CHAPTER 2

REVIEW OF RELATED LITERATURE AND STUDIES

This chapter gives recognition to the concepts and theories of financial
budget planning and control from different books and references which the
researchers used to provide supplementary information. Review of related
literature and studies, foreign and local was conducted for the achievement of the
goals and completion of the study.
Foreign Literature
A budget is a quantitative expression of a plan for a defined period of time.
It may include planned sales volumes and revenues, resource quantities, costs
and expenses, assets, liabilities and cash flows. Budgeting practices are heavily
influenced by the organizations management style and can vary considerably, but
the theory is common to all. Given the relationship between budgets and planning,
readers might also like to refer to the Planning and Forecasting topic gateway.
Budgeting is the process of expressing the predicted costs and resources
for a planned course of action over a specified time period. Budgets can be
drawn up for business units, departments, products, teams or the entire
organization. Another term for a budget is a financial plan, but budgets can refer
to non-cash resources, such as staff or time.
Budgeting helps all types of organization to plan and control their
operations, and to support their managerial strategies. A budget sets out the
benchmark against which performance will be measured. For example, this might
be the minimum profit and loss performance expected by senior management.
Performance against budget may be part of the organizations appraisal system
for individuals who are deemed accountable for such performance. Therefore

budgets are a management tool, expressed in quantitative terms because this is

the easiest way to prioritize and co-ordinate complex competing decisions
throughout the organization.
However, budgets may be dismissed as a finance tool because they
usually originate from the finance department and involve numbers. An
unenlightened manager might undervalue their contribution. Budgets are often
unpopular because of the time and effort spent on preparing and negotiating
them, or explaining variances.
Budgets can include financial indicators such as cash, profit/loss, working
capital and non-financial items such as staff numbers, orders and volumes of
output. Progress is monitored regularly (typically monthly) by comparing actual
performance against budget. Here budget holders explain significant favorable or
unfavorable variances. Budget variance is described as: The difference, for each
cost or revenue element in a budget, between the budgeted amount and the
actual cost or revenue. Where flexible budgeting is employed, it is the difference
between the flexed budget and the actual value (http://www.cimaglobal.com.
Retrieved September 10, 2013).
Budgets are more commonly used in large companies which usually have
formal and sophisticated budgetary systems. It does not mean however, that
budgeting is applicable only to large firms. The use and importance of budgets in
small companies should not be overlooked.
Management consist of many activities, including making decisions, giving
orders, establishing policies, providing work and rewards, and hiring people to
carry out the abilities of the management.

This was true in many ways

organizations in the past. Alternatively, planning and control may be pushed into
17

the background and become almost invisible to line workers unless a major
problem or failure occurs. Even which the planning effectively perform the basi9c
functions of planning, organizing, and control management still must all three
functions require participation by all management levels.
Management set goals and objectives and formulate plans for achieving
them. The expected financial impacts of plans are develop and evaluated
through budgeting. Once plans are implemented, control depends heavily, or
cost accounting, which provides management with reports of actual production
cost, marketing expenses, and administrative expenses. Comparison of actual
cost with those budgeted for control. The reasons for significant deviations are
then determined a corrective actions are taken (Carter, 2007).
The capital budgeting process consists of five distinct but interrelated
steps: Proposal generation. Proposals for new investment projects are made at
all levels within a business organization and are viewed a business organization
and are reviewed by finance personnel. Proposals that are require large outlays
are more carefully scrutinized than less costly ones; Review and analysis.
Financial managers perform formal review and analysis to assess the merits of
investment proposals; Decision Making. Firms typically delegate capital
expenditures decision making on the basis of dollar limits. Generally, the board of
directors must authorize expenditures beyond a certain amount. Often plant
managers are given authority to make decisions necessary to keep the
production line moving; Implementation. Following approval, expenditures are
made and projects implemented. Expenditures for a large project often occur in
phase; Follow up. Results are monitored and actual costs and benefits are

