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BUDGET AND
BUDGETARY
CONTROL IN
BUSINESS
ORGANISATION.
(a case study of Delatre Bazon Nig. Ltd.)
BUSINESS ADMINISTRATION.
IN BUSINESS ADMINISTRATION.
NOVEMBER 2009
2
CERTIFICATION PAGE
Business Administration.
__________________ ________________
(Supervisor) Centre Co-ordinator
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DEDICATION PAGE
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ACKNOWLEDGEMENT
dream and purpose in life to come through. First of all, thanks to Almighty
God who gave me power and wisdom, and the grace to be educated and to
_____________________________________________________________
______ for their love towards me in prayer, also my supervisor who has
and my lovely Register of warri center MRS Stella Oyabugbe and my Co-
odinator of warri Centre Mrs Alex Obinaka for her love towards me and
my father
______________________________________________________ whose
Vision for my life was to be great and useful in life and those many love
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ABSTRACT
The researcher viewed a budget as a plan expressed in quantitative,
• 1. Introduction
INTRODUCTION
deal on the detail of budget construction and the use to which budgets
can be put. Like all management tools, the researcher highlights the
fullest advantage.
Budgets can take many forms and serve many functions. Budgets can
provide the basis for detailed sales targets, staffing plans, inventory
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investors and creditors. Budgets are necessary to convince banks and
proper time.
period of time are compared with the budgeted results, any differences
(or variances) being noted, and some corrective action taken to bring
the actual activities back into line with the budgeted ones if such
mind are:
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2. Is it a way of communicating the plans to various units of the
units.
budgeting is encouraged?
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1.2 OBJECTIVES OF THE STUDY
organization in setting up the goals and efforts are made for its
coordination.
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- It makes a prediction about capital expenditure for future.
strategy;
structure;
organizational structure;
1.4 HYPOTHESES
It is a conjectural statement of the relationships
phenomenon.
variables.
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HYPOTHESIS THUS:
1. Explain observed events in a systematic manner
2. Predict the outcome of events and relationships
3. Systematically summarized existing knowledge.
2.` Budgetary control does not help in eliminating wastes and raises
ALTERNATIVE HYPOTHESIS
1. Does Budgetary control operates in various cost centers and
financial constraints.
Material Procurement
Time Constraints
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government agencies to obtain valuable information for
the project.
Financial Constraints
resident.
• Personal budget
• corporate budget
• government budget
• management checks
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CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
costs and revenues. Budgets may be divided into two basic classes:
projects and often require special financing. The operating budgets are
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1. Preparation of various budgets.
performance.
supporting schedules.
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2.2 IMPERATIVE FOR BUDGETING
level personnel to plan their operations for the forth coming period.
carry out the day to day activities to achieve the best possible results
Variance analysis can be done to pin point the variables that changed
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Budgetary control system facilitates participation of department
techniques.
necessary.
plan for the short-term future, typically one year (see Budget
direction. On the other hand, if the actuals diverge wildly from the
budget, this sends an 'out of control' signal, and the share price
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2.6 GOVERNMENT BUDGET
constraint..
financial success.
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Whether you make thousands of naira a year or hundreds of
step you can take towards putting your money to work for you instead
goals.
where your money goes and can help you reach your financial goals.
Since financial matters are one of the leading causes of marital discord
budget, and saving for the future can also have positive effects on
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also estimates the various costs involved with manufacturing those
It usually covers a period in the short term future. The cash flow
to cover expenses and when the company will need to seek outside
financing.
often broken down into specific tasks, with task budgets assigned
to each.
data items.
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2.10 ADVANTAGES OF BUDGETING AND BUDGETARY CONTROL
control:
for achieving the targets for each department, operation and (ideally)
direction.
investigated and the reasons for the differences can be divided into
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Enables remedial action to be taken as variances emerge.
exception principle.
b) inaccurate record-keeping.
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Waste may arise as managers adopt the view, "we had better spend
budget.
