1 Budgeting and Budgetary Control System: A study on Selected Indian Companies Dr. K. Manoharan Nair, Former Associate Professor and Head of the Post Graduate Dept of Commerce and Research Centre, Mahatma Gandhi College, Thiruvananthapuram Alireza Kaab, Research Scholar, Deptt. of Commerce, University of Kerala, Thiruvananthapuram ABSTRACT Budgeting is very important and it determines the way in which the organization can attain its financial and other goals. It is an estimate about the future actions of the management in the form of financial Statements. Once the budget is set in quantitative or qualitative terms the management try their best for not exceeding the target set. But on account of dynamic nature of the environment both internal and external the estimated figure will vary. As a control measure they traise the variations between the actual and the budgeted one and identify the causes of such variations and take corrective measures for not occurring such variations in future. One of the components which is significant for internal control system is budgetary control system (BCS).The objective of the present study is to know the budgetary control system in selected Indian companies. Keywords Budgeting, Budgets, Budgetary Control System (BCS), Management Accounting System. INTRODUCTION Budgeting is very important in the sense that it determines the way in which the organization can attain its financial and other goals. Budgeting is an estimate about the future actions of the management in the form of financial Statements. Management accounting provides useful information for management to develop strategies. In order to achieve organizational objectives, implementation of internal controls is necessary. One of the components which is important to conduct internal controls is budgetary control system (BCS). In India much attention has been given to improving of budgetary control and planning and their interrelationship in developing countries like India. Budgeting is the process of preparing a detailed statement of financial results that are likely to happen in a period in a time to come. A budget is the sum of money allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them.it helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging mangers to consider problems before they arise. It also helps to co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments in a way to control resources; communicate plans to various responsibility center mangers, motivate managers to strive to achieve budget goals, evaluating the performance of managers, provide visibility into the company s performance and for accountability. In this context a study is made to know the budgetary practices of selected Indian companies LITERATURE REVIEW Budgetary control allows for greater expansion opportunities and provides the means to strengthen the control of management within major companies and it can be performs well only in highly managed companies (Nicolas Berland (2001). In a study on budgetary control system, David Otley (2001) revealed that the assumption of budgetary control is that it is the main integrative control method for most business enterprises. The assumption being that an organization s business plan can be represented financially by the budget and that the budget can be used as a monitoring and controlling method for the complex issues of the business plan. Ruth Hamson, Len Bird (2002) in a study argued that budget management and budgetary control is influenced by three main elements: control, performance and people all of which are governed by the culture of the organization.
2 Joshi. P.L., Javahar Al-Mudhaki, Wayne G. Bremser (2003) conducted a study on corporate budget planning, control and performance evaluation in Bahrain, examined the budget planning as well as budgetary control systems within organizations in Bahrain. The study concluded that most of the companies prepare both fixed and variable budgets and also they have tight budgetary control systems. In study by Alnoor Bhimani and David Otley (2007) found that budgetary control systems and responsibility accounting still form the backbone of the management control systems of many organizations. Budgetary control is the most common, useful and widely used standard device of planning and control according to Rashmi Rathi (2011). Cheng-Tsung Lu (2011) in study concluded that budgeting control system could not achieve effectiveness in planning, motivating, negotiating, and controlling if there was no support from the organizational members, and also pointed out when the department managers have higher budgetary motivation and more positive budgetary attitude, the budgetary performance tends to be higher. Sidhakam Bhattacharyya and Gautam Bandyopadhyay (2012) in a study concluded that no budgetary control system is effective unless it provides for the integration of budgeting, accounting