The Effectiveness of a Management Accounting Technique

Introduction

Accounting as a body of knowledge does not have a single definition. Various authors have come up with different definitions which reflect the period in the evolutionary stages of accounting thoughts during which the definitions were made. According to Bill R. J. Accounting is concerned with the qualification of economic events in monetary terms in order to collect, record, evaluate and communicate past events and to aid in decision-making.

The American Association of Accounting in 1996 defined accounting as the process of identifying, measuring and communicating economic information to permit informed judgement and decision by users of the information. In a similar vein, Management accounting has been subjecting of different definitions. One of such is given by T. Lucey who defines it as the application of professional knowledge and skills in the preparation and presentation of accounting information in order to assist management in the formulation of policies and in planning and control.

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Management accounting is concerned with the provision of information to people saddled with the responsibility of managing the affairs of an organisation in order to assist them to make better and informed decisions and control which eventually culminates in improved efficiency and effectiveness of the overall business affairs. That has always been the focus of Management Accounting. In recent times, Management Accounting is wearing a changed nature. This is seen in the recent developments witnessed in different organisations due to the fact that organisations are making customer satisfaction an overriding priority.

Others are adopting new management approaches, changing their manufacturing system into a modern system. To this end, in the last 40 years, the world of manufacturing environments have experienced dramatic changes which were as a result of automation at every stage in the manufacturing processes which has changed the typical pattern of cost structures and the ways in which efficiency is achieved. It is worth of note too that increasingly; products are highly customised and tailored to individual customers’ requirements.

Many manufacturing concerns have moved from the era of mass production into the era of flexible production to customer specification. The Ernst & Young and Institute of Management Accountant Survey identifies various management accounting techniques, both traditional and modern which have been contributing immensely to the efficient running of organisations whether large, medium or small organisations. Those tools include Budgeting and Budgetary Controls, Break-even analysis, Target costing, Benchmarking, value-based management, Value chain analysis and so forth.

This research will focus on Budgeting and Budgetary Control due to their wide application in businesses regardless of their size. The increasing complexity of business operations and the ever-changing conditions of the business environment such as the economic, social, technological political development as well as Government policies, make it increasingly difficult for a company to consistently earn profit that would constitute a fair return on the capital invested. There is thus the need to employ modern management tools to improve managers’ efficiency in order to guarantee a steady return on capital invested.

Decision-making and management accounting information

Decision-making is a purposeful selection from among a set of alternatives in the light of a given objective. Decision-making is not a separate function of management; in fact decision-making is intertwined with other functions such as planning, coordinating and controlling. Chiefly among all these functions is planning which is described as the foremost and most basic of all management functions and the skill with which it is performed determines to a large extent the success of all operations of an organisation.

In planning, managers outline the steps to be taken in moving the organisation towards its objectives. The decision-making aspect of the management function, however, ensures that best alternative is selected to achieve the objectives. Budgeting plays a vital role in planning and that has a direct bearing on the strategies to be adopted in an organisation.

The concept of budgeting and budgetary controls

A budget is a plan of action, normally expressed in financial terms. It provides a benchmark against which actual performance can be measured and therefore aids control of the organisation.

In the CIMA terminology, a Budget is defined as “ a plan quantified in monetary terms, prepare and approved prior to a defined period 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”. Some common types of budget in wide use in various organisations include Fixed Budget, Flexible Budget, Rolling /Continuous Budget and Zero Based Budget.

The budgetary control systems

The budgetary control system usually consists of two distinct elements, which are planning and control. Planning involves the setting of various budgets for the appropriate future periods using a suitable budgeting approach. Usually, management at various levels in the organisation is involved in this budgetary planning stage for their individual area of responsibility. The control stage on the other hand involves the comparison of the plan in the form of budgets with the actual results achieved for the appropriate period. Any significant divergent or variation between the budgeted and the actual results should be reported to the appropriate management so as to initiate necessary actions.

Benefits of budgeting and budgetary controls

Among other benefits, budgeting if effective in an organisation will help to achieve the following:

• It compels planning: Management of an organisation is/are forced to look ahead into the future. Budgeting also gives the organisation a sense of purpose and direction.
• It encourages coordination of activities: It coordinates the various separate aspects of the business by providing a master plan for the business as a whole. Though it is impossible to anticipate all decisions, the budget can provide a framework of reference within which later operating decisions can be taken.
• Authorising and delegating: The adoption of budgets by management explicitly authorises the decisions made within them.

