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Budgetary control


Budgetary Control is essential to ensure that the organisational objectives are achieved either on short, medium or long term basis. Budgets are financial expressions of plans of action and an aid to co-ordination and implementation of a given projector program to be undertaken in the daily and long-term plans of the organisation. Budgets need to be used by managers as a channel for the decision making process so as to achieve optimum performance for the organisation. Actual reporting of results and variances acts in evaluating and measuring the performance of managers.


Budgetary controls refer to the effective and orderly execution of the budget. Budgetary controls are usually achieved through selective expenditures and periodic reporting on budget performance (Wood and Sangster , 2007).

A budget is a management tool used in implementing the strategies adopted so as to realize declared objectives in respect to the mission or vision of the firm. A budget articulates the expected outcomes resulting from implementing given strategies. Therefore it is used as a measure of performance. It can be used during reward and assessment of performance by employees. It is essential in strategic corrective adjustments on clarification and determination of the subsequent direction of the firm (Hall, 2003).

A budget is a plan, qualified in monetary terms, prepared and approved prior to a defined period of time, showing details of income to be generated, and expenditure to be incurred, and capital to be employed, to attain a give objective. There may be several objectives, such as achieving a given return on capital employed or earnings per share (EPS), and perhaps improving the liquidity position, or reducing borrowings. It is not supposed to be a set of estimates, prepared by the finance department, to give an idea of what is likely to happen during the coming year. It is supposed to express the intentions of top management, detailed as a financial plan, with a commitment from all managers to achieve the results expected (Perks 2007).

According to Perks (2007), budgetary control is the use of budgets that relate the responsibilities of managers to the requirements of the policy, and the continuous comparison of actual results with budgeted results to identify and implement specific actions to achieve the results intended, or to provide a basis for revising planned results. Objective will not achieve themselves. The idea is that managers are responsible for achieving defined objectives, and actual results are monitored and compared with the established plan or budget.

Financial accounting information can be used for planning, decision-making and control in an organization. But costing systems and budgetary control have been developed, along with management accounting more generally, to provide information more to the needs of management. Absorption costing emerged from financial accounting so that the costs of different products can be calculated, and to establish the cost of closing inventories for the purpose of profit measurement. Marginal costing systems are usually seen as being more relevant for planning, decision-making and control. But each approach has its limitations, and, as with all accounting information, care is needed to manage an organization on the basis of the most appropriate information. The use of budgetary control systems for planning purposes is part of a control mechanism, and provides a basis for financial planning (Perks 2007).

Establishing effective budgetary control system in organization requires planning where a budget manual should reflect the details of the budgeting process from activities to the responsible people. The use of budgetary controls by managers in the organization as an aid to decision making is essential towards achieving optimum performance of the firm.  (Meigs, 2000).

Budgetary control is vital to enable attainment of organizational targets across the operations of the business. The future revenue and anticipated expenditure are usually reflected in the performance and position objectives of the organization. Therefore controls enable achievement of both short term and long term goals (Welsch and Gordon, 2000).

Budgetary control is concerned with ensuring that actual expenditure is in line with budgeted amounts and that the objects and levels of activity envisage in the budget are achieved. A crucial role of management accounting is that of introducing and maintaining a sound system of budgetary control. Closely connected with budgetary control is the question of cost allocation, and an obvious function of management accounting is to devise adequate costing systems. Finally, it is often suggested that the evaluation of managerial performance in public sector organisations could be greatly improved if more services were sold rather than provided at no charge. Although the income received might not always measure accurately the real value of services provided, it might offer an approximate indicator of output. Management accounting can help not only in determining the prices to be charged, but also in putting the issues surrounding charging for services into perspective (Jones and Pendlebury, 2000).

The first requirement of a good system of budgetary control is to set up accounts for collecting data on inputs and outputs at the lowest distinct level of activity. These accounts are called 'cost centres'. Individual managers will be responsible for one or more of these cost centres and together such as cost centres form a responsibility centre. The responsibility centre are aggregated to form further responsibility centres at the programme or service level, and an aggregation of such programme or service responsibility centres makes up the individual departments of the organisation (Jones and Pendlebury, 2000).

According to Jones and Pendlebury (2000), it is the responsibility centres that provides the basis for budgetary control by clearly defining the area of responsibility of individual managers. These individual managers are often referred to as "budget holders" and are made responsible for achieving their budgets. A responsibility centre receives inputs in the form of labour, materials, etc., and with these inputs is expected to produce output in the form of goods or services. The budget reflects the monetary values of the inputs allocated to each responsibility centre, and, where possible, shows the expected output or level of activity.