18

compared with those that were expected. Action may be required if actual
outcomes differ from project ones (Gitman & Zutter, 2012).
Budgetary Control is the process of establishment of budgets relating to
various activities and comparing the budgeted figures with the actual
performance for arriving at deviations, if any. Accordingly, there cannot be
budgetary control without budgets. Budgetary Control is a system which uses
budgets as a means of planning and controlling. According to I.C.M.A. England
Budgetary control is defined by Terminology as the establishment of budgets
relating to the responsibilities of executives to the requirements of a policy and
the continuous comparison of actual with the budgeted results, either to secure
by individual actions the objectives of that policy or to provide a basis for its
revision.
Budget Control is a system of controlling costs which includes the
preparation

of

budgets,

coordinating

the

department

and

establishing

responsibilities, comparing actual performance with the budgeted and acting

upon results to achieve maximum profitability."
The above definitions reveal the following essentials of budgetary control:
(1) Establishment of objectives for each function and section of the organization.
(2) Comparison of actual performance with budget. (3) Ascertainment of the
causes for such deviations of actual from the budgeted performance. (4) Taking
suitable corrective action from different available alternatives to achieve the
desired objectives. When an entity or an individual undertakes a construction
project, various accredited contractors are invited to bid for the project and the
contract is awarded to the lowest bidder. Contractors on the other hand, prepare
and estimate of the cost that will be incurred on the project so as to arrive at a
19

reasonable yet profitable bid price. For that reason, project planning is difficult
challenge for managers. Project can be defined as a series of related tasks
directed toward a major output. For companies with multiple large projects,
such as construction firm, s project organization is an effective way o assigning
the people and physical resources needed. It is temporary organization structure
designed to achieve by using specialist from throughout the firm (Welsch, 2006).
Project scheduling involves sequencing and allotting to all project
activities. One popular project scheduling approach is the Gantt chart. Gantt
chart is used to schedule resources and allocate time. They permit managers to
observe the progress of cash activity and to spot and tackle problem areas.
Gantt charts, though, do not adequately illustrate the interrelationships, between
the activities and resources.
Throughput, an important concept in operations, is the number of units
processed through the facility sold. Throughput is a critical difference between
the successful and the unsuccessful enterprise.

This has led to a focus of

constraints, which has been popularized by the book Goal: A process of ongoing
improvement by Elihayu Goldratt and Jeff Cox. The Theory of Constraints (TOC)
is a body of knowledge that deals with anything that limits and organizations
ability to achieve its goals. Constraints can be physical or nonphysical (Heizer &
Render, 2007).
Management control system (MCS) is a system which gathers and uses
information to evaluate the performance of different organizational resources like
human, physical, financial and also the organization as a whole considering the
organizational strategies Management control devices ensure that strategic
intentions are achieved. Management Control Systems (MCS) is a systemized
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accounting-based control of planning, monitoring, and performance-performance

measurement, locked-in by the processes of strategic planning and operational
control.
As organizations evolve, a variety of procedures, planning requirements,
budgetary policies, and operating guidelines are put in place in order to facilitate
the control of operations. The system of controls and the resulting management
style within an organization can be an important inhibitor or facilitator of a firm's
strategic initiatives. There are developed five interdependent criteria, reflecting
management choices: performance measurement, strategy, organizational
structure, direction, and motivation. The interdependence of the components is
seen as a key factor in control system design. The understanding of the
importance of any managerial activity within a control system is necessary for an
effective MCS-design and implementation (Anthony and Govindarajan, 2007).
A system of Internal Control extends beyond those matters which relate
directly to the accounting and financial functions in an organization. Internal
Controls may be either accounting or administrative in nature; distinction
between accounting and administrative controls, however, will vary in individual
circumstances.
Accounting controls constitutes the companys organizational plan, as well
as its methods and procedures which are primarily designed to safeguard its
assets and assure the reliability of its financial records. Example of accounting
controls are the segregation of record-keeping from asset-custody functions,
physical

controls

over

assets,

internal

auditing, and

authorization or approval of certain transactions.

21

requirements

for

Administrative controls usually relate only indirectly to financial records.