This invariably serves two functions:

• The responsibility to make decisions is delegated to individual managers within the organisation.
• The need continuously to ask for top management ratification of decisions will be reduced to the nearest minimum.
• Budgeting assists in evaluating performance: One of the functions of accounting information is that it provides the basis for the measurement of managerial performance.
• By setting targets for each manager to achieve, the budget provides a benchmark against which his actual performance can be measured objectively. Before using the budget for this purpose, however, it must be accepted as reasonable by the individual budget holder whose area of responsibility it covers and whose performance is to be evaluated.
• Discerning trends: Early detection of budgeting also enables unexpected trends because it gives specific expectations with which actual performance is continuously compared.
• Communicating and motivating: Budgeting when applied in an organisation should lead to a good communication structure. Managers involved in the setting of budgets for their own areas of responsibility need to have agreed strategies and policies communicated to them. Similarly, budgets that have been agreed upon by managers should provide some motivation towards their achievement.
• Control: One important benefit of budgeting in an organisation is that it helps to control business affairs. When the goal has been set for an organisation, the management uses the budgetary system to control the running of the business to evaluate the extent to which those goals are achieved. By a continuous comparison of actual performance with planned results deviations or variances are quickly identified and appropriate action initiated.

The behavioural aspect of budgeting

Much has been said and written about the benefits to be derived from a budgetary control system. However, despite the sophistication of most management accounting control techniques they have met with little success. Numerous types of research have been conducted to unravel what is responsible for the low success rate and what can be done to remedy the situation.

The reasons for the low level of success in practice have been attributed to the lack of cooperative attitude of the operating managers to the control techniques. This usually manifests at both the planning stage and implementation stage.

Aim and objective of the report

The aim of this research work is to critically assess the effectiveness of Budgeting as one of the numerous management accounting techniques being utilised in Guinness Nigeria Plc in relation to the achievement of overall organisational objectives.

The research will be focussing on the extent to which Budgeting cuts across the organisation as a whole and it will examine the behavioural aspect of budgeting among budget holders in the organisation. Is budgeting having a direct impact on the financial and economic decisions being made by budget holders? Is budgeting in GN Plc effective in communicating the overall business goals to the managers as well as the employees of the organisation? Is budgeting as a traditional technique being utilised in GN Plc effective in giving Authorisations to the budget holder in terms of spending decisions?

Is it effective in motivating Managers to make decisions that will have a beneficial effect on the organisation as a whole? Is budgeting effective in ensuring adequate control of business affairs?

Reason for choosing the topic

The topic: An analysis of the effectiveness of a management accounting technique in an organisational setting; was chosen out of a burning desire to learn more about an aspect of accounting that has always been seen as core to the accountancy profession. Though there has been development in the area of budgeting and budgetary control techniques, which is the focus of this report.

Budgeting has generally been seen as a traditional management accounting technique. Interestingly, despite this description and some beyond budgeting models being developed lately by some scholars, budgeting is still in the widest use in all organisations even in government corporations. Hence its effectiveness in an organisational setting has remained important to the researcher.

Introducing Guinness Nigeria plc

Guinness Nigeria Plc is a blue-chip multinational company that occupies an enviable leading position in the Brewery sector here in Nigeria.

The Company is a subsidiary of Diageo a global Company, trading in over 180 markets around the world. Diageo is listed on both the London Stock Exchange (DGE) and the New York Stock Exchange (DEO). Due to its relationship with Diageo, Guinness Nigeria maintains a centralised reporting structure and that has facilitated the easy rendition of monthly Accounting reports to the parent company in the UK. Guinness Nigeria is one of the renowned names in the beer market in Nigeria and is a member of the Food, Beverage and Tobacco Industries.

The company came into Nigeria as early as the 19th century; trade had grown sufficiently by the 1950s to support a trading company to handle sales and Distribution. The company’s main business is the production and distribution of alcoholic and non-alcoholic beverages, which are Foreign Extra Stout, Harp Lager, Malta Guinness, Satzenbrau, Gordon Spark and the newly introduced Guinness Extra Smooth. In 1962, Ikeja Lagos was chosen as the site of the first Guinness Brewery outside Ireland and Great Britain. His Excellency, Late Hon. Dr.