Once the budget has been fixed, individual service chief offers are responsible for monitoring and controlling income and expenditure against the budget. Within each department of the authority there will be a structure of accountable cost centre managers, who will normally receive a regular (monthly) budget monitoring report that enables them to compare net expenditure to date with the approved budget. Most local authority will fairly sophisticated computerized financial information systems, which will profile the budget over the year to highlight variances and project the outturn for the year on the basis of the trends in expenditure to date. Some will also include details of commitments entered into and non-financial data relating to outputs and other performance measures. The cost centre manager will be expected to investigate any material variances and take corrective action as appropriate. The role of the chief financial offer in this process is to run the financial management system, and to monitor expenditure and forecast outturn at the corporate level (Henley et al, 1992).

Henley et al (1992), have considered each of the elements comprising the framework that governs local authorities financial accounting and reporting, namely statue and regulations, professional accounting standards and statements of recommended practice, and other professional guidance on best practice. They have outlined the specific accounting requirements affecting housing and direct services organizations, and the requirements for local authority annual reports, and have reviewedthe debate surrounding the way in which local authorities account for their fixed assets. They have outlined local authorities budget arrangements, covering the financial planning process, the budget development cycle, and budgetary control.

There are many studies in the literature on the impact of budgetary control to improve organizational performance.  The impact of budgetary control in improving organizational performance has been discussed extensively through two major mechanisms in the accounting literature: motivational and informational. The studies on the motivational impact of budgetary control on performance have been equivocal. For example, while some studies argued that budgetary control positively and significantly associated with performance (Lau and Tan, 1998), other studies have found either only a weak positive association between control and performance(Milani, 1975) or a negative association between two variables (Bryan and Locke, 1967).

However, the empirical research on informational impacts of budgetary control has, in general, produced consistent results. For example, Kren (1992), argued that budgetary control was associated with greater job-relevant information, which, in turn, was associated with higher job performance. Chong et al. (2002), argued that the act of control provides an opportunity for subordinates to gather, exchange, and disseminate job-relevant information to facilitate their decision-making process, which in turn improves job performance.

In addition, Chong and Johnson (2007), suggested that the cognitive effect of control in goal-setting allows subordinates to gather, exchange and share job-relevant information. Chong and Johnson (2007), further suggested that the availability of job-relevant information allows subordinates to develop effective strategies or plans, which will help them to exert effort over time, in an attempt to attain their goals. Magner et al. (1996) found that control has a direct and positive effect on job relevant information. Also, Magner et al. (1996) argued that the act of control allows subordinates to interact with superiors whereby subordinates can ask questions to clarify goals, task strategies, conditions in the work enviroment, and other issues that have an important impact on their jobs. 

On the other hand, Shields et al. (1998) suggested that the cognitive impact of budgetary control improves a subordinate's quality of decisions as a result of sharing information with the superior.

Budgetary control as proven management tool (Collier, 2006) helps organization management, and enhances improved performance of any economy in different ways. Its primary function is to serve as a guide in financial planning operators, it also establishes limits for departmental excesses. It helps administrative officials to make careful analysis of all existing operations, thereby justifying expanding, eliminating or restricting present practice. (Musselman and Hughes 1981).

Budgeting and control entails a distinct pattern of decisions in an organization which is capable of determining its objectives, purposes or goals, and how these goals are achieved by establishing principal policies and plans. However, the inability to recognize the problem concerned and fixing a boundary off investigation creates an obstacle for the successful implementation of budgeting and control. Some organizations only look for narrow ranges of alternatives which they arrive at from their past expenses and present situation, other management levels even avoid long-term planning and budgeting in favour of today's problems thereby making the problems of tomorrow more severe (Smith, 2007).

The foregoing reflects on the need for organizations to set up a formal mechanism for scanning its environment for opportunities and give early signs of future problems, this course of action will improve the system of budgeting and control, resulting in an apriori expectation of improved performance, in the manufacturing sector as seen in this study.

Budgets were first introduced in the 1920s as a tool to manage costs and cashflows in large industrial organizations. Bragg (2007) states that it was during the 1960s that companies began to use budgets to dictate what people needed to do. In the 1970s performance improvement was based on meeting financial targets rather than effectiveness companies then faced problems in the 1980s and 1990s when they were not willing to spend money on innovations in order to stay with the rigid budgets, they were no longer concerned about how customers were being treated, only meeting sales targets became essential.

Budgeting in business organizations are formally associated with the advent of industrial capitalism for the industrial revolution of the eighteenth century, which presented a challenge for industrial management.