and financial accounting. Budgetary control system is an effective way to reduce the accounting errors (David A Palmer, 2012). Okpala (2013) concluded that budgetary control has significant influence on workers motivation which leads to savings in the service charge expenditure. Human factors within budgetary controls thus managerial commitment, employees motivation, employees training, competence as well as attitude affect the budget control process (Kenneth Adongo and Ambrose Jagongo, 2013). STATEMENT OF THE PROBLEM Every organization irrespective of whether it is small, medium or large made use the tool budgets and implement it and compare the actual with budgeted and taken steps for avoiding the occurrence of such causes in future. To what extent these are made effective is the problem to be looked into and hence the present study with the following research questions: What is the relationship between budgetary control system and organizational efficiency? What are the issues related to budgeting and budgetary control systems within an organization? How organizational efficiency can be improved using budgetary control system? OBJECTIVES OF THE STUDY The objectives set for the study are: To investigate the relationship between budgetary control system and organizational efficiency. To investigate the issues related to budgeting and budgetary control system in an enterprise. To investigate ways by which organizational efficiency can be improved using budgetary control system. METHODOLOGY Method of Study: The study method is empirical which tests the feasibility of solutions by applying statistical measures. Data Source: Both secondary and Primary data has been used for the study Secondary Data: The secondary data has been collected from the literature survey and annual reports of the companies selected for the study. Primary Data: Primary data has been collected by using Purposive Sampling Technique with a total sample of respondents selected 10 each from 5 Companies selected purposively by those companies use budgetary control system in their organization for last five years. Tools for Data Collection: The primary data has been collected by using of Questionnaire and Interview Schedule specifically developed for the purpose. Tools used for Data Analysis: Simple statistical and mathematical tools like percentages, mean and ranking methods are used for analysis of data. ANALYSIS AND INTERPRETATION OF DATA
3 In the first part of analysis include the socio- economic background of the respondents and the second part analyze the variables. Part A - Analysis on Socio Economic variables 1. Gender The gender dimension in the management of companies is significant. The proportion between male and female of the sample respondents selected for the study are given in Table 1.1. Table 1.1: Gender wise Classification Gender No. of Responses Percent Valid Male 42 84.0 Female 8 16.0 Total 100.0 It is clear from Table 1.1 that 84 percent of respondents are males while other 16 percent are females. It shows that the majority of respondents are male. 2. Age Another important personal profile variable is the age of respondents.it also have an impact on determining the efficiency of control system in companies. The age wise classification of respondents is shown in Table 1.2. Table 1.2: Agewise Classification Age No. of Percent Responses Valid Below 25 8 16.0 25-35 22 44.0 Above 35 20 40.0 Total 100.0 Table 1.2 shows that 16 per cent of respondents fall below 25 years of age, 44 per cent fall between 25 to 35 years and 40 per cent are of the age group of above 35 years. It means that majority are from the age group of 25 to 40 years. 3. Educational Qualifications Education is knowledge and this knowledge increases the skill, maturity and potential of the managers. So the information is collected and the views of respondents on it are depicted in Table 1.3. Table 1.3 Educational Qualification No. of Qualification Responses Percent Valid Professional 33 66.0 Table 1.3 indicates educational qualifications of respondents, 66 per cent of the respondents have professional qualification (graduates in MBA, PhD of accounting) and 34 per cent have non-professional education. It means majority have high professional qualifications. 4. Experience The experience is yet another variable taken for analysis of the management of rubber plantation in Kerala and the collected data are recorded in Table 1.4 Nonprofessional 17 34.0 Total 100.0 Table 1.4 Professional Experience Professional Experience No. of Responses Percent Valid 1-5 Years 8 16.0 5-10 Years 12 24.0 11-15 Years 13 26.0 Above 15 Years 17 34.0 Total 100.0 Table 1.4 indicates that 16 per cent of respondents have 1 to 5 years working experience, 24 percent have 5 to 10 years experience, 26 per cent have 11 to 15 years experience and 34 per cent have above 15 years experience. Majority of them have experience with 11 to 15 years.