Nnamdi Azikiwe, commissioned the Lagos Brewery the following year the then Gov. General and later President of Nigeria. Steady growth and market for Guinness products over the next 30 years prompted the building of three more breweries in Nigeria, which are in Ogba in Lagos, Oregbemi Estate in Benin and Osisama in Aba. The Accounting system in Guinness Nigeria has been the type that facilitates easy adoption and application of Budgeting throughout the organisation. The company uses software called the Sun System and the Vision to assist in business operations as a world-class manufacturing company.

Information gathering

This section is designed to show the process that has been used to gather information in this research. It will answer the fundamental question of how the study will be analysed in the scope of the research work.

The population of the study and sample size

The population is the universe of some groups of people or objects in which the researcher is interested. This research work concentrates on Guinness Nigeria Plc as a case study in order to assess the effectiveness of budgeting in the organisation.

Therefore the population of the study is Guinness Nigeria. Meanwhile, the sample size to be used basically will be some heads of functions that are also budget holders; some top management persons as well as middle and lower-level managers who are involved with the application of budgeting in the organisation. These are considered to be representative of the population.

Method of data collection

For the purpose of the research and analysis project, two data collection methods were employed. These are primary research and secondary research.

Primary Research Primary data were obtained through structured personal Interviews of some key employees in Guinness Nigeria Plc, Head of Functions who are also budget holders. The questionnaire was also used to elicit information from both decision enablers and the decision-makers within the Organisation. The data so gathered via this means was invaluable and it forms the basis of data analysis and presentation. Secondary Research Two different methods were used in this regard namely, Library research and Electronic research.

Library Research: This has been carried out using some facilities like the Public Library, ACCA study text as well as the Student Accountant magazine. This book review assisted in giving background knowledge as per the main focus of the research, which is budgeting. Other relevant data were obtained through the company’s internal materials such as the G-News, Management reports and the current annual report.

Electronic Research: Business-related worldwide web sites were visited to have a clue as to what the effectiveness of budgeting in an organisation entails. Search engines such as Google was greatly used.

Techniques of data analysis

The aim of this research is to assess the effectiveness of budgeting in GN Plc as an organisation. For these reason data gathered with the aid of the questionnaire will be analysed using a simple percentage given as A% =a/nX100 Where a = Number of response to one option of items in the questionnaire. n = Total number of responses to an item A%= The percentage of responses to the option to the total responses to the item.

The Chi-square statistical method will also be adopted in the analysis of the research questions

The method adopted in gathering information

Basically, personal Interview was used to elicit information from a number of Budget holders within the organisation. Decision-makers and enablers were also interviewed to assess the extent at which the decision of the responsible individuals within the organisation relates to the budget of every function within the organisation. Questionnaire was also utilised so as to be able to adequately analyse the information so gathered via the personal one on one interview.

A questionnaire containing 15 structured questions was circulated via the mail to the respondents who are apparently top management personnel in the organisation and the questionnaire was received a week latter.

Data presentation and analysis

What was identified and observed in the study are here presented in clear terms using descriptive and explanatory tables and figures. Simple percentages and graphics will be used to analyse some questions, especially those requesting for personal or demographic data or information.

The chi-square statistical method will be applied in analysing the research questions which will be restated in the form of hypothetical statements in order to find out whether or not the study has actually achieved its objectives mentioned in chapter one and to what extent are those objectives achieved.

Method of data presentation

The questionnaire collected were properly edited and coded. Tables charts and percentages are used to analyse the background information of respondents as provided in the first section of the questionnaire.

Primarily the hypotheses formulated were tested using the chi-square method of data analysis. The Chi-square method is a non-parametric statistical technique, which do not make rigid assumptions about the distribution of the population parameters and adopt procedures that are not generally concerned with the population parameters, hence they are also called the distribution free statistic. The decision rule states the condition under which the null hypothesis H0 or the alternative hypothesis H1 should be accepted or rejected.

Where the calculated values exceed the table value (at a given significance level) null hypothesis is rejected, otherwise the alternative hypothesis is accepted. Mathematically Chi- Square is given as: ?(0? E)2 E Where X2=Chi-Square value calculated ? = Summation O=Observation E= Expected frequency at 5% SL or 95% CL Chi-square is also applicable where there are two sets of variable expressed in frequencies. It is however limited by its inability to give estimates of mean; hence it can not provide confidence interval.

