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PROJECT TOPIC- IMPACT OF BUDGETING AND BUDGETARY CONTROL ON THE PROFITABILITY AND GROWTH OF MANUFACTURING COMPANIES

PROJECT TOPIC- IMPACT OF BUDGETING AND BUDGETARY CONTROL ON THE PROFITABILITY AND GROWTH OF MANUFACTURING COMPANIES

 

Abstract

Budgets and budgetary control has been described as an aid for the achievement of profitability and growth of manufacturing companies as it provides a holistic and integrated approach to capture future manufacturing operation. Thus, this project is the impact of budget and budgetary control on the profitability and growth of manufacturing companies in Nigeria using Guinness Nigeria PLC as a case study. The major objectives of the study was firstly to determine the relevance of budget and budgetary control to manufacturing companies and secondly to determine whether significant relationship exit among some budget variables such as turnover, total cost, profit and total asset. Literature review and the annual report account of Guinness Nigeria PLC were the major sources of secondary data employed to provide information as evidence to evaluate the impact of budget and budgetary control in the manufacturing operations. The use of Durbin Watson Regression model based on the statistical package for social science (SPSS) was the statistical software utilized for the purpose of determining the regression and correlation results. Based on the analysis gathered in the study, there is a significant positive correlation between budget sales and total cost. It was identified in the study that profitability is dependent on investment in productive assets. The major recommendation was that manufacturing companies should adopt and implement a sound budget and budgetary control system that will address materials, labours, overheads and capital expenditure budget toward achieving a desired profitability.

CHAPTER ONE

INTRODUCTION

1.1   Background to the study

The whole essence of management is the achievement of objectives through proper decision making. Although, management accounting can assist managers in making decisions, the actions that follow managerial decision normally involve several aspects of the business such as marketing, production, purchasing and financing functions, and it is important that managers should co-ordinate these various interrelated aspect of decision making. If they fail to do this, there is a danger that managers may each make decisions that they believe are in the best interest of the organization which in fact, are not.

For example, the marketing department may introduce a promotional campaign that is designed to increase sales demand to a level beyond that which production department can handle. The various activities within a company should be co-ordinate by preparation of plans and actions for future periods. These detailed plans are usually referred to as budget (Drury, 2004).

Accordingly, Adeniyi (2008) defined a budget as a plan qualified in monetary terms prepared and approved prior to define periods of time usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective(s). Terry (2009) also defined a budget as a quantitative expression of a plan of action prepared in advance of the period to which it relates. Budgets may be prepared for the business as a whole, for department, for function such as sales and production and for financial and resource items such as capital expenditure, cash, manpower, purchases etc. the process of preparing and agreeing budgets is a means of translating the overall objectives of the organization into detailed, feasible plans of actions.

Furthermore, a budget is a future plan of action formulated by management for the whole organization or section thereof which is expressed in monetary terms. It also relates to the estimation of revenue, expenditure, assets acquisition and capital sourcing for the budget year. One should be reminded on the fact that budget is a short term financial plan does not mean that it should be focus on only today’s problem but it should be a continuation of a long rate plan.

Consequently, Farounbi (2006) opined that budgetary control is the establishment of budget relating the responsibilities of executives to the requirements of a policy and continuous comparison of actual with budget result either to secure individual action, the objectives of the policy or to provide a basis for its revision. In other words, it is a part of overall system of responsibility accounting within an organization (Adeniyi, 2008).

Following the uncertainties prevailing in the Nigeria business environment today, managers and stakeholders must be poised and prepared to compete favorably under these rapidly shifting conditions. In order to survive, and to experience profitability and growth, budgeting has proven to be effective management techniques to forecast the major changes as it affects the profitability and growth of the manufacturing sectors.

Budgeting as a proven management tools helps organization management and enhance improved performance of any economy in different ways. Drury (2004) identified six(6) multiple function of a budget namely: planning annual operations; coordinating the activities of the various parts of the organization and ensuring that the parts are in harmony to each other; communicating plans to the various responsibility centre, motivating managers to strive to achieve the organizational goals; controlling  activities and evaluating the performance of managers.

