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BUDGETING, AN EFFECTIVE APPROACH TO PROFITABILITY, PLANNING AND CONTROL IN MANUFACTURING INDUSTRIES

Project Topic: Budgeting, an Effective Approach to Profitability, Planning and Control in Manufacturing Industries


CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Budgeting is a comprehensive, formal plan of action that estimates the probable expenditure and income for an organization over a specific period. So, budgeting describes the overall process of preparing and implementing a budget.  Since budgets are such valuable tools for planning and control, budgeting affects nearly every type of organization from governments and large corporations, manufacturing industries to small businesses as well as families and individuals.

Manufacturing firms generally engages in budgeting to determine the most efficient and effective strategies for profit making and expanding its asset base and survival. Budgeting can help a company; use its limited financial and human resources in a manner which best exploits existing business  opportunities.

Good budgeting incorporates good business judgment in the review and analysis of past trends and data pertinent to the business. This information assist a company in decision relating to the type of business organization needed, the amount of money to be invested, the type and number of employees to hire and the marketing strategies. In budgeting a company usually devises both long-term and short-term plans to help implements its strategies and to conduct ongoing evaluations of its performance. Budgeting provides a variety of benefits including an increased awareness of costs, coordination of efforts towards company goals, an enhanced communication and a framework for performance evaluation.

Budgeting as a management plan of action expressed quantitatively, mostly but not exclusively, in financial terms (Kodjo S.N. 2009). Since it is a “plan” of action. It must have goals clearly specified to be achieved. In the business environment these goals are invariably profit targets, which is why budgeting is also called profit planning.

Also, since it relates to the future it must have a clear time frame-short-term, medium-term, long-term, one month, one quarter, one year etc. its scope, would however indicate whether it covers the entire activities of the organization –such as a master budget – or a specialized function – such as a financial budget.

The budget is not only a major management planning device. It is also a basic accounting model for managerial control. This is because by specifying the goals to be achieved, the managerial control function is facilitated through an evaluation of actual performance, a comparison of this with the targets specified by the budget, and the institution of an appropriate remedial action or actions….

1.2     STATEMENT OF PROBLEM

The report of some manufacturing firms going into liquidation, laying off some staff, shutting down for some time, delay in paying salary, under utilization and over utilization of labour have always pointed to improper budgeting and lack of budgeting (Effiong, 2008).

Management inability to have perfect control and thorough planning, contributed to the poor performance and low profit of the manufacturing firms.

The case of fraud reports is on the increase today despite budgeting device and this has made stakeholders, investors, creditors and customers worried and at times frustrating over the growth of these problems. (Oduah, 1997).

One of the ways of curtailing this ugly phenomenon is to monitor and control the activities of the employee through the instrument of proper budgeting. (Effiong, 2007).

Based on these the research intends to evaluate budgeting as an effective approach to profitability, planning and control.

1.3     OBJECTIVE OF THE STUDY

          The main objective of the study is to evaluate budgeting as an effective approach to profitability, planning and control in manufacturing industries. The specific objectives are:

  • To determine whether budgeting is an effective tool for achieving corporate plans.
  • To find out the extent to which budgeting has contributed to the overall performance of the company.
  • To find out whether budgeting provides a yardstick for measuring profitability in manufacturing industry.
  • To find out whether proper budgeting has contributed in organizational planning and control.

1.4     RESEARCH HYPOTHESES

The following hypothesis was formulated as to resovle the problems stated above.

Hypothesis I:

HO:   Budgeting is not an effective tool for planning and control in manufacturing industries.

HA:   Budgeting is an effective tool for planning and control in manufacturing industries.

Hypothesis II:

HO:   Efficient and effective budgeting does not bring about high level performance and cost reduction.

HA:   Efficient and effective budgeting bring about high level performance and cost reduction.

Hypothesis III:

HO:   Effective budgeting process does not enhance planning and increases profitability.

HA:   effective budgeting process enhances planning and does not increase profitability.

Hypothesis IV:

HO:   Budgeting is not an effective tool for evaluating performance.

HA:   Budgeting is an effective tool for evaluating performance.

1.5     SCOPE OF STUDY

This study covers budgeting and its effectiveness to profitability, planning and control in manufacturing companies.

In the course of study, the researcher encountered the following problems:

  • Time: The study will be restricted only to budgeting in manufacturing companies with special reference to two manufacturing as it will not be possible to visit all manufacturing companies due to short period of time allocated to this project study.
  • Hoarding of Information: Some of the respondents refusal to give information by not all or some of the question in the questionnaire.
  • Attitude of some managers who claimed to be too busy and cannot be seen.

1.6     SIGNIFICANCE OF THE STUDY

The study will help management of manufacturing industries to engage in budgeting not just budgeting as a mere tool but as proper tool for achieving profitability and proper control. The study will provide management of manufacturing industries the opportunities for effective planning, and control, improved performance and cost reduction, increased profitability, performance evaluation and achievement of set organizational goals.

Shareholders of companies will be made aware of future of organization and thus this will encourage them to have confidence in their organization.

1.7     DEFINITION OF TERMS

Terms which due to their technical nature carry special meanings need some definitions to aid proper understanding of the work. The researcher therefore define briefly the following terms.

Budget: It is a financial and or quantitative statement prepared and approved prior to a defined period of time of the policies to be pursued during that period.

Budgeting: It is the overall process of preparing and using a budget.

Planning: Planning is future oriented. A plan specifies in some form what the management wants to do. Planning involves making forecasts and assumptions about the organizations external environment which is uncontrollable.

Controlling: Controlling involves monitoring the implementation of the plan and taking corrective action as needed.

Financial Budget: The financial budget contains projections for cash and other balance sheet items assets and liabilities.

Profitability: To give an advantage or a useful result.

Budget period: The period for which ha budget is prepared and used,

Control Period: A period in respect of which comparisms are made between budget and actual results.

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Project Topic: Budgeting, an Effective Approach to Profitability, Planning and Control in Manufacturing Industries

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