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2.13 BUDGET ORGANISATION AND ADMINISTRATION:
committee include:
manual
variances.
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liaising between the budget committee and managers responsible
d) Budget manual:
This document:
budgeting system.
Firstly, determine the principal budget factor. This is also known as the
key budget factor or limiting budget factor and is the factor which will
material or labour.
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a) Sales budget: this involves a realistic sales forecast. This is
market research
mathematical models.
competition
work-in-progress budgets.
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If requirements exceed capacity he may:
subcontract
production requirements
storage space
by:
production requirements
man-hours available
monthly surpluses and deficits of actual cash. Its main uses are:
debtors
deficits arises
cash sales
payments by debtors
purchase of stocks
i) Step 1: set out a pro forma cash budget month by month. Below is a suggested layout.
• administration
• research and development
• selling and distribution expenses
• capital expenditures
• working capital (debtors and creditors).
An example
A sugar cane farm in owned and operated by Delatre Bazon Nig. Ltd. devised an
operating budget as follows:
• Cultivation
• Irrigation
• Field maintenance
• Harvesting
• Transportation.
With each operation, there will be costs for labour, materials and machinery usage.
Therefore, for e.g. harvesting, these may include four resources, namely:
• Labour:
-cutting
-sundry
• Tractors
• Cane trailers
• Implements and sundries.
Having identified cost centres, the next step will be to make a quantitative calculation of
the resources to be used, and to further break this down to shorter periods, say, one
month or three months. The length of period chosen is important in that the shorter it is,
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the greater the control that can be exercised by the budget but the greater the expense
The quantitative budget for harvesting may be calculated as shown in figure 2.2.
Each item is measured in different quantitative units - tonnes of cane, man days etc.-and
depends on individual judgement of which is the best unit to use.
Once the budget in quantitative terms has been prepared, unit costs can then be
allocated to the individual items to arrive at a budget for harvesting in financial terms as
shown in table 2.2.
In table 2.2 tractors have a unit cost of N7.50 per hour - machines like tractors have a
whole range of costs like fuel and oil, repairs and maintenance, driver, licence, road tax
and insurance and depreciation. Some of the costs are fixed, e.g. depreciation and
insurance, whereas some vary directly with use of the tractor, e.g. fuel and oil. Other
costs such as repairs are unpredictable and may be very high or low - an estimated
Item harvesting Unit cost 1st quarter 2nd quarter 3rd quarter 4th quarter Total
Labour
Cutting N0.75 per tonne - 6,750 12,000 7,500 26,250
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Sundry N2.50 per day - 750 1,125 1,125 3,000
Tractors N7.50 per hour - 4,725 8,250 5,250 18,225
Cane Trailers N0.15 per tonne - 1,350 2,400 1,500 5,250
Imp. & sundries N0.25 per tonne - 2,250 4,000 2,500 8,750
- N15,825 N27,775 N17,875 N61,475
So, overall operating cost of the tractor for the year may be budgeted as shown in figure
2.4.
If the tractor is used for more than 1,000 hours then there will be an over-recovery on its
operational costs and if used for less than 1,000 hours there will be under-recovery, i.e.
in the first instance making an internal 'profit' and in the second a 'loss'.
Master budget
The master budget for the sugar cane farm may be as shown in figure 2.5. The budget
represents an overall objective for the farm for the whole year ahead, expressed in
financial terms.
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49,365 106,413 129,357 107,632 392,767
Add: Opening valuation 85,800 135,165 112,240 94,260 85,800
135,165 241,578 241,597 201,892 478,567
Less: Closing valuation 135,165 112,240 94,260 90,290 90,290
Net crop cost - 129,338 147,337 111,602 388,277
Gross surplus - 66,200 102,663 8,398 111,723
Less: Overheads 5,876 7,361 7,486 5,321 26,044
Net profitless) (5,876) (6,699) 95,177 3,077 85,679
Once the operating budget has been prepared, two further budgets can be done,
namely:
ii. Cash flow budget which shows the amount of cash necessary to support the operating
budget. It is of great importance that the business has sufficient funds to support the
Reporting back
During the year the management accountant will prepare statements, as quickly as
possible after each operating period, in our example, each quarter, setting out the actual
operating costs against the budgeted costs. This statement will calculate the difference
between the 'budgeted' and the 'actual' cost, which is called the 'variance'.
