Prepare A Budget 20
2.8 Problems of Budgeting 25
2.9 Effective Internal Control System 26
2.10 Tools of Internal Control System 37
References 39
CHAPTER THREE:
RESEARCH METHODOLOGY
3.1 Research Design 40
3.2 Sources of Data 40
3.3 Research Instrument 41
3.4 Reliability/Validity of Research Instrument 42
3.5 Population 42
3.6 Sampling Size/Technique 43
3.7 Administration of Research Instrument 47
3.8 Method of Data Analysis 48
3.9 Decision Criterion for Validation of Hypothesis 49
CHAPTER FOUR:
DATA PRESENTATION AND ANALYSIS
4.1 Data Presentation 50
4.2 Analysis of Questions 51
4.3 Test of Hypotheses 72
CHAPTER FIVE:
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 83
5.3 Conclusion 84
5.4 Recommendations 86
Bibliography 88
Appendix 1 91
Appendix 2 92
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
According to Enudu (1999), the business environment is characterized by
a lot of uncertainties ranging from such factors as: Economic environment,
political and legal factors, social environment, supply and demand forces,
competition, consumers’ attitude and technological changes.
A critical look at the performances of some of these manufacturing
business organizations will reveal a lot of business failures as a result of lack of
proper planning against these uncertainties.
According to Drury (2000), proper planning of business helps in reducing
uncertainties thereby providing the management of these enterprises with a clear
direction by determining their courses of actions in advance.
According to Pandey (2010), for any enterprise to achieve these goals and
objectives, they must be managed effectively and efficiently. Management is
efficient if it is able to accomplish the objectives of the enterprise and becomes
effective when it accomplishes the objectives with minimum efforts and costs.
One of the ways in which the management can achieve these objectives is
though profit planning and control or budgeting.
According to Nweze (2011), Budgeting in its true word is the design of
the future state of an entity and the effective ways of bringing it about.
Budgeting or planning involves the determination of the future course of actions
for accomplishing the objectives of the enterprise.
According to Lucey (2002), the main purpose of budget planning is to
provide the necessary guidelines for making decisions. With the proper budget
planning, the enterprise can no longer be under the mercy of whims of Fickle
economic and social forces thereby relying on the ability to sense what is
required. (Nweze 2011).
The value of budgeting control of any organization can never be over
emphasized as these organizations and companies have limited resources and
these scarce resources impose limits on the number of extent and range of end
result the organization was set out to achieve.
According to Nwoha and Ekwe (1999), some of these goals include
maximizing profit or achieving some satisfactory level of performance, profit
satisfaction achieving continual growth or ensuring the survival of the
organization avoiding risk in making investment and performing a social
services desired by others.
According to Nweze (2011), A budget therefore co-ordinates the separate
plans of different departments in an organization be it manufacturing concerns
or non-manufacturing concerns and provides means of bringing both the
marketing, production and financial activities of the organization together.
The proper co-ordination of the various activities of these organization
especially manufacturing concerns by their management is the main concern of
this study.
1.2 STATEMENT OF THE PROBLEM
Having stated earlier according to Enudu (1999) that the business
environment is full of uncertainties as a result of such factors; socio-economic
issues, political unrest, demand and supply forces, legal issues and
technological changes all these affect the management of any organization in
one way or the other thus needed attention for proper management.
You would equally recalled that organizational goals and objectives are
numerous but the means or resources for satisfying these needs are limited, at
times not available hence needed control to satisfy the high priority areas.
These problems enunciated above have led the researcher to find answers
to such questions as follows:-
Do manufacturing companies in Nigeria do Budgeting?
If they do, what are the types of budgeting usually employed by them?
The type used or applied does it enhances their profit planning strategies?
1.3 OBJECTIVES OF THE STUDY
According to Pandey (2010), Budgeting was undertaking with the
following objectives in mind.
To find out whether or not manufacturing business organizations control
their levels of profit making and the means used to achieve this.
To examine whether the manufacturing business concerns in Nigeria
plans their profits hence their losses are unnecessarily large in relation to
their budget estimate
To identify the types of budgeting in some of the manufacturing business
concern in Nigeria that enhance efficiency
1.4 RESEARCH QUESTIONS
Does the manufacturing business organization control their levels of
profit making and the means used to achieve it
Does manufacturing business concerns in Nigeria plans their profit hence
their losses are unnecessarily large in relation to their budget estimate
Does the types of budgeting in some of the manufacturing business
concern in Nigeria enhance efficiency
1.5 HYPOTHESES OF THE STUDY
To identify the achievements of the desired objectives, the following
hypotheses are formulated:
H0: Represents Null Hypothesis
H1: Represents Alternate Hypothesis
HYPOTHESIS I
H0: Manufacturing business organization do not control their levels of profit
making and the means used to achieve it
H1: Manufacturing business organization do control their levels of profit
making and the means used to achieve it
HYPOTHESIS II
H0: Manufacturing business concerns in Nigeria do not plan their profit hence
their losses are unnecessarily large in relation to their budget estimate.