4 Part B - Variable Analysis 1. Budgeting Table 1.5: Process of Budgeting and its Efficiency Strongly Disagree Disagree Neutral Agree No No No No per cent per cent per cent per cent 1. Is there any budget preparing 7 7 2 4 process? (14.0) (14.0) (4.0) (8.0) 2. Does organization enjoy budgetary 2 3 2 15 control system? (4.0) (6.0) (4.0) (30.0) 3. Do you have budget committee? 3 7 3 12 (6.0) (14.0) (6.0) (24.0) 4. Is there relationship between 2 3 1 6 budgetary control and efficiency? (4.0) (6.0) (2.0) (12.0) 5. Does budgetary control system is 5 10 1 12 in a proper manner? (10.0) (20.0) (2.0) (24.0) Source: Computed from Primary Data Figures in brackets shows Percentage to total. Strongly Agree No per cent 30 (60.0) 28 (56.0) 25 (.0) 38 (76.0) 22 (44.0) Total No per cent Mean 77 87 80 90 74 All responses about budgeting process and budgetary control system within organizations summarized in table 1.5. in which 30 respondents representing 60per cent of the total respondents indicated that their organizations have budget preparation process, which means the process of budget preparation need to be improved within organization. The average mean level of satisfaction recorded in this case is 77 per cent. The average mean level of satisfaction recorded in this case is 87 per cent. In it, 56 per cent of the respondents believed there is a budgetary control system in their organizations. The average mean level of satisfaction recorded in this case is 80 per cent Responses about existence of budget committee in organizations indicated that per cent of respondents declared there is a budget committee in their organization. The average mean level of satisfaction recorded in this case is 90 per cent.relationship between budgetary control and efficiency obtained highest rank since 76 per cent of respondents were strongly agreed that there is a relationship between budgetary control system and organizational efficiency. The average mean level of satisfaction recorded in this case is 74 per cent. Only 46 per cent of respondents declared that implementation of budgetary control system take place in a proper manner in their organizations. 2. Relationship between Budgetary Control system and Organizational Efficiency Table 1.6: Budgetary control system and organizational efficiency Forecasting Future Events Better Planning Source: Computed from Primary Data Cost Reduction Maximize Profitability Minimize Variances No per cent No per cent No per cent No per cent No per cent No per cent 3 6.0% 15 30.0% 12 24.0% 10 20.0% 10 20.0% 100 % No Rank No Rank No Rank No Rank No Rank Total 3 5 15 1 12 2 10 3 10 4 Total As presented in table 1.7 only 3 (6.0per cent ) respondents indicated that future events can be predicted through budgetary control system. Interestingly, 15 (30.0per cent ) of the respondents indicated that budgetary control system
5 leads to better planning and through good planning organizational efficiency can be improved, while 12 (24.0per cent ) of respondents pointed out that cost reduction is one of the components of budgetary control system which can lead to organizational efficiency. 10 (20.0per cent ) of respondents indicated that maximization of profitability is an important characteristic of budgetary control system, and 10 (20.0per cent ) of respondents believed that budgetary control system would diminish the variances and eventually leads to organizational efficiency. All the variables listed above are important components of budgetary control system in order to achieve organizational efficiency but the priority is different in each organization. Some organizations utilizing budgetary control system as a tool for cost reduction while some other are using it as a managerial tool to planning for future operations. It is noticed from Table 1.6 that 20 per cent each of the respondents viewed that minimize profitability and minimize variances and another 24 per cent give importance to cost reduction and30 per cent viewed that better planning. Only 6 per cent pointed out that forecasting and future events. In it first ranked variable is Better planning according to 15 respondents, Second ranked variable is cost reduction by 12 respondents, Third ranked one is Maximise profitability by 10 respondents and another 10 respondents ranked four as minimize variance and only 3 respondents ranked fifth as forecasting future events. Table 1.7: Are there any issues in implementation of budgetary control system? Strongly disagree Disagree Neutral Agree Strongly Agree Total issues in implementation of budgetary control system Source: Primary data No per cent No per cent No per cent No per cent No per cent No per cent Mean 11 22.0% 20 40.0% 0 0.0% 5 10.0% 14 28.0 % 100.0 % 56 Table 1.7 represents responses in regards to challenges in implementation of budgetary control system. 