BUDGET AND BUDGETARY CONTROL ON PERFORMANCE OF LAPO

         BUDGET AND BUDGETARY CONTROL ON PERFORMANCE OF LAPO

CHAPTER ONE

INTRODUCTION                                             

1.1       Background to the Study

The resources of an organization should be managed effectively and efficiently to achieve its purpose. This implies that the organization should be able to achieve its objectives by minimizing cost. Thus, managing implies coordination and control of the efforts of the organization for achieving organizational objectives. The process of managing is facilitated when management charts its future course of certain objectives in advance, and takes decision in a professional manner, utilizing the individual and group efforts in a coordinated rational manner.

In the business world today, organizations have developed a variety of processes and techniques designed to contribute to the planning and control functions. One of the most important and widely used of these processes is budgeting. Budgeting involves the establishment of predetermined goals, the reporting of actual performance results and evaluation of performance in terms of the predetermined goals. Budgetary control systems are universal and have been considered an essential tool for financial planning. The purpose of budgetary control is to provide a forecast of revenues and expenditures which is achieved through constructing a model of how businesses might perform financially if certain strategies, events and plans are carried out (Churchill, 2001).

Budgets are monetized expressions of target to be accomplished in a given year by an individual, organization or nation. It is a deliberate attempt to achieve superior targets over time with available and expected resources. Such targets are influenced by the experiences of the past and expectation of the future.

The motivations for this study also comes from the work of Herath and Indriani (2007) who investigated on the “role of budgetary control system as a component of the management control system in creating and sustaining competitive advantage” and came with a positive conclusion.

They concluded that budgetary control system plays a leading role in establishing an efficient management control system for creating a sustainable competitive advantage.

Basically, a budget system enables management more effectively to plan, coordinate, control and evaluates its activities. It is a device intended to provide greater effectiveness in achieving organizational efficiency. In any organization where budget is used as a means of profit planning, many alternative plans have to be considered and the most profitable one will be adopted. To be effective, however, the functional aspects must outweigh the dysfunctional aspects. Because where a budget plan exists, decisions are not merely spontaneous reactions to stimuli in an environment of unclassified goals. It is relevant to note that management activities are the driving force behind every organization and of course necessarily unavoidable. A budget systems serve the needs of management in respect of the Judgments and decisions it is fruited to make and to provide a basis for the management functions of planning and control. Developing a budget is a critical step in planning any economic activity. This includes business, governmental agencies and individuals.

Furthermore a budget is an attempt made at the beginning of each financial year to plan the profit and loss account for the year and to aim for a definite statement of financial position. This profit planning must be a well thought-out operational plan with its financial implication expressed as both long and short range profit plans.

         BUDGET AND BUDGETARY CONTROL ON PERFORMANCE OF LAPO