THE ROLE OF BUDGETARY CONTROL AS A TOOL FOR COST CONTROL IN MANUFACTURING COMPANIES IN NIGERIA
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The changing complexity of business activities and the ever changing conditions of business environment- social, economical, political and technological advancements makes it ever increasingly difficult for an organization to consistently earn a profit that could be termed a fair return on the capital invested. Budgeting and budgetary control has for long be a techniques of interest to management accountants, business experts, and financial evaluators. Experts has conventionally accepted budgeting and budgetary systems, which are the basic components of budgetary system, as a fundamental basis for profit planning and cost control in an organization.
A budget identifies the planned expenditure for a project, program, or portfolio. It is used as baseline against which the actual expenditure and predicted eventual cost of work can be reported. Initial cost estimates can be comparative or parametric. These are refined, as the feasibility and desirability of the initiative are investigated and a greater understanding of scope, schedule and resources are developed. Once approval is given, these refined estimates form the baseline cost. By allocating costs to the activities in a schedule, a profile or expenditure is produced.
A budget has been defined by chartered institute of management accountants (CIMA), as “a financial or qualitative statement prepared and approved prior to a defined period of time for the purpose of attaining a given objective. It includes income, expenditure, and the employment of capital”.
A budget provides an in depth plan of action for a business over a definite period of time, by planning, problem can be anticipated before they arise and solutions can be sought through careful study. The budgeting planning process ensures that managers do plan for future operations, and they consider how situations in the next year might change and what steps they should take now to respond to these altered conditions.
Budgetary control is derived from the concept and use of budgets. A budget is an anticipated financial statement of revenue and expenses for a specified period. Budgeting refers to the formulation of plan for a given period in numerical terms. Thus, budgetary control is a system which uses budgets as a means for planning and controlling the entire aspects of organizational activities or parts thereof.
The chartered institute of management accountants (CIMA), defined budgetary control as “the establishment of budgets relating the responsibilities of executives to the requirements of a individual action the objectives of this policy or to provide a basis for its revision”.
Batty (1982), defined budgetary control as a system which uses budgets as a means of planning and controlling all aspects of producing and selling commodities or services. This is true as we tend to prepare revenue and expenditure variance analysis to be able to deduce areas of divergence for which the management needs to watch to avoid embarrassment as any adverse variance will translate into inability to meet the corporate objective which will eventually lead to disagreements with stakeholders.
Howard and Brown (1998) sees budgetary control as “a system of controlling cost which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with budgeted and acting upon results to achieve maximum profitability”. The above definitions point out that budgeting is an aid to planning and control
Cost is any monetary sacrifice made to secure benefit. Without cost, there can be no productive activity that will generate the profitability objectives of the firm. Empirical results have shown that in many organizations, operating costs are unnecessarily high, thereby robbing the organization of the profit that would have been made (Yoshikawa, Innes, Mitchell, & Tanaka, 1993). In order to ensure that costs are brought to the barest minimum, there is need for cost control.
According to Bromwich (2000), cost control is the process of setting standard, measuring actual result, comparing actual result with the standard cost, and taking corrective actions where there is deviation. Adeniji (2004) stated that cost control is the regulation of cost of operating a business and is concerned with keeping costs within acceptable limits. These limits will usually be specified as a standard cost or target cost limit in a formal operational plan or budget. If actual cost differ from planned cost by an excessive amount, cost control action will be necessary.
Ukpai (1999) posited that cost control action ought to lead to reduction in excessive spending, for example, when material wastage is higher than budget or productivity level is higher than standard. A cost reduction program, however can be directed towards reducing expected cost level by cutting cost to below current standard level by purchasing new equipment, changing methods and techniques of production, and so on. However, standards reflects current cost and conditions and not necessarily the cost and conditions which will minimize costs (ukposido, 2002).
The important of cost control program within a company cannot be overemphasized. Companies that are losing money, need to increase profit, or must become more competitive. They need to cut down expenses in order to succeed. Knowing how to implement effective cost control strategies can be determining factor in the survival of a business.
Cost control is simply the prevention of waste within the existing environment. The environment is made up of agreed operating methods for which standards have been developed. These standards may be expressed in a variety of ways, from broad budget levels to detailed standard costs.
Cost control is defined as the regulation by executive action of the course of operating an undertaking. Cost control aim at achieving the target of sales. Cost control involves setting standards. The firm is expected to adhere to the standards. Cost control emphasis is on the past and present. Cost control is applied to things which have standards. It seeks to attain lowest possible cost under existing conditions. Cost control is preventive function.
