CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
A budget is a financial and quantitative statement prepared prior to a defined
period of time of the policy to be pursued for the purpose of attaining a given
objective.
Also according to A.U.Nweze (2004) in his profit planning.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
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adopted, because where the plan chosen in great expectations, then the best use
has been made of the available resources.
On the other hand budgetary control is the establishment of policies and the
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 whereby actual state of affairs can
be compared with that planned for by the management, so that appropriate action
may be taken to correct adverse situation that may occur before it is too late. It is
also used to fix responsibility.
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 business, governmental agencies
and individuals.
Therefore businesses of all types and governmental unit at every level must make
financial plans to carry out routine operations, to plan for major expenditures and
to help in making financial decisions.
On this background, every organization no matter nature 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 THE PROBLEM
The main problem with budgeting is that it reflects data from the past and present
, and will only enable predictions and forecasts to be made out the future. At the
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same time, numerous pressures in the job may impose constraints upon
managers, which affect the quality of information they collect. The
Problem can be numerous; clearly, nothing can be forecasted with absolute
certainty. No matter what financial and marking researches take place every
organization has to take risk.
Though accounting information may reduce the unpredictability of event in the
future. It will never eliminate it.
All these can interrupt the system of budgeting control:
(1) If the actual results are completely difference from the target the budget can
lose its significance as a means of control. Whereas a fixed budget is not able to
adapt to changes, a flexible budget will recognize changes in behavior and can
be amended to fall into line with changing activities.
(2) Following a budget to rigidly can restrict an organization’s activities. On the
other hand, if a manager realizes towards the end of the year that his or her
department has under spent, he or she might go on spending spree.
(3) If budgets are imposed upon managers without sufficient consultation , they
may be ignored.
An appropriations budget limits expenditures to the appropriations provided in
the budget. Naturally, the amounts appropriated tend to be in line with the
expected revenues for the period. Such a system provide little in the way of
flexibilility. It also has a serious defect because the control aspect is limited to
an end of the period comparison of actual revenues and expenditures with those
budgeted .
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The fixed or fore type of budget is criticized as being a restrictive budget, which
establishes expose limits that cannot be exceeded. The future can not be certain,
therefore, it is extremely difficult to forecast what will happen in future.
Hence, when circumstances that will alter the forecast materially occur, an
inflexible plan propels a company into troubles.
It is impossible to state the duration of a budget programme because the longer a
budget period the more difficult it becomes to anticipate how general economic
conditions will affects the business of the company.
1.3 OBJECTIVES OF THE STUDY
The objective of budgeting and budgetary control in a business organization
includes;
PLANNING – To produce detailed operational plan for the different sectors and
facets of the organization.
CO-ORDINATION – To bring together and reconcile into a common plan the
actions of the different parts of the organization.
COMMUNICATION – To provide a definite line of communication so that all
the parts will be kept fully informed of the plans that the policies, constraints to
which the organization is expected to confirm.
MOTIVATION – To influence managerial behavior and motivate managers to
perform in line with the organizational objectives.
CONTROLLING – To assist manager in managing and controlling the
activities for which they are responsible .
PERFORMANCE EVALUATION – To evaluate performance by providing a
useful means of informing managers of how well they are performing in
meeting targets that they have previously helped to set out.
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CLARIFICATION OF AUTHORITY AND RESPONSIBILITY – To make it
necessary to clarity the responsibilities of each manager who has a budget. Also
to authorize the plans contained in the budget so that management by exception
can be practiced (ability to give a sub ordinate a clearly defined role with
authority to carry out the tasks assigned to him).
1.4 SIGNIFICANCE OF THE STUDY
The study is Budgeting and budgetary control is of great importance to a
business organization because;
The preparation of budget helps in the delegation of responsibilities to each
executive and induces early consideration of basic policies. It also assists in
the focusing of attention on the contribution which may be made by each
product and market to the total profit and reveals any opportunity which may
be made in maximizing profit.
It provides a means of ensuring that capital invested in the business is kept
to a minimum level justifiable with the level of activities. It also ensures that
adequate liquid resources are made available at any time.
It defines goals and objectives that can serve as benchmarks for evaluating
subsequent performance.
Better control of current operations is helped by regular systematic
monitoring and reporting of activities.
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It regulates the spending of money and expose loss, waste and inefficiency
and through this corrective action will be taken to a improve the adverse
situation.