Glautier and Under (1987) state that "the emergence of scientific management philosophy with its emphasis on detailed info' as a basis for taking decision provided a tremendous impetus for the development of management accounting and indeed budgeting techniques". However, budgeting at the early stage of its development was concerned with preparing and presenting credible information to legitimize accountability and to permit correct performance evaluation and consequently, rewards.

Over the years, the function and focus of budgeting has shifted considerably and business organization become more complex and their environment becomes dynamic coupled with the emergence trend, the term budget and budgeting have been differently defined and examined by various scholars in several ways.

Atrill and McLaney, (2007) defined a budget as a plan of dominant individuals in an organization expressed in monetary terms and subject to the constraints imposed by the participants and the environments, indicating how the available resources may be utilized, to achieve whatever the dominant individuals agreed to be the organisation's priorities. The impressive thing about this definition is that, it recognizes the constraint imposed on budget by other participants who are to ensure that the objectives and targets enunciated in the budget are achieved.

Growthorpe (2008) in his formal definition, defines budget as "a qualitative statement, for a defined period of time, which may include planned revenue, expenses, assets, liabilities and cashflows. A budget provides a focus for the organization, aids the co-ordination of activities and facilitates control whereas control is generally exercised through the comparison of actual costs with a flexible budget".

Growthorpe (2008) in his recent definition of budget defines it as "a quantitative expression of a plan of action prepared for the business as a whole for departments, for functions such as sales and production or for financial resource items such as cash, capital expenditure, manpower purchase, etc. The process of preparing and agreeing budgets is a means of translating the overall objectives of the organization into detailed, feasible plans of action" Welsh (2003) opines that budgeting is the only comprehensive approach to managing so far developed that, if utilized with sophistication and good judgement fully recognizes the dominant role of the manager and provides a framework for implementing such fundamental aspects of scientific management as management by objectives, effective communication, participative management, dynamic control, continuous feedback, responsibility accounting management by exception and management flexibility.


Budgeting, at both management level and operation level looks at the future and lays down what has to be achieved. Control checks whether the plans are being realized and put into effect corrective measures, where deviation or short-fall is occurring (Anthony and Govindarjan, 2003).

Anthony and Govindarjan (2003), emphasized that without effective controls, an enterprise will be at the mercy of internal and external forces who can disrupt its efficiency, and be unaware, such enterprise will not be able to combat such forces. When a budgeting and control system is in use, budgets are established which set out in financial terms, the responsibility of managers in relation to the requirement of the overall policy of the company. Continuous comparison is made between the actual and budgeted results, which is intended to either secure, thorough action of managers, the objectives of policy or to even provide a basis for policy revision.

Hope and Frazer (2003), opines that the budget had grown beyond a financial tool. It is above all managerial tool, in essence, it is the best tool for making sure that key resources, especially performance resource are assigned to priorities and to results.

It is a tool that enables the manager to know when to review and revise plans, either because results are different from expectation or due to environmental, economic conditions, market conditions or technologies change, which no longer correspond to the assumptions of the budget. Hope and Frazer (2003), emphasized that budgets should be used as a tool for planning and control. According to Zimmerman (2006), control involves the making of decisions based on relevant information which leads to plans and actions that improve the utilization of the productive assets and services available to organizations management. Effective control is said to be based on standards with which actual performance can be compared. If there are no standards, then there can be no effective measure of attainment. Hudson and Andrew identified and elaborated on five categories into which standards fall, they are: quantity, quality, time, complaint and value.

Effective control is a key management task which ensures that efforts produced at all levels are commensurate with those required to ensure the long-term future effectiveness and success of the organization (Smith, 2007).

According to Merchant and Van der Stede (2003), budgeting is not a substitute for effective decision making. Most budgets provide only for finances and specify where and how it should be spent, they do not provide for people. People think, perform, have competence, need finances to be sure, however without the people, finance alone is insufficient in arriving at an improved performance of any organization.

In essence managers should also look into human resource budgeting and see how improvement in this results in better performance. In addition to being the managers' planning tool, budgeting is also one of the most effective tool of communication and integration. It shows how each part of the organization relates to the end and needs of the whole. Budgeting therefore requires that the manager in charge of the whole and each person in charge of parts discuss the budget jointly inorder to arrive at better result (Anthony and Govindarjan 2003).

Having reviewed the concepts "Budget" "budgeting" and "control" which are key to this study, stating their purpose and importance, there is need to consider some of the problems that are associated with these concepts, so that organizations who seek to survive in the complex economic environment will be familiar with these likely problems and apply necessary tools in by-passing them so as to experience improvement in the organizations performance.