From the above analysis, one will notice that the issues of budgeting and budgetary control is a delicate matter which managers should handle with outmost care and expertise if manufacturing organization wish to maximize profitability and growth in their business pursuit. It is in this light that this research work studies the “impact of budgeting and budgetary control in the profitability and growth of manufacturing companies using Guinness Nigeria PLC as a case study.

PROJECT TOPIC- IMPACT OF BUDGETING AND BUDGETARY CONTROL ON THE PROFITABILITY AND GROWTH OF MANUFACTURING COMPANIES

Historical Background of the Case Study

Guinness Nigeria is a subsidiary of Diageo plc of the United Kingdom, was incorporated in 1962 with the building of a brewery in Ikeja, the heart of Lagos. The brewery was the first outside of Ireland and Great Britain. Guinness Nigeria Plc is a company engages in the bottling and marketing of products such as Guinness stout, extra stout, harp lager beer, satzenbrau lager beer and Malta Guinness. Most of these products are alcoholic beverages which are readily available in the Nigeria market.

The original Guinness brewery at St James gate in Dublin, republic of Ireland was founded in 1759. The second brewery, portrayal brewery was opened in London.

Guinness Nigeria Plc was incorporated as Guinness Nigeria Limited to import and distribute Guinness stout from Dublin in Ireland for sale in Nigeria, a decision to build success of the trade in Nigeria.

Following the great achievement and success of the trade in Nigeria, a decision to build a small brewery in Nigeria was taken and later in 1960, construction of Ikeja brewery started. In 1962, the stout brewery in Ikeja was commissioned. The brewery was then the third Guinness stout brewery in the world and the first outside the brewery isles. Following increased demand of the product in Nigeria, Guinness stout brewery was opened in Benin and Ogba Lagos in 1974 and 1982 to be precise. A brewery for harp lager beer was opened in Benin in 1974.

Going back to history in 1999, Guinness Nigeria Plc as then had three breweries; the first was Ikeja brewery located at Oba-Akran Avenue industrial estate in Lagos. The second one is the Ogba brewery located in ACME road industrial estate in Lagos and last one was the Benin brewery located in Benin City Industrial Estate along Benin Asaba road, Benin City.

The company is jointly owned and managed by Nigerians and foreign investors but Nigeria own majority of the shares. Guinness Nigeria Plc is trying to minimize cost on imported barley malt sought possible substitute for barley includes sorghum and maize. This resulted in the successful launching of malt lager beer in 1986.

Guinness Nigeria Plc contribution to Nigeria economy lies only in providing direct employment to 6000 Nigerians engage in the production of crown corks, cartons, bottles, label and crates but also employment was created for importers and suppliers of raw materials.

1.2   Statement of Problem

In order to provide solutions to identified lapses in budgeting and budgetary control in the profitability and growth of manufacturing companies, the research questions will be investigated. They are: budgeting and budgetary control not helping in the achievement of profitability and growth of manufacturing companies in Nigeria, budgets been prepared for both financial and non-financial resources such as human in recent past years, the significant relationship between profitability and budgeted sales, the positive correlation between budgeted sales and total cost.

1.3   Research Questions

                The following research questions will be addressed with the view to achieving the objectives of the study.

  1. Is there any relationship between profitability and budgeted sales or turnover?
  2. Is there any significant relationship between budgeted sales and total cost?

iii.    Does profitability depends on the level of investment in productive assets?

1.4   Objectives of the Study

The research aims at achieving the following objectives;

  1. To determine the relationship between profitability and budgeted sales or turnover.
  2. To establish the relationship between budgeted sales and total cost.

iii.    To determine whether profitability is dependent on the level of investment in productive assets.

1.5   Statement of Hypothesis 

Hypothesis One:            

HO:   There is no significant relationship between profitability and budgeted sales.

HI:    There is significant relationship between profitability and budgeted sales.

 Hypothesis Two

HO:   There is no positive correlation between budgeted sales and total cost.

HI:    There is positive correlation between budgeted sales and total cost.

Hypothesis Three

HO:   Profitability is not dependent on the level of investment in productive assets.

