The Impact of Budgetary Control on the Performance of Nigerian Manufacturing Companies

Topics: Budget, Management accounting, Scientific method Pages: 13 (4452 words) Published: September 4, 2011
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Budgeting is a planning process which underlines predicting and quantifying the future in financial terms and predicting the future needs for finance. Aside from the planning role of budgeting, numerous articles on management accounting constantly stress the multi-purpose role of budgeting in business organization. Budgeting is used for forecasting, planning, coordination, communication, control and motivation. In the past few decades, considerable attention has been paid in particular to the role of management control of budgeting (Otley & Pollanen, 2000). In order to reveal the nature of budgeting at business organizational level, it would be best to begin by comparing budgeting with accounting. Budgeting and accounting have different meanings among managers, planners, and the personnel who use these. Both are critical components that must interact to achieve the goals and objectives of an organization. Accounting is a system used to record, classify, and summarize business operation (Meigs, 1996). The role of keeping the financial information and on-going analysis necessary to provide management and outside interests with the facts necessary for decision, is also considered as accounting (Grigg, 1988). Relying on certain standards and GAAP (General Accepted Accounting Principles), the accountant of a company develops and reports data to measure firm performance; to assess its financial position, to comply with and file reports needed by securities regulators; to file and pay taxes; and to prepare the balance sheet, financial statements, and the cash flow of the company to recognize sales revenue, expenses etc. when they are incurred. Therefore, accountants provide accounting information used for individuals external to an organization such as shareholders, customers, suppliers, tax authorities, as well as for employees (so-called financial accounts) and internal managers of an organization (so-called management accounts). Financial accounting systems ensure that the assets and liabilities of a business are properly accounted for, and provide information about profits etc. to shareholders and to other interested parties. In contrast, management accounting systems provide information specifically for the use of managers within an organization to assist in their decision making (Ryan et. al, 2002). Based on the classification above, budgeting is, traditionally, classified in the management accounting domain by the existing accounting literature. In this sense, budgeting is a narrower concept with more specific focus. Budgeting, if it covers financial aspects, reflects the management’s expectations regarding income, cash flow, and financial position in monetary terms. (Horngren, 2002) It focuses on a forthcoming accounting period, rather than on the past period on which the accounting is based to make records. Therefore, budget planning focuses more on a forecast purpose to estimate what is likely to occur in the future and how organizational resources are allocated to realize future operations. Moreover, another important part of budgeting is that of feedback, in which both the plan and the action are compared, providing the opportunity to analyze variances, the causes and to revise future budgets in line with experience. This is called budgetary control. As a common example of a financial plan in management accounting, however, budgeting pays attention to the administrative function internal to a firm, especially in terms of planning and control. Budgeting is viewed as a critical element of management control (as above mentioned) by a number of scholars (Anthony, 1965; Flamholtz, 1983; Otley and Pollanen, 2000; Otley, 2003). Given the control-required standards against which performance could be assessed, the budget is the natural standard of comparison. This leads to using the budget with an annual planning period, in practice in many organizations this...

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