Cost control is exercised through a variety of techniques which includes inventory control, standard costing, budgetary control, labor cost control, material cost control etc. Cost control helps to improve profitability and competitiveness, it is indispensable for achieving greater productivity. Cost control may also help a firm in reducing its costs and thus reduce its prices and in the absence of cost control, profits may be drastically reduced, despite a large and increasing sales volume. If the prices of the products are reasonable, it can maintain higher sales and thus employment of work force.
1.2 Statement of the Problem
Every company has primary duty of achieving the objective of profit maximization of the company through budgeting which is the comparison of performance against plan or target. Due to the state of our economy, and government policies, this goal is much hindered during the period of economic depression which features low capacity utilization, high interest rate shortage of foreign exchange to buy the need raw materials and so on.
Likewise, due to the economic problem, organizations using budgetary control as a measure to check its expenses often find it very difficult to comply with the stipulated budget because the rising cost of doing business in the country has been of utmost concern to most businessmen and the entire citizens at large. This has even accounted for capital flight and closure of some businesses and the movement of manufacturing companies to neighboring countries, where cost of doing business is relatively low compared to what is happening in Nigeria.
Likewise, managers may overestimate costs so that they will not be blamed in the future should they overspend. The use of effective budgetary control on cost control system is needed to arrest the situation and this is what the study aims at achieving.
1.3 Research Questions
The following research questions are listed below;
- What are the cost control techniques used in manufacturing companies in Nigeria?
- Does budget help to ensure effective cost control and profit growth?
- What relationship is between planned and actual budget?
- What are the effects of budgetary control on cost control in manufacturing companies?
1.4 Objectives of the Study
The main objective of the study is to analyze the impact of budgetary control on cost control in manufacturing companies in Nigeria. The specific objectives are;
- To evaluate the cost control techniques that are being used in manufacturing companies in Nigeria
- To know if budget help to ensure effective cost control and profit growth.
- To evaluate the relationship between planned and actual budget.
- To determine the effect of budgetary control on cost control in manufacturing companies in Nigeria.
1.5 Research Hypotheses
Hypothesis 1: Budgetary control has no impact on cost control in manufacturing companies in Nigeria.
Hypothesis 2: Budget does not ensure effective cost control and profit growth.
Hypothesis 3: There is no relationship between planned and actual budget
1.6 Significance of the Study
This research work intends to help ascertain how budgetary control can be useful tool in evaluating cost control in manufacturing companies. It will help management in assessing their performance in profit, planning and control. The research work will also help to evaluate the cost control techniques that are used in manufacturing companies.
The research work will help to examine whether manufacturing companies can reduce costs as well as maintain a high quality of their products and services
The significance of the research work is to provide both theoretical and practical lasting solutions to problems encountered by manufacturing companies in enhancing their profitability through budgetary control.
The research work will also identify how a good budgetary control as a tool for cost control will lead to the growth and expansion of the manufacturing companies in Nigeria. Another significance of the research work is that it shall establish the fact that budgetary control gives standards by which the organizational actual performance is ascertained.
Lastly, the work will also intend to add to the existing literature to help future researchers interested in the subject matter and as a basis for further reference.
1.7 Scope of the Study
The study will be limited to cost control as a dependent variable and budgetary control as an independent variable. It will take into consideration manufacturing companies in Nigeria. The scope of this study is to investigate and evaluate budgetary control as a tool for cost control in the manufacturing industries in Nigeria.
The analysis to be made in this study will be based on data made available to the researcher by the company’s staff and head of departments in the questionnaire that will be administered
1.8 Definition of Terms
Budgetary control: This is a control technique whereby actual results are compared with budgets. It is the process by which budgets are prepared for the future period and are compared with the actual performance for finding out variance, if any. Any differences (variances) made the responsibility of key individuals who can either exercise control action or revise the original budget.
Manufacturing company: This is a commercial business that converts raw materials or components into finished goods or products. A manufacturing company is any business that uses components, parts or raw materials to make finished goods. These finished good can be sold directly to customers or to other manufacturing businesses that uses them for making different product. Manufacturing companies in today’s world are usually comprised of machines, robots, computers and humans that all work in a specific manner to create a product.
Cost control: It is a tool of management executives to regulate the working of the manufacturing concern. Under the globalize economy, mere planning is not enough. Efforts are constantly made to scrutinize the results of the workings. If so, out of control situations may be find out and eliminated immediately, with the help of cost control, the executives can limit the costs within the planned levels.
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