There are many ways in which management accounts can be prepared. To continue
with our example of harvesting on the sugar cane farm, management accounts at the
Figure 2.6 Management accounts - actual costs against budget costs Management
accounts for sugar cane farm 3rd quarter 20XX
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- Cutting 12,200 12,000 (200) 19,060 18,750 (310)
- Sundry 742 1,125 383 1,584 1,875 291
Tractors 9,375 8,250 (1,125) 13,500 12,975 (525)
Cane trailers 1,678 2,400 722 2,505 3,750 1,245
Imp & sundries 4,270 4,000 (270) 6,513 6,250 (263)
28,265 27,775 (490) 43,162 43,600 438
Here, actual harvesting costs for the 3rd quarter are N28,265 against a budget of
N27,775 indicating an increase of N490 whilst the cumulative figure for the year
to date shows an overall saving of N438. It appears that actual costs are less
than budgeted costs, so the harvesting operations are proceeding within the
budget set and satisfactory. However, a further look may reveal that this may not
be the case. The budget was based on a cane tonnage cut of 16,000 tonnes in
the 3rd quarter and a cumulative tonnage of 25,000. If these tonnages have been
achieved then the statement will be satisfactory. If the actual production was
much higher than budgeted then these costs represent a very considerable
saving, even though only a marginal saving is shown by the variance. Similarly, if
the actual tonnage was significantly less than budgeted, then what is indicated as
Just to state that there is a variance on a particular item of expenditure does not
really mean a lot. Most costs are composed of two elements - the quantity used
and the price per unit. A variance between the actual cost of an item and its
budgeted cost may be due to one or both of these factors. Apparent similarity
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between budgeted and actual costs may hide significant compensating variances
For example, say it is budgeted to take 300 man days at N3.00 per man day -
giving a total budgeted cost of N900.00. The actual cost on completion was
N875.00, showing a saving of N25.00. Further investigations may reveal that the
job took 250 man days at a daily rate of N.50 - a favourable usage variance but a
the total costs would not have revealed. Price and usage variances for major
Labour
The difference between actual labour costs and budgeted or standard labour
costs is known as direct wages variance. This variance may arise due to a
difference in the amount of labour used or the price per unit of labour, i.e. the
i) Wage rate variance: the wage rate was higher or lower than budgeted, e.g.
ii) Labour efficiency variance: arises when the actual time spent on a particular
job is higher or lower than the standard labour hours specified, e.g. breakdown of
a machine.
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Materials
The variance for materials cost could also be split into price and usage elements:
i) Material price variance: arises when the actual unit price is greater or lower
ii) Material quantity variance: arises when the actual amount of material used is
greater or lower than the amount specified in the budget, e.g. a budgeted
fertiliser at 350 kg per hectare may be increased or decreased when the actual
Overheads
i) Overhead volume variance: where overheads are taken into the cost centres, a
of overheads.
higher or lower than that budgeted for the level of output actually produced.
After a budgeting system has been in operation for some time, there is
takes into account all the changes which should affect the future
changes in budgets. This can cause a severe handicap for the business
because the budget should be the first year of the long range plan.
Thus, if changes are not started in the budget period, it will be difficult
term objectives.
existing resources (that is, a zero base). This means all resources will
example, in the sales area, the current existing field sales force will be
ignored, and the optimum way of achieving the sales objectives in that
developed. This might not include any field sales force, or a different-
sized team, and the company then has to plan how to implement this
new strategy.
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The obvious problem of this zero-base budgeting process is the
Hence, some companies carry out the full process every five years, but
year on a rolling basis, so that each sector does a zero base budget
insights about all aspects of sales, production, and other phases of operations.