H1: Manufacturing business concerns in Nigeria do plan their profit hence
their amount of losses are not unnecessarily large in relation to their
budget estimate.
HYPOTHESIS III
H0: The type of budgeting in some of the manufacturing business concern in
Nigeria is not efficient.
H1: The type of budgeting in some of the manufacturing business concern in
Nigeria is efficient.
1.6 SIGNIFICANCE OF THE STUDY
According to Nweze (2011), Budgeting is very important especially at
this time of our economic development at this time of our economic
development is that?
a. It will show why profit planning is very vital for any manufacturing
establishment that wishes to survive.
b. It will help them to determine and maintain an acceptable level between
high profit and low profit at a given time thus leading them to attain the
various organizational goals and objectives.
1.7 SCOPE OF THE STUDY
According to Enudu (1999), it is expected that a study of this will entail
visits to 36 states in the country to elicit information from numerous
manufacturing concerns. But this was not possible because of some constraints
such as time and money.
1.8 LIMITATIONS OF THE STUDY
As a result of these constraints (time and money) this study was limited to
manufacturing concerns in the old Eastern states which includes; Enugu,
Anambra, Abia, Ebonyi; and Imo state with hope that the conclusions reached
in the course of the study would apply to other manufacturing business in
Enugu State at AMA Breweries Plc. Enugu in particular.
Another limiting factor was the literacy level of the respondents. Out of
78 respondents sample their opinions, 2 of them were sceptical as regards given
out useful information on the budget planning of this organization. This was a
result of dishing out useful data to their competitors in the same manufacturing
industries or business.
1.9 DEFINITION OF TERMS
EFFICIENT: A firm is said to be efficient if it can manage their resources well
EFFECTIVENESS: This entails proper co-ordination of these limited
resources in form of both human and material resources to combat their
responsibilities
PLANNING: The design of a desired future state of an entity and the effective
ways of brings it about.
GOALS: Performances can be defined as the assessment of the company
towards reaching the targeted goals and objectives.
Budgeting As An Instrument Of Internal Control In A Manufacturing Organization:
Budgeting plays a critical role as an instrument of internal control in a manufacturing organization. It helps in planning, monitoring, and managing financial resources and operations to ensure that the organization achieves its objectives efficiently and effectively. Here’s how budgeting serves as an internal control tool in a manufacturing organization:
- Setting Financial Targets: Budgets establish financial goals and targets for the organization. These targets serve as benchmarks against which actual performance is compared. This helps in ensuring that the organization’s financial objectives are clear and achievable.
- Resource Allocation: Budgeting involves allocating resources such as labor, materials, and capital to various departments or projects within the manufacturing organization. This allocation is done in a way that aligns with the organization’s strategic priorities. It ensures that resources are used optimally and not wasted.
- Expense Control: Budgets specify the expected expenses for various activities. By comparing actual expenses with budgeted amounts, management can identify cost overruns or unexpected expenditures promptly. This allows for timely corrective action, such as cost-cutting measures or process improvements.
- Revenue Planning: Budgets also project expected revenues based on sales forecasts and pricing strategies. Monitoring actual revenues against budgeted figures helps in identifying discrepancies and taking corrective actions, such as adjusting sales strategies or expanding market reach.
- Cash Flow Management: Budgets include cash flow projections, helping the organization manage its cash effectively. This is crucial in manufacturing where there are often significant upfront costs before revenue is generated. It ensures that there is sufficient cash to cover operational needs and prevents liquidity issues.
- Performance Evaluation: Budgets provide a basis for evaluating the performance of different departments or teams within the organization. By comparing actual results to budgeted figures, management can identify areas of strength and weakness and take corrective actions as needed.
- Variance Analysis: One of the key tools in budgeting is variance analysis. This involves comparing actual results to budgeted amounts and investigating any significant variances. Variances can indicate areas where internal controls may be weak or where there are operational inefficiencies that need to be addressed.
- Fraud Prevention: Budgets can help in detecting and preventing fraudulent activities. By comparing actual transactions to budgeted figures, irregularities and discrepancies may become apparent, prompting further investigation.
- Forecasting and Planning: Budgets are typically prepared for a specific period, such as a fiscal year. This allows the organization to plan for future resource needs, expansions, and investments. It helps in aligning long-term strategic goals with short-term operational plans.
- Communication and Accountability: Budgets provide a framework for communication within the organization. They define roles and responsibilities for budget preparation, execution, and monitoring. This accountability helps ensure that everyone is working towards common financial goals.
In conclusion, budgeting serves as a vital instrument of internal control in a manufacturing organization by providing a structured approach to financial planning, resource allocation, and performance monitoring. It helps in ensuring that financial resources are managed efficiently, operational objectives are met, and potential issues are identified and addressed in a timely manner.