They constitute the companys organizational plan, methods and procedures
which are primarily designed for operational efficiency and adherence to
managerial policies. Examples of administrative controls are time and motion
studies, quality controls, performance ratings, trainings programs and the like
(Smith, Skousen & Kimwell, 2004).
There are two issues traditional budget is faced with; the first issue is the
accounting. The budget process serves two functions. It serves to build the
internal budgets for each responsible center in the company and the roles up to
form the external earnings per share capital.
The problem with traditional budgeting is that it is based on general ledger
(G/L). The G/L is the store house for the basic financial information of the
company. That basic information is specifically direct revenue, direct expense
and balance sheet amount s by centers. Many managers who get involved in the
budget process generally only budget these amounts for the areas of their
responsibility. Many of these managers have major profitability responsibility but
never get to budget profitability. He further went to say that the internal
accounting at most companies was based on expense allocations. This
antiquated methodology is the underlying reason most management reporting
systems are underutilized and one of the impediments to improving the
budgeting process.
Monopoly in market, it was seen from several respondents comments that
they prefer to enter a market where they know that they can have a monopoly. In
other words, companies, which knew that they would have a competitive and
technological advantage over other players in the new market ventured into new
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areas. This strategy also included targeting certain market segments where
competition was less.
Pursue one project, several respondents expressed that they preferred to
target one particular project to enter a new market. During the execution of that
project, the company understands the new market and the players in that
particular region and later decides whether to continue working in the market or
not. Some companies also follow their clients to new markets. Such entries are
less risky for the companies.
Join with local players, for some general contractors entering new
markets, the players; the legal, regulatory and economic forces were new to
them. To overcome these difficulties they teamed up with local players such as
subcontractors, suppliers, and laborers or even went in for joint ventures.
Establish good PR, many respondents expressed that good word of mouth
and networking was important to stay in business. Individuals working in the
marketing department did most of the service selling and were usually the first
people to go to the new market. Some companies also indicated that over 50 %
of the work was obtained through repeat clients thus highlighting the importance
of relationship selling (Nolan, 2005).
Local Literature
Budget is a detailed plan defining or outlining the sourcing and uses of
financial and other resources of the company in a given period of time. This is the
plan expressed in a quantitative terms. Every organization or individual has to
budget their scarce resources to make the best use of such resources (time,
money and energy). Owners of successful small companies who survived and
grew even in difficult economic times carefully planned or budget their inventory,

23

purchases, expansion of facilities, and even financial transactions so that they do

not over extend themselves and yet was able to meet customers needs.
Developing a budget is a critical step in planning any economic step in planning
any economic activity both profit oriented or not-for-profit oriented entities
(Payongayong, 2006).
A budget is a plan, expressed in quantitative terms, on how to acquire and
use the resources of an entity during a certain period of time. A budget is a plan.
And a plan may either be in a descriptive or quantitative form (Roque, 2011).
Budgeting is the process of stating in quantitative terms their operations,
usually in units and pesos and planned their organizational activities for a given
period of time. Budgeting is the best approach to planning, controlling as well as
cost reduction program of the company.
The objectives of budgeting are it compels or forces managers to plan, it
provides information that can use to improve decision making functions, it helps
to set a benchmark that can be use for performance evaluation, and it improves
communication and coordination.
The major benefits of budgeting are: Budgeting compels managers to thin
ahead by formulizing their responsibilities in business operations. Evaluating
performances. Budgeting provides definite expectations that serve as the best
framework for judging subsequent performance; Coordinating and control.
Budgeting aids managers in coordinating their efforts, so that the objective of the
organization as a whole matches the objectives of its parts; Motivation and
positive behavior. People who are involved in preparation of the budget must
develop a sense of commitments to the achievement of the budget they need.

24

Likewise, promotions, incentives and rewards are based on job performance,

which certainly the achievement of their targets.
Planning is the process of translating the goals and objectives of the
organization and developing a strategy in developing those goals in a systematic
manner. Managers depend heavily on management accountants when planning
is being prepared.