Not only are these individuals ideally positioned to provide the best possible
effectively advocate for the opportunities and resource needs within their unit.
The budget committee's work is not necessarily complete once the budget
greatly impact the fate of specific business units, in terms of resources made
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performance. As a result, members of the budget committee will generally take
follow the organizational chart. Each component of the entity will be involved in
budget plan is achieved. But, beyond the data compilation, there is critical
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MANDATED BUDGETS: Some entities will follow a top-down
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reduced to doing the basic budget calculations consistent with
On the positive side, top-down budgets can set a tone for the
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PARTICIPATIVE BUDGETS: The bottom-up participative approach is driven by
management may initiate the budget process with general budget guidelines, but
it is the lower-level units that drive the development of budgets for their units.
These individual budgets are then grouped and regrouped to form a divisional
budget with mid-level executives adding their input along the way. Eventually top
management and the budget committee will receive the overall plan. As you
might suspect, the budget committee must then review the budget components
for consistency and coordination. This may require several iterations of passing
the budget back down the ladder for revision by lower units. Ultimately, a final
budget is reached.
argued that it improves employee morale and job satisfaction. It fosters the
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modern organizations. Furthermore, the budget is prepared by those who have
the best knowledge of their own specific areas of operation. This should allow for
a more accurate budget; in any event, it certainly removes one of the primary
excuses that is used to explain why a particular budget was not met!
time consuming and expensive to develop and administer. This occurs because
of the iterative process needed for its development and coordination. Another
potential shortcoming has to do with the fact that some managers may try to
"pad" their budget, giving them more room for mistakes and inefficiency. More
will be said about this problem shortly, but it is particularly problematic with a
top-down or bottom-up. But, the reality is that most budgets are prepared with a
through an organization. Review the preceding graphics, this time noting how
the top-down arrows change from yellow to pink as they pass through the middle-
level leadership. Conversely, the arrows in the bottom-up approach morph from
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There is always a chance that information can be so transformed as to lose its
original intent. Top management can lose touch with information originating on
the front line, and front-line employees may not always get a clear picture of the
result, great care must be taken to preserve the efficiency and effectiveness of
growing entities. Sometimes the very attributes that contribute to growth can be
undone by the growth itself. The charts of some entities consume many pages
and involve potentially dozens of "levels." Other companies may have worked to
"flatten" their organizational chart to minimize the number of links in the chain of
command. While these endeavors are often seen as attempts to reduce the cost
more clear and direct access to vital information originating with front-line
employees (and vice versa). In addition to focusing on revenues and costs, the
BUDGET ESTIMATION: One thing is sure, no one can see the future. And,
trap of becoming cavalier about the estimates that form the basis for a budget.
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This should be avoided. Budget estimates should be given careful
affect the budget is known as creating "budget slack" or "padding the budget."
met or exceeded. However, this does little to advance the goals of the
organization.
When slack is introduced into a budget, employees may fail to maximize sales
and minimize costs. For example, once it is clear that budgeted sales goals will
be met, there may be a reduction in incentive to push ahead. In fact, there may
be some concern about beating sales goals within a period for fear that a new
period. This can result in a natural desire to push pending transactions to future
periods. Likewise, padding the planned level of expenses can actually provide
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they don't spend all of the currently budgeted funds. This has the undesirable
standards. If employees feel that budgets are not possibly achievable, they may
problem as they are to budgetary slack. Suffice it to say that preparing a budget
organizational psychology that a good manager must take into account in the
process.
individual building blocks that are tied together in logical harmony, and reflect the
The starting point for the master budget is an assessment of anticipated sales via
the sales budget. The expected sales level drives both the production plans and
the selling, general, and administrative budget. Production drives the need for
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materials and labor. Factory overhead may be applied based on labor, but it is
ultimately driven by overall production. The upper portion of the following graphic
The lower portion of the preceding graphic illustrates that the planned business
activities must be considered in terms of their cash flow and financial statement
impacts. It is quite easy to plan production that can outstrip the resources of a
outcome; the budgeted financial statements are key measures of that objective.