Reserch hypothesis

Based on the aforementioned aims of the study and research questions mentioned above the following research hypothesis are formulated. Hypothesis I: HO: That budgeting and budgetary controls are not effective in ensuring the achievement of organisation objectives. Q 6& Q 8 HI: Budgeting and budgetary controls are very effective in ensuring that organisation objectives are achieved. Hypothesis II HO: That budgeting is not effective in ensuring adequate control of business affairs Q 10 HI: That budgeting is very effective in ensuring adequate control of business affairs.

Hypothesis III HO: Budgeting fails to give authorisation to budget holders when making decisions relating already agreed budget. HI: That budgeting gives authorisation to budget holders to make decisions provided that has been agreed in the budget.

Summary, findings, conclusion & recommendation

The thrust of this study is to assess the effectiveness of budgeting and budgetary controls in Guinness Nigeria Plc. Budgeting though often described as a traditional management accounting technique has been in wide use in organisations regardless of its size.

The report has focused on the effectiveness of budgeting and budgetary controls as a management accounting technique being applied throughout Guinness Nigeria Plc. It began with a brief description of accounting and management accounting. Review of various write-ups on the topic was carried out to establish what an effective budgeting and budgetary control system is like. The literature reviewed highlights some benefits which management hope to achieve from the adoption of good budgeting and budgetary control system, it also shows the behavioural aspect of budgeting, indicating that if not carefully applied Budgeting can lead to dysfunctional behaviour. In general, the opinion of various scholars on budgeting and budgetary control is that it plays a vital role in the management of any business.

Thus having evaluated the activities of Guinness Nigeria Plc with respect to budgeting and budgetary controls system the major findings from the research are as follows:

1. The Zero based budgeting method proposed first by Peter A. Phyrr of Texas has been adopted in Guinness for all areas of activities evidently because of the benefits associated with that approach to budgeting. The adoption of Zero based budgeting method in Guinness Nigeria was as a result of the need to improve the challenge around cost since cost management has been seen as a key contributor towards achieving strategic objectives and goals in GN Plc.
2. To avoid dysfunctional behaviour often associated with budgeting and budgetary control systems. Guinness Nigeria Plc has adopted a participatory approach when establishing budget for each of the department in the organisation. Budget holders with help of accountants in the organisation are actively involved in the preparation of budget for individual manager’s area of responsibility.
3. The information system in GNPLC has been the type that facilitates easy application of budgeting and budgetary control across the business. Budget holders are periodically made aware of their positions in relation to the agreed budget in monthly basis. A report is usually generated at the end of every month comparing the actual activity level with the budget. This enable budget holder to better manage their budget holder to better manage their budgets at the same explanation is sought.
4. There is the business Risk department in Guinness Nigeria Plc. This department handles the change aspect of budgeting and budgetary control for the organisation as a whole. Uncertainty in planning is adequately taken care of by this department

Conclusion

This study has shown that budgeting and budgetary controls have being effective management accounting technique being applied in Guinness Nigeria Plc. With the help of some statistical models used in the analysis of the hypothetical statements formulated (Chi-square).

The report has shown that budgeting and budgetary control is effective means of ensuring adequate control of business affairs. However budget has to be realistic if it is to motivate budget holders and discourage dysfunctional behaviour. The research has also shown that budgeting is effective in giving authorisation to budget holders when making decisions that has been agreed upon in the budget.

Recommendations

While it can be said that budgeting and budgetary control is effective in Guinness Nigeria Plc when what the management hope to achieve with it is considered, some are of the opinion that budgeting is not very effective due to the fact that some budget holders constantly overrun their budgets and without sanctions.

It is therefore recommended that agreed budgets, which are realistic, should serve the purpose of good performance measure for budget holders. Excellent budget management should be applauded and inadequacies given due consideration. The organisation need to be wary of some adverse impact that too heavy a reliance on agreed budget can have on management behaviour which can be dysfunctional with regard to the objectives of the organisation as a whole. It is recommended that some beyond budgeting models identified by some scholars such as Hope and Fraser should be considered and the possibility of their adoption examined. It is also important that budget holders receive enlightenment from time to time on how to better manage their budgets.

There must be a continuos revision of budgets, written statement of authorities and responsibility. There is need to effectively harmonise budget plans with the various other management accounting techniques for optimum result since budget and budgetary controls are only a means to an end and not an end in its own. It is also important that management seek for ways to match authorisation that effective budgeting hope to achieve with approval. Finally, for a budget plan to be fully realised, its conceptualisation, preparation and implementation must be anchored on objectivity and sincerity of purpose without which the whole process of budgeting and budgetary controls will become a game of chance.

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