Goals are abstract achievements while, objectives are

desired quantifiable achievement for a period of time. These objectives must be

logically desired results based on goals.
Controlling is the process of setting performance standards, measuring
performance, periodically comparing actual performance with standard, and
taking corrective measures or actions when operations do not conform to what is
expected. Managers must exert their best effort to achieve what was planned
(Payongayong, 2006).
Budgets are more commonly used in large companies which usually have
formal and sophisticated budgetary systems. Most firms use budgets because
they are aware of the advantages that may be derived from budgeting, among
which are follows:
Budgeting compels periodic planning. Through budgeting, the members of
the organization are forced to plan on how to acquire and use the firms scarce
resources. This results into a more efficient and effective utilization of such
resources.
Budgeting enhances coordination, cooperation and communication.
Budgets prepared for the different segments of the organization are usually
interrelated with each other. In the process of preparing such budgets, members
of different organizational segments are enabled to exchange their ideas and
objectives thereby giving them an opportunity to communicate with each other.
25

Budgeting forces quantification of plans and proposals. Budgets, as

already mentioned are plans expressed in quantitative terms. Though it may be
difficult to quantify all plans and business proposals, budgeting compels people
in the organization to express their plans in terms of pesos and other units of
measure to make them more meaningful and much easier to evaluate.
Budgeting provides a framework for performance evaluation. Actual
results if operations are compared with the budgeted figures to monitor the
organizations or the organizational segments performance. Any deviations of
actual figures within the planned or budgeted amounts are noted, evaluated and
investigated to determine the necessary corrective actions, if any. Deviations or
variances also provide feedback information that is important in developing
budgets for the succeeding budget period.
Budgeting enables members of the organization to be aware of business
costs. Ordinarily, only the accountants and financial executives are concerned
about the cost implications of business activities and decisions. Other managers
have their own areas of concern. During the budgeting process, however, these
managers who are given participation in developing the budget become aware of
the possible cost consequences of their planned activities, thereby allowing such
managers to conduct a cost-benefit analysis of their own proposals.
Budgeting satisfies some Legal and Contractual requirements. In some
cases, budgets are prepared because the firm is required to do so. For instance,
governments

agencies,

some

charitable

institutions

and

not-for-profit

organizations are required to prepared a budget and operate within such budget.
Budgeting directs the firms activities toward the achievement of
organizational goals. In the budgeting process, specific organizational goals for

26

each segment, as well as the goals of the organization as well as a whole are
formally established and incorporated in the budgets (Roque, 2011).
Effective and efficient management of working capital improves returns
and minimizes the risk that the business enterprise will run short of cash. By
optimally managing cash, receivables, and inventory, a business enterprise can
maximize its rate of return and minimize its liquidity and business risk.
To improve cash inflow, you should evaluate the causes of and take
corrective actions for delays in having cash receipts deposited. Ascertain the
origin of cash receipts, how they are delivered, and how cash is transferred from
outlying accounts to the main corporate accounts. Also investigate banking policy
regarding availability of funds and the length of time lag between when a check is
received and when it is deposited.
The type of delays in processing checks are (1) mail float, the time
required for a check to move from debtor to creditor; (2) processing float the
time needed for the creditor to enter the payment; and (3) deposit collection
float, the time it takes for a check to clear.
There are many possible ways to accelerate cash receipts including the
use of lockboxes, return envelopes, pre-authorized debits (PADs), wire transfers
and depository transfer checks (Salvador, Baysa, Gamboa & Fua-Geronimo,
2012).
Effective cash management requires controls to protect cash from loss
through theft or fraud. The following are some characteristics of a system of cash
control: Segregation of duties for handling cash and recording cash transaction.
No one person should be in complete control of a transaction. The employee
handling cash receipts should not have access to the accounting records for