To remain competitive, companies need to align their budgetary planning and control systems with the overall strategy. The following questions confront all top level managers, as they formulate budgetary plans and allocate capital; which is better for a firm? Investing outrageous amount of capital, or scale back on capital investment? To reduce employment so as to raise the amount of assets at work per employee or elevate employment to meet the demands created by new investments? These questions become more compelling as investors demand that corporations consistently deliver shareholders value regardless of their long-term strategy for deploying human and financial capital. An important factor that distinguishes the winners from the losers in creating shareholder value is the equality in investment decisions, which in turn depends on the soundness of such budgetary planning and control system (Anthony, 1965).

Unfortunately, many organizations make poor investment decisions from investing too little in positive NPV (Net Present Value) projects and much in negative NPV projects, resulting in investment myopia.

Anthony, noted that such distortions can distract companies from what they ought to do, causing them to sink million of dollars in wrong products and ideas. For instance, coca-cola invested in pastes and wine, products for which its rate of return were not only below those of its soft drinks business, but also below its costs of capital. Such errors deplete shareholders value and lead to corporate control contests that results in chief executive officer replacements and hostile takeovers.

Boquist (1998) observed that companies continue to blunder and fail because they have flawed budgetary planning and control systems, which they apparently fail to recognize. Some firms sense weakness of their budgetary analysis but viewed them as individual problems rather than systematic deficiencies. They misdirect efforts and produce greater frustration. As a result, corporate strategy and capital allocation become misaligned and remain so, despite disapproving financial performance. Boquist pointed out some of the drawbacks organizations encounter in the course of implementing budgetary planning and control systems. They include:

Lack of dynamic structure

Present day economic environment demands that organization adapt new and instructure practices. Given the new competitive realities, there is need for management of embrace flexible and adaptable budgetary planning and control system which has the ability to quickly respond to environmental changes and complexities. A good budgetary planning and control system must involve not only an analysis of capital allocation requests when the project is executed, but also an analysis of all the capital needed to generate information such as market research, prior to investing in the project.

Absence of connection between compensation and financial measures

Many companies adopt the NPV criterion in selecting a project but compensate managers based on product earnings or rate of returns. This misaligns their interest with those of shareholders. The reason for misalignment between compensation and budgetary allocation system is that the NPV cannot be used to determine compensation because it (NPV) is a stock/summary measure, based on projected cash flows and not on realized performance. Organisations are expected to adopt flow measures which are computed periodically, either quarterly or yearly as soon as they are realized.

Lack of Integration

Most often, capital budgeting and expense budgeting are distinct processes for instance organizations that do practice capital budgeting make assumptions about future cashflows that are dependent on certain advertising and sales promotion outlays. However, these outlays are typically covered by the expense budget. Boquist noted that even in organizations in which the determination of the expense request is tied at the outset of capital request, the people approving the two requests do not necessarily try to ensure consistency between the two budgets.

Finance function not a strategic partner

Financial analysts doing budgetary planning are often seen as traffic caps than strategic partners. They often get into the budgetary process near the end, merely to rubber-stamp a conclusion that a marketing or manufacturing executive realized earlier. Budgetary planning then becomes a mere exercise, rather than values that produced the desired result, consequently, the quality of information for budgetary planning and control is seriously compromised.

Poorly trained financial professionals

In recent time, training outlays are typically treated as expenses rather than investments (Hope and Frazer, 2003). If the most sophisticated budgetary planning and control system is put in place, absence of the necessary investment in upgrading those involved in budgeting, will only result in expecting to win a battle by sending in people with unfamiliar guns, which all together amount to total failure of such budgeting system (Anthony and Govindarjan 2003).


For an organization to be run smoothly, there must be goals and set objectives, formulation of strategies and policy framework. Management has to ensure that at all levels; systems put in place are observed, monitored, controlled and reviewed. The environment a firm is operating in will be very essential in the decisions that are to be made. Budgetary variances should be carefully examined and solutions thereof to address the outcomes and effects of such encumbrances since it will be evident in the performance of the firm (Callahan and Tammy, 2007).

Tanzania Investment Centre is an agency mandated by the government to facilitate, coordinate, attract and promote investment in the country. In order to achieve the set primary objective of the agency the government requires several operational programs that are supported by and carried by the government and stakeholders such as donors, employees and international agencies like World Bank.

It should be noted that several controls been overlooked, not put in place, weakened or overshadowed at different levels thus leading to over or underestimations in planning and execution of several policies. This has tremendously affected the performance of TIC.

Imperative to note is that budgetary controls are in corroboration with other activities and systems of an organization. With all levels of decision making and operations being key in attainment of the prime mission and vision of the firm , it should therefore be  a clear indicator that while other factors drive organizational performance, Budgetary controls remain significant.


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