It would be very easy to expand the above to reflect additional interactions and
However, the graphic would start to resemble the organization chart that was
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SALES BUDGET: The budgeting process usually begins with a sales budget.
The sales budget reflects forecasted sales volume and is influenced by previous
the resulting expected cash collections. Sales often occur on account, so there
can be a delay between the time of a sale and the actual conversion of the
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transaction to cash. For the budget to be useful, careful consideration must also
Prepared by……
Date………..
Reviewed by……
Date…………
BUDGETARY CONTROL
INTERNAL CONTROL QUESTIONAIR
Questions Yes No N/A COMMENTS
Planning
• Is there a requirement to
business plan?
Responsibility
• Are budgetary responsibilities
established?
• Are staff aware of their
responsibilities?
• How often is responsibility
reviewed?
Budget Setting
-When has the budget been
approved?
- By whom?
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- Is this before the start of the
financial year?
-How has the budget been
drawn up?
-By whom?
- Are budget holders involved in
the setting of the budget?
-Who reviews each budget?
Is this member of staff at a
senior level?
-Are there guidelines on how
requests for capital expenditure
should be submitted?
-Who produced the guidelines?
-Who analyzes and reviews the
business case requests for
capital expenditure?
-Is a reconciliation undertaken of
income and expenditure to items
appearing on the general
ledger?
-Does income and expenditure
appear on the budget
statements?
Information
Variances
-Is there a formal virement
policy?
-Is there a requirement for
budget holders to formally
account for variances?
-Are variations in income and
expenditure reported to budget
holders and the board?
-Who actions the variations and
does the Board take account of
this?
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Management Information
Budget Holder
A person who has been delegated a budget, in writing, for which they are personally
responsible
Budget Manager
A person appointed by the budget holder to manage the budget on their behalf
Budgets
A financial plan covering expenditure and income. It incorporates a set amount of
funds, net of any income, to deliver a specific set of aims and objectives.
Forecasts
Predicted income and expenditure, split over periods of the financial year, based upon
known, or expected activity. The forecast gives an indication as to the financial position
at the year end.
Virement
The act of transferring budgets. Virement is subject to strict Treasury controls when
moved between Administration, Programme and Capital Subheads. Movement within a
subhead it permitted
CHAPTER THREE
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3.1 RESEARCH DESIGN
population;
workplaces;
brought;
56
(v) The impacts of the confounding factors are “controlled”
statistically; and
1995).
errors.
57
that a set of systematic data collection instruments
3.2 Sampling
58
The list of all senior and junior staff of the firm is from
3.3 Population
that:
59
1. Most empirical research work in the social
population.
Questionnaire
60
The questionnaire has a lot of merits. It needs less skill
disapproved.
61
The questionnaire also has some demerits. It has noted
(Selltiz, 1976).
62
be reluctant to put forth enough alternative information
1996).
63
Ten (10) of the questions have alternative answer for
Interview
64
has the merit that it is a very feasible method (Selltiz
questionnaire.
Observations
65
how to greet the respondents and how to tick the
Tools
(c) Caption
66
(g) Comparisons are easily made utilizing a table than a
prose information;
a prose formation:
testing.
67
Research work is subject to one form of limitation or
off.
CHAPTER FOUR
68
DATA PRESENTATION
AND ANALYSIS
4.1 INTRODUCTION
69
Data Presentation,
Percentage analysis
Cross-tabulated analysis
Hypothesis testing
TABLE1
70
THE SUMMARY OF THE PERSONAL DATA OF THE
RESPONDENTS
1 SEX FREQUENCY
Male 150
Female 50
Total 200
2 Marital Status Angles
Married 130 suspended
Single 70 in degree
Total 200
3 AGE
21-30 years 90
31-40 years 90
41-50 years 10
51-60 years 10
Total 200
4 HIGHER
EDUCATIONAL
QUALIFICATION
DIPLOMA 10 18
OND 30 54
HND 80 144
FIRST DEGREE 20 36
SECOND DEGREE 40 32
NIM 20 36
TOTAL 200 360
single. For the ages of the 200 respondents they are 21-
71
30 years, 31-40 years, 51-60 years with frequency of 90
respectively.