27

cash. This prevents simultaneous misappropriations and manipulating of

accounting records to cover up stolen cash.
Imprest System, which is characterized by daily deposit of all cash
receipts intact in the bank and making disbursement through issuance of checks.
This system prevents the presence of significant amount of cash balance within
the business vicinity.
Voucher system, which is a system to control the cash disbursements.
Under the voucher system, properly approved vouchers, ensuring that all
disbursements are authorized, support all cash payments. All potential payments
are recorded first in the voucher register, and actual payments are recorded in
the check register.
Internal audits at irregular intervals. Cash counts are conducted without
the previous notice to the cashier, such that the cashier is always conscious of
his accountability, keeping the cash on hand intact. This may also involve test of
checking of transactions and record keeping, which prevents convenience and
manipulation of cash records (Robles & Empleo, 2010).
Banks use different methods for the recognition and measurement of
items in their financial statements. While harmonization of these methods is
desirable, it is beyond the scope of this standard. In order to comply with IAS 1
presentation of financial statements and thereby enable users to understand the
basis on which the financial statements of a banks are prepared, accounting
policies dealing with the following items may need to disclosed: (1) the
recognition of the principle types of income; (2) the valuation of investment
dealing securities; (3) the distinction between those transactions and other
events that result in the recognition of assets and liabilities on the balance sheet

28

and those transactions and other events that only can give rise to contingencies
and commitments; (4) the basis for the determination of impairment losses on
loans and advances and writing off uncollectible loans and advances; (5) the
basis for the determination of charges for general banking risks and the
accounting treatment of such charges (Liz, Ruado & Domingo, 2013).
Foreign Studies
Budget preparation was carried out in the branches of the bank and that
managers are the personnel responsible for the preparation and implementation
of budget. It also revealed that the bank has a budget committee and that on the
average budgets are actualized. Budget failure according to respondents was
caused by poor implementation and forecasting. There was a significant
relationship between budget and control mechanism in the banking industry and
there was also a significant relationship between budget preparation and budget
implementation in the banking industry (Abu-Saeed, 2008).
Using data from management controllers or CFO, this research empirically
investigates the reasons why companies implement budgetary control. Two
theoretical frameworks are mobilized: contingency and neo- institutional theories.
The contingency theory explains the implementation of the budgetary control by
the search for technical efficiency. Indeed, the budgetary control allows
decentralization with coordinated control, management by objectives and
management by exception. For these reasons, it constitutes a useful tool in some
technical environment. Five variables are used to operationalize the technical
environment of organizations: environment uncertainty, complexity of the

29

technology, organizational decentralization and strategy. For neo-institutionalist

theory, the purpose of the budgetary control is not solely to improve technical
efficiency of the organization, but also to give the illusion of rationality for internal
and external actors and to legitimate the action of the organization. The budget
thus responds to the expectations of the institutional and social environment of
the organization. This institutional environment is characterized by the belonging
to a parent corporation and the relationships with this parent, the type of
shareholding and the functional background of the president of the organization.
The empirical findings show that the neo-institutional framework is
remarkably better at explaining the implementation of budgetary control than
contingency framework. These results confirm the role of the budgetary control
as a legitimating tool. It can thus be seen as a rational myth, i.e. as an
institutionalized structure that gives the illusion of rationality (Adams, 2003).
Companies use budgets for planning and controlling their operations.
Therefore, budgets are an important tool for management in forecasting the
future of a business. There are two main reasons for inaccuracy in a budget. One
reason would be by error, the other by design. This study was concerned with
budgetary slack, which was one of the causes of budgetary inaccuracy due to
design. Cyert and March defined organizational slack as the difference between
the resources available to the firm and the resources necessary to maintain the
organization. Onsi stated that budgetary slack represents either the amount of
additional resources managers purposely construct in the budget, or the amount
by which they wittingly understate productive capability. Schiff and Lewin
indicated that, through the process of understating revenues and overstating

30

costs, managers can create budgets with slack. It was generally assumed that
budgetary slack was detrimental to organizations, but it also had been beneficial
in certain instances. Schiff and Lewin discovered that management can and does
create slack to achieve attainable budgets and to secure resources for furthering
their personal goals and desires. They also stated that slack creation was
universal with managers in companies that were profitable or non-profitable,
stable or growing. They implied that it served managements self-interest to have
slack included in the budget (Ramdeen, Santos & Chatfield, 2007).
Local Studies
The concept of budgeting emphasizes the total system approach
integrating all the functional operational elements of the entity. Therefore, wide
level of participation at all management level should be attained. But, what is
really difficult in the budgeting process is how to coordinate and reconcile the
conflicting objectives of the different functional areas in the organization.
Attempts are made through budget meetings to reconcile the different objectives
and to coordinate them to maximize company operations towards the attainment
of a common purpose (Cunanan, 2004)
The perceived benefits of budgetary planning and controlling strategies
when the respondents are grouped according to the size of the projects handled
are very satisfactory. As the number of workers employed increases, the
application of budgetary procedures become more frequent because large
manpower resources needs more control as dealing with more manpower is
more difficult that with lesser number of workers.
The most important benefit brought by the budgetary planning and
controlling strategies according to the nature of projects handed is that: It
31

