CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The word “budget” was derived from the French word “bougette” which means a small bag. It connotes a small bag which embodies the financial proposals of an organization for a given period of time usually one year. The organization could be government, business enterprises or family. Initially, business firms used the appropriation type of budget adopted from the government. The purpose was to limit the expenditure on some items such as advertising and research and development, which were considered as luxury item. But this is in contrast with what is obtainable in the present day economics. Going by the volume IV of International Edition of the Encyclopedia Americana [1988], “a business unit employs a budget to carry out its financial planning or forecasting. A business budget is a formalized quantitative presentation – a set of figures of a firm’s coordinated plans”. Budgeting is essentially, a process of planning and control. A well-prepared budget provides management with a planned program based upon investigation, study, and research on the part of the entire organization. In addition, a well-prepared budget provides complete co-ordination of the marketing, production and financial activities of a business. Budgeting alone, however, does not bring realization of the plans. Control over operations is necessary in order that deviations from the plans may be noted and corrected so that the business may be kept on the planned course. Budgetary Control originated in the 1920’s as a means of planning and control. Businessman wanted to see the possible outcome of their plans and forecasts, and budgets were prepared for this purpose. Hamilton [1961] rightly indicated that, “modern budgetary control comprises both a plan of operations and the means of controlling operations within the scope of the “plan”. He further pointed out that: “Budgetary Control by itself is not a wonder-working device; neither should it be regarded as a mere accounting procedure. It is a powerful tool of good business management. Effective use of this tool requires sound organization, proper accounting classification and records, adequate research, and the enthusiastic support of all employees from top down”. Budgetary Control is very useful in the making of business plans. Every organizational activity can be expressed in terms of budgets. With the operation of a budgetary control system, business expenditure can be made to match with the economic realities of the organization. In recent years, budgetary Control has been frequently examined to find its relationship with profitability of Industries. The existence of many industries as at present can only be justified in terms of their profitability. Therefore, to such industries, anything, which improves their profitability, is worthwhile. Profitability may mean different things to different organization under different conditions. Most organization takes it to mean ability to realize a return over and above the cost of resources put into the organization’s activity. However, to some other organizations, anything, which reduces the cost of operation, is profitable. The use of budgetary control in profit planning is tremendous. It can be used in matching expenditure and income in order to make some profits. And to the extent that budgetary control is frequently applied in profit planning, its contribution to the realization of profits cannot be doubted.
1.2STATEMENT OF PROBLEM
Budget is a guide to a particular objectives and it is obvious that without a guide to a particular objective it will be very difficult to achieve that objective economically. However, many organization today do not make good budget about their organization and where they do, they do not control their performance vis-a-avis their budget very well to control the controller able factors in their budget to enable them to achieve their plan. Budget, which is one of the tools that could be used by business organization to achieve their profit plan unfortunately, is not being used properly by many business organizations. In essence, many business organizations have failed in their profit plan due to lack of budgetary control in their organization.