14 (28.0per cent ) of the respondents indicated that there is some issues in implementation of budgetary control system in their organizations. It shows these issues should be addressed by the senior managers. Interestingly, 31 (62.0per cent ) of the respondents believed that there is no issue in implementation of budgetary control system in their organizations. It can be interpreted that the budgetary control systems in these organizations runs smoothly and senior management considered budgetary control system as efficiency component. Table 1.8: What are the barriers in proper implementation of budgetary control system? Undetermined Responsibilities Source Primary data Lack of Financial Experts Senior Management Negligence Organizational Strategies Table 1.9: Rank of Responses Inaccurate Information No per cent No per cent No per cent No per cent No per cent No per cent 9 18.0% 11 22.0% 26 52.0% 4 8.0% 0 0.0% 100.0% Senior Management Negligence Lack of Financial Experts Undetermined Responsibilities Organizational Strategies Total Inaccurate Information Rank per cent Rank per cent Rank per cent Rank per cent Rank per cent 1 52 2 22 3 18 4 8 5 - Source: primary data
6 It is seen from table 1.9 that first ranked variable by respondents ( 52 per cent) is the senior management negligence, second rank one is lack of financial experts ( 22 per cent of the respondents ), third ranked one is undermined responsibilities ( 18 per cent of respondents), fourth ranked variable is organizational strategies and fifth ranked one is inaccurate information. CONCLUSIONS AND SUGGESTIONS Budgeting is very important and it determines the way in which the organization can attain its financial and other goals. Hence, the current study conducted to investigate budgeting and budgetary control system (BCS) within Indian organizations. The study data analysis indicates that budgetary control system is implemented in most of the organizations but somehow it should be improved. Most of the respondents agreed that there is a strong relationship between budgetary control system and organizational efficiency. Interestingly, finding of the study revealed that budgetary control system serves different purposes within Indian organizations, in some organizations BCS is used for cost reduction and in other cases it used for maximize profitability as well as to minimize variances. Eventually, most of the respondents agreed that there are some barriers in proper implementation of BCS in their organizations. The findings indicated that most significant barrier in BCS implementation is senior management. Hence, the senior management plays prominent role in implementation of BCS and the problems involved the management should be addressed in order to achieve organizational goals. The study recommends that in order to increase organizational efficiency, senior management should put in place measures to solve the problems associated in budgetary control system procedure. Moreover, budget participation should be take place within organizations in order to enhance employee s perception in regards to budgeting and planning. While this study extends the literature on budgeting and budgetary control system, more studies in this field are needed. The study recommends further research on budgeting and budgetary control system since it is most significant factor in organizational efficiency. REFERENCES [1] Batty, J. (1963), Management Accounting including Financial Management and Control, Macdonald and Evans. [2] Nicolas Berland: environmental turbulence and functions of budgetary control, Accounting, Business & Financial History, Vol.11, No.1, Paris, France, (2001), PP 59-77. [3] David Otley: extending the boundaries of management accounting research: developing systems for performance management, British Accounting Review, Vol.33, United Kingdom, (2001). PP 243-261. [4] Ruth Hamson, Len Bird: Devolved Budgets in the Public Sector, Journal of Finance and Management in Public Services, Vol.9, United Kingdom, (2002), PP 29-44. [5] P.L. Joshi, Javahar Al-Mudhaki, Wayne G. Bremser: corporate budget planning, control and performance evaluation in Bahrain, Managerial Auditing Journal, Vol.18, Bahrain, (2003), PP 737-7. [6] Alnoor Bhimani and David Otley: Trends in budgetary control and responsibility accounting, Contemporary Issues in Management Accounting, United Kingdom, (2007), PP 291-307. [7] Cheng-Tsung Lu: Relationships among budgeting control system, budgetary perceptions and performance: A study of public hospitals, African Journal of Business Management, Vol.5, No.5, Taiwan, (2011), PP 6261-6270. [8] Sidhakam Bhattacharyya and Gautam Bandyopadhyay: Expenditure and Budgetary Control in Urban Local bodies in India - Developing Prism Model, International Journal of Governmental Financial Management, Durgapur, West Bengal, India, (2012), PP 16-26. [9] David A Palmer: budgetary control and variance analysis, Financial Management Development, No.213, USA, (2012), PP 1-10. [10] Kenneth Enoch Okpala: Budgetary Control and Service Charge Management Performance in Real Estate Sector, Asian Economic and Financial Review, Vol.3, No.6, Mowe Ogun State, Nigeria, (2013), P 749-761. [11] Kenneth Adongo and Ambrose Jagongo: Budgetary Control as a Measure of Financial Performance of State Corporations in Kenya, International Journal of Accounting and Taxation, vol.1, No.1, Kenya, (2013), PP 38-45. [12] Baloguan, Mamidu and Owuze: budgetary control and organizational performance, Journal of Educational Research in Natural and Social Sciences, Vol.1, No 1, Owo, Nigeria, (2015), PP 97-108.