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CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND TO THE STUDY

A budget is designed to express forecast of revenue and expenditures for the ensuring fiscal year, which may correspond to the calendar year with exemption of primitive economics. The budget is the key instrument for the expression and execution of policies, principles, procedures, plans and objectives of management in quantitative and monetary values. Management of an enterprises is efficient if, it is able to accomplish the objectives of the enterprise and it is effective when it accomplishes the objectives with minimum effort.

After planning and setting of designed goals which in essence means making a project in the form of predetermined statement of managerial policy during a given period that provides a standard for comparison with actual results to achieve an organizational objective. There is need to monitor the progress of the company towards these goals. In controlling, managers measure their firm’s performance against established objectives, determine the cause of deviation and take corrective action where necessary. Without budgets, controlling would lack a plan against which to measure performance and as such the companies organizational objectives would not be attained.

Horngren and foster (2015), defined a budget as “a quantitative expression of a plan of action and an aid to co-ordination and implementation”. Also, Warren and fess (1998) defined budgeting as “formal written statement of management plans for the future expressed in financial terms. Almost everyone uses some form of budgeting to handle personal finances, whether it be a written plan for how much to spend on rent, food, clothing, entertainment, travel etc. In order to control this expenditure, they normally set limits on how much they will spend on each item. As they incur the actual expenditure, they make comparison with the budgeted estimate. Both the public and private enterprises use the budget and budgetary control system. The private enterprise, which are profit oriented are aimed among others at maximum profit achievable which forms the core objectives of the financial aim of the enterprises.

An organization must plan in order to decide what line of action to pursue in a future time period and effective ways of bringing it about. Planning is vital to the success of an organization because when formulated, it leads to making critical appraisal of existing condition and gives the business a sense of direction. Thus, we can say that a plan which is prepared to show how resource will be acquired and used over a period of time is known as budgeting. Its use to control activities is known a budgetary control. A budget draws the course of future action; thus it aids management in fulfilling its planning function. Managers set different goals for their business but a common goal for almost every business are a planned profit. To ensure that its goals is attained, a firm must set limits on what is to be spend and what is to be considered acceptable operating performances. The limits are set forth in a master budget ad compared with the actual result as the year progresses. Without budget such find that its cost have exceeded acceptable level. This brings about the budgetary control system.

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