Figure 4.1 below shows the simple bar chart of the data on
140-
120-
100-
80 -
60 -
40 -
20 -
0 -
MAIL FEMALE
GENDER OF THE RESPONDENTS
72
Frequency percentage Valid Cumulative
Percent Percent
MAIL 150 75.0 75.0 75.0
FEMALE 50 25.0 25.0 100.0
Total 200 100.0 100.0
Figure 4.2 below shows the simple bar chart of the data
120 -
100 -
80 -
60 -
40 -
20 -
0 -
- 73
MARRIED SINGLE
MARITAL STATUS OF THE RESPONDENTS
frequency of 70 of them.
N = 200.00
74
1.0 2.0 3.0 4.0
From figure 4.3 above, it is shown that the age classes limit
Figure 4.4 below shows the pie chart of the data on the
75
FIG.4.4 THE PIE CHART OF THE DATA ON THE HIGHEST
EDUCATIONAL QUALIFICATIONS OF THE
200 RESPONDENTS
NIM DIPLOMA
OND
5%
15%
SECOND DEGREE
10%
20%
40%
10%
76
SOURCE: from the data in table 1.
to 180, 540, 1440, 360, 720 and 360 and respectively at the
respondents
Cross- tabulation 1
DOES BUDGETARY CONTROL OPERATES IN VARIOUS COST
CENTRES AND DEPARTMENTS WITH EFFICIENCY AND
ECONOMY?
NO
YES NO DON’T ANSWER Total
10
KNOW 2
19
2 91
DIPLOMA 6 2 2
OND 19 7 19
HND
FIRST
14 31 9
40
DEGREE - 10 39 21
SECOND 40 18 200
DEGREE 21
NIM
Total 100 43 39
39 39
77
The above table shows that the total of 100
development.
Cross-tabulation 2
OND 19 19
HND 14 30 47 91
FIRST
DEGREE 10 9 19
SECOND
DEGREE 40 40
NIM 21 21
Total 104 40 47 9 200
78
Chi-Square Test (1)
Residuals
79
The observed value of the dependent variable minus
TEST STATISTICS
DOES BUDGETARY
DOES BUDGETARY CONTROL HELPS
CONTROL OPERATES IN ELIMINATING
IN VARIOUS COST WASTES AND
CENTRES AND RAISES THE
DEPARTMENTS WITH PROFITABILITY
EFFICIENCY AND POSITION OF A
ECONOMY? BUSINESS
ENTERPRISE?
ALTERNATIVE HYPOTHESIS
80
Looking at the chi-square test 1 above, the computer
NULL HYPOTHESIS
81
1. Budgetary control do not operate in various cost
economy.
the hypothesis.
enterprise.
82
CHAPTER FIVE
CONCLUSION
5.0 INTRODUCTION
83
5.1 FINDINGS
Budgets can take many forms and serve many functions. Budgets can
provide the basis for detailed sales targets, staffing plans, inventory
convince banks and other lenders to extend credit. She also found out
that …..All budgets must be profiled across the financial year, and
future.
5.2 SUMMARY
84
In summary, the researcher has been able to unveil the
business objectives
• Poor decision-making
• Departmental embarrassment
• Business interruption
85
• Inefficient use of resources
• Delegation letters
• Forecasting
• Variance Analysis
planning process)
Managers
plan.
• Exception reporting
• Consistent methodology –
• Standardisation of output
86
5.3 CONCLUSION
benefits.
87
2. Budgeting, due to its approval and authorization by the
BIBLIOGRAPHY
DTI (1998). Net benefit: the electronic commerce agenda for the
UK, London.
Available: http://www.dti.gov.uk/public/frame8.html
90