It encourages management to decentralize responsibilities without losing
control, especially where a company has many branch offices or factories.
It provides for the co-ordination of sales production and other activities of
the business and forces all members of management team to plan in
harmony and consider all relevant factors before a decision is taken.
Where budgetary control is in operation, cost consciousness is always
increased and through this means, waste and inefficiency will be reduced. It
also gives lower levels of management to also take part in the management
of the business.
It provides a means of communicating management’s plans through the
organization.
It uncovers potential bottle necks before they occur.
1.5 FORMULATION OF HYPOTHESIS
STATEMEN T OF HYPOTHESIS
H0: Budgets are not an effective guide to business growth.
H1: Budgets are an effective guide to business growth.
H0: Budgets are not a means to control and synchronize organization’s
personnel and functions.
H1: Budgets are a means to control and synchronize organization’s
personnel and functions.
H0: Budgets are not more effective when reward penalty is based on goal
attainment.
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H1: Budgets are more effective when reward penalty is not based on goal
attainment.
1.6 SCOPE OF THE STUDY.
The study of “budgeting and budgetary control” in business organizations
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 in business
organizations in general and with special reference to Soltrag Hotel and
Destiny.
1.7 LIMITATION OF THE STUDY
Though budgeting and budgetary control has many impressive and far
reaching advantages, but it also has certain limitations and pitfalls which the
organization must consider.
According to Terry Lucey in his costing sixth edition (pg 386) the principal
factor limiting budget is customers demand, that is the company is unable to
sell all the output it can produce.
Other factors limiting the study are; the system requires the co-operation and
participation of all members of management and not only that, the basis for
success is executive managements absolute adherence and enthusiasm for
the budget. This is really very important; but most often budgetary control
has failed because some of the members of management have paid lip
services to its execution.
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To install budgetary control takes time, times without number
management has become impatient and lost interet because it expects too
much within a short time, whereas, the system must be explained to the
responsible officials, guided them where necessary, train and educate
them in the fundamental steps, methods and purposes of a budgetary
control system.
Budgetary control system does not eliminate nor take over the role of
administration hence the executives should not feel confined to a
particular area, rather, it should be designed to provide detailed
information which will guide them to operate with strength and vision
towards the achievement of the organizations.
Looking at planning, budgeting or forecasting, one will simply agree that
there is none of these terms that can be regarded as a science, but there is
a certain amount of judgment involved.
Budget ignores responsibility centers in performance evaluation.
It represents on ordinary tool which may not be effective without closer
supervision.
The need for superior executive ability in preparation and presentation.
Budget may encourage interdepartmental conflicts among divisional
heads.
Establishment of unattainable targets or standard for workers.
Lack of realistic data in budget preparation.
Persistent increase in the level of inflation.
Frequent changes in the level of technology.
Political instability.
Negative attitudinal trait of the operating managers against the budget.
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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 (pg 653). Responsibility
centre is a unit of a firm where an individual manager is held responsible for
the units performance.
BUDGETING – According to UgwuChukwuma 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, liabilities, and cash flows, which
provides a focus for the organization, aids the co-ordination of activities and
facilitates control.
1.9 HISTORICAL BACKGROUND OF SOLTRAG HOTEL AND
DESTINY
The lodging system of Soltrag and Destiny Hotels Limited Agbara
Ogun State started when this hotel was established in 1990 at its
inception, Soltrag and Destiny Hotels Limited inherited three modern
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hotels. There were ninety three chalets at the time of its establishment.
These hotels were located at abuja, lagos ,osun. However they have
since been improved upon with additional chalets, better management
and better services.
The management of soltrag and destiny hotels limited insists that
standard obtainable in its hotels of all types compare favorably with the
standards elsewhere. Each chalets is provided with a room stewards,
hot and cold water tub, to-wall carpet, air conditioner, television, Wi-
Fi, refrigerator and intercom. The cable News Network (CNN) is
received in the hotels through its satellite dish. The body managing the
hotels through its satellite dish. The body managing the hotel now at
the apex of the management include
1. The General Manager
2. The Company Accountant
3. The Company Secretary
4. The Operational Managers
5. The Public Relations Officer
6. The House Keeper
7. The Food and beverages Manager
8. The Number of Staff are Eighty
These are both junior and senior cadres.
1. Administration
2. Accounts
3. Restaurant
4. Bar
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5. Kitchen
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