HI:    Profitability is dependent in the level of investment in productive assets.

For the first hypothesis, the dependent variable is profit while the independent variable is budgeted sales. The second hypothesis, budgeted sales is dependent variable while total cost is the independent hypothesis. Similarly, in the third hypothesis, the dependent variable is profit while total asset is independent variable.

1.6   Significance of the Study

According to ICAN study pack (2009), the significance of the study is the part of research that reveals the relevance of the study to the field in question and it is relevance to stakeholders within the field as it is meant to provide resources or point of reference to the study embarked upon by such stakeholders in the industry.

In this research, the field in question includes the manufacturing sectors and its stakeholders such as budget committee and planners who delight in accurate and reliable budgeting and budgetary control.

The following therefore are the significance of this study:

  1. The study will be of considerable help to the management board of manufacturing companies in Nigeria to re-awaken their insight into how budgeting budgetary control enhances the achievement of their long range plan.
  2. It will enhance the issue of coherent co-ordination of department budgets among the functional managers such as the production manager, sales manager, finance manager etc.

iii.    The findings of this study will expose both managers and planners to the need to control actual cost and revenue to reflect the budget figures.

  1. It will equip the management board of manufacturing companies with the techniques of variance analysis and how these can help in resolving unfavorably variables.

1.7   Scope of the Study

The scope of the study cover the published financial statement of Guinness Nigeria PLC from 2007 to 2012.

 

1.8   Limitations of the Study

The major limitation encountered in this research work is as follows:

  1. Time constraint: Time is a major limitation in this project work, though there was the problem of obtaining the published financial statement of Guinness Nigeria plc, but it was all due to the limited timing of the project work. The time required by the project was not given so; the available time was shared between the research work and normal classes.

 

 Finance constraint: This is another constraint to the project work; there was a problem of insufficient fund to source for materials and literature both online and offline which militated against the research work.

 

iii.    Non co-operation constraint: Non co-operation by the management of Guinness Nigeria plc to release their financial statement of their company since one is not a member of staff or shareholder in their company.

 

1.9   Definition of Terms

In the course of the research work, some technical words came across and were used in the research. These words defined below in order to permit through understanding of the beneficiaries of the findings of the research.

 

Annual Budgeting: According to Drury (2004) it is concerned with the detailed implementation of the long term plan for the year a-head. It is therefore a continuous and dynamics process and should not end once the annual has been prepared. It is also known as short term planning or budgeting.

Variance: This is defined as the difference between an actual result and a budgeted amount (Adeniyi, 2008). It measures the extent which actual performance deviates from expected or standard performance.

Manufacturing Sector Company: Adeniyi (2008) defined this as a company that purchases materials and components and convert them into different finished products.

Benchmarking: It is the continuous process of measuring products, services and activities against the level of performance (Faroubi, 2006).

Investment: According to Adeniyi (2008), refers it to the resources or assets used to generate income.

Actual cost: It refers to cost incurred (a historical cost) as distinguished from budgeted or forecasted cost.

Long-Range Planning: According to Sizer (1989) it is a systematic and formalized process for purposely directing and controlling future operations towards desired objectives for periods extending beyond one year.

Profitability: John (2008) is of a view that profitability refers to a company’s ability to generate adequate returns on invested capital.

Growth: According to the oxford advanced learners dictionary of English, 5th edition, growth can be seen as increase in economic ability and profit. According to Adeniyi (2008), growth component is a change in operating income attributable to an increase in the quantity of output sold between one period and the next.

Budgeting Process: Faroubi (2006) opined that budgetary process cannot be viewed as being purely concerned with the current year. It is instructive to note that the budgetary process is only part of whole corporate planning of organization.

Budget: According to Terry (2009), it refers to a quantitative expression of a plan of action prepared in advance of the period to which it relates.

Master Budgets: According to Terry (2009), it refers to the summary of all other budgets and it is expressed as a budgeted profit or loss and balance sheet.

PROJECT TOPIC- IMPACT OF BUDGETING AND BUDGETARY CONTROL ON THE PROFITABILITY AND GROWTH OF MANUFACTURING COMPANIES

 

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