compels the management to give serious and timely attention to planning and
instill in them the habit of careful study (Peralta 2005).
Budget process in the government which is similar to that in the private
industries, mentioned the relevance of education as a basis for empowerment
and that every person involved in the budget process and control procedures
should have enough training and experience to carry out his functions effectively.
The study also emphasized that decision making is one of the corner stones of
an organizations life and that without the required knowledge, experience, and
exposure in the assigned task, it cannot be carried out effectively (Abesamis,
2006).
In accordance with the study of Casamina and Plazo (2011), company
should make effort to make solutions and revisions when changes in budget
occur. Conduct a review of the limitations of maintaining the budget planning and
financial control against the benefits obtain. Moreover, continue innovating good
budget planning skills and improvement on delegation of every responsibility to
individuals. They should also continue to train and develop human resources.
The company should promote full commitment and involvement of the
employees as to budget planning and financial control and supporting and
motivating the employees as they move toward excellence and improvement in
their performance, and treat prior problems encountered in the budget planning
and financial control with an effective good manufacturing practice.
The researchers were able to relate studies made by Belleza, Bunyi,
Noveras, Ramos, Raypan (2009) in emphasizing that it is functional to encourage
the participation of members from each level of the organization. Furthermore, it
suggested that annual team building activities be conducted to help build

32

cooperativism and to avoid individualism within the group. Preparation of the

budget to be structured was also pointed out to achieve a high probability of
successfully attaining objectives. Time and effort differences should be
considered in making up plans.
Everyone uses the word budget as if it were an all cure for financial
problems of an enterprise. However, a budget is simply a plan and specific
management actions are needed to make it a reality. It is a planning document
created before anticipated transaction occurs. If people want to make things
happen, they have to plan. Once they have the plan, they are in better control of
the inertia of the past and of the unknown forces of the future. But planning alone
is not enough, control is also important. It is a process of comparing actual
performance versus budget. These two represents the key features for the
management to undertake control by exception (Caasi, 2005).
Synthesis
The related literature and studies just reviewed, provided guidelines and
directions necessary to meet the desired objectives. Past researches provided
findings and conclusions with the present researchers to correlate to their own
study. In addition to that, some of the recommendations cited on the related
studies are found to be associated and still applicable to the current study in spite
the fact that they were conducted on different time frames. Though some of the
materials cited above are not included in the scope of the study, it enabled the
researchers to have firm background knowledge of the problem study.
The present study is similar from the local study previously conducted by
Casamina and Plazo (2011) entitled Stressing the Budget Planning and
Financial Control of Macro Liquid Petroleum Gas Co., Inc. This study confirms
33

that company should make effort to make solutions and revisions when changes
in budget occur. Conduct a review of the limitations of maintaining the budget
planning and financial control against the benefits obtain. Moreover, continue
innovating good budget planning skills and improvement on delegation of every
responsibility to individuals. Furthermore, both studies provide an understanding
of the financial budget planning and control employed, the problems encountered
and possible solutions to such, as well as the companies socio-economic and
environmental contributions as viewed by the representatives of the respondent
companies. The difference between the studies is the nature of business; the
present study used bank while the past study used Oil Company as their subject.
Another difference is that the present study focused on the financial budget
planning. On the other hand, the previous study focused on both the operating
and financial budget planning.
The present study helps to confirm the facts that were presented in the
literature and studies, both local and foreign, with regards to the financial budget
planning and control of ones business. The information given by the reference
assists the researchers in conducting a study that would contribute to the existing
body of knowledge about the topic.

34