BUDGET AND BUDGETARY CONTROLS AS A TOOL FOR THE EVALUATION OF MANAGEMENT PERFORMANCE (A CASE STUDY OF ANGLOGOLD ASHANTI (GH) LIMITED)
ABSTRACT
The research enquired examined budgets and budgetary controls as a tool for the evaluation of management performance in AngloGold Ashanti Obuasi mine. The objective of the paper was to identify if there is a link between budgetary control and management performance.
A descriptive case study approach was used for the study. Thirteen departmental heads of Anglogold Ashanti Limited were sampled using the purposive sampling technique.
The researcher employed a descriptive study outline for information gathering. From the thirteen departmental heads of Anglogold Ashanti Limited sampled, a carefully designed questionnaire was used to elicit their response as per the subject matter of the study. The data was analysed using the Statistical Package for Social Sciences with descriptive statistics such as frequencies and percentages. A regression analysis model was used to analyse the link between budgetary control and management performance.
The study found that there is a positive relationship between budgetary control and management performance with budgetary control process and challenges in the control systems having the highest influence on management performance among the factors examined. Budgetary control features and human elements in budgetary control also had an influence on management performance but were not as pronounced as the factors in the control process and the challenges in the budgetary control systems. The study recommends that, the management of Anglogold Ashanti Limited must continually review their budget and budgetary control systems in order to ascertain its effectiveness. It also suggests for further research in the same sector but with a larger sample.
TABLE OF CONTENTS
DECLARATION I
CERTIFICATION II
DEDICATION III
ACKNOWLEDGEMENT IV
TABLE OF CONTENTS V
LIST OF TABLES VIII
CHAPTER ONE 1
INTRODUCTION 1
BACKGROUND TO THE STUDY1
PROBLEM STATEMENT4
OBJECTIVES OF THE STUDY5
RESEARCH QUESTIONS6
SCOPE OF THE STUDY6
LIMITATIONS OF THE STUDY7
SIGNIFICANCE OF THE STUDY7
ORGANISATION OF THE STUDY8
CHAPTER TWO 9
LITERATURE REVIEW 9
INTRODUCTION9
THE HISTORY OF BUDGET AND BUDGETARY CONTROL9
THE CONCEPT OF BUDGET11
CHARACTERISTICS OF BUDGET13
BUDGET MANUAL AND ITS OBJECTIVES14
TYPES OF BUDGET15
FIXED BUDGET16
FLEXIBLE BUDGET16
CASH BUDGET16
MASTER BUDGET17
SALES BUDGET17
ROLLING BUDGET18
SHORT TERM BUDGET18
LONG TERM BUDGET18
PREPARATION OF BUDGET19
THE BUDGET CYCLE20
THE BUDGET PERIOD20
PURPOSE OF BUDGET PREPARATION21
BENEFITS OF A BUDGET23
CHALLENGES OF A BUDGET24
BUDGETARY CONTROLS26
THE CONCEPT OF CONTROL26
BUDGETARY CONTROL27
OBJECTIVES OF BUDGETARY CONTROL29
CONDITIONS FOR EFFECTIVE BUDGETARY CONTROL SYSTEM30
THE BUDGET AS A TOOL FOR FINANCIAL PERFORMANCE31
REASONS FOR MEASURING FINANCIAL PERFORMANCE32
CRITERIA FOR MEASURING BUDGET PERFORMANCE33
REVIEW OF RELATED STUDIES35
CHAPTER THREE 39
METHODOLOGY AND ORGANISATIONAL PROFILE 39
INTRODUCTION39
RESEARCH DESIGN39
POPULATION OF THE STUDY40
SAMPLING TECHNIQUES40
SAMPLE SIZE41
DATA SOURCES41
INSTRUMENTS FOR DATA COLLECTION42
RELIABILITY AND LEGITIMACY OF THE INSTRUMENT42
DATA ANALYSIS42
ETHICAL CONSIDERATIONS42
PROFILE OF ANGLOGOLD ASHANTI OBUASI MINE43
CHAPTER FOUR 47
ANALYSIS OF FINDINGS AND DISCUSSION OF FINDINGS 47
INTRODUCTION47
ANALYSIS OF DEMOGRAPHIC DATA47
THE LINK BETWEEN BUDGETARY CONTROLS AND MANAGEMENT PERFORMANCE52
ANALYSIS OF BUDGETARY CONTROL FEATURES IN RELATION TO MANAGEMENT PERFORMANCE52
ANALYSIS OF THE HUMAN ELEMENTS IN BUDGETARY CONTROL IN RELATION TO MANAGEMENT PERFORMANCE54
ANALYSIS OF BUDGETARY CONTROL PROCESS AND CHALLENGES OF BUDGETARY CONTROL SYSTEMS IN RELATION TO MANAGEMENT PERFORMANCE57
ANALYSIS OF THE RATING OF THE BUDGETARY CONTROL FACTORS IN RELATION TO MANAGEMENT PERFORMANCE60
CORRELATION ANALYSIS ON THE RELATIONSHIP BETWEEN BUDGETARY CONTROL AND61
MANAGEMENT PERFORMANCE 61
MANAGEMENT PERFORMANCE TREND IN ANGLOGOLD ASHANTI, OBUASI MINE62
CHAPTER FIVE 65
SUMMARY OF FINDINGS, CONCLUSION & RECOMMENDATIONS 65
INTRODUCTION65
SUMMARY OF FINDINGS65
CONCLUSION67
RECOMMENDATIONS67
DIRECTIONS FOR FUTURE STUDIES68
REFERENCES 69
APPENDICES 75
LIST OF TABLES
Table 1: Gender of Respondents 47
Table 2: Age of Respondents 48
Table 3: Educational Background of Respondents 50
Table 4: Department of Respondents 51
Table 5: Length of service of Respondents 51
Table 6: Respondents‘ Duration in Current Role 61
Table 7: Correlation between Budgetary Control and Management Performance 63
Table 8: Management Performance Indicators of AngloGold Ashanti 68
CHAPTER ONE INTRODUCTION
Background to the Study
The efficiency and effectiveness of the processes of a business relies on the controls accessible to management. There are several activities happening concurrently in all business organisations, for example, production, procurement, distribution, marketing and financing a product. These activities are interrelated in such a manner that they influence the achievement of the business objectives. Thus, management needs to ensure that the scarce resources available to the organisation are equitably distributed in order that none of these activities are put aside.
A budget and budgetary control system serves as one of the means of controlling the scarce resources available to individuals and business entities.
The Chartered Institute of Management Accountants (CIMA, 2004), describes a budget as "a financial and/or quantitative statement, prepared and approved prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective.‖ Drury (1992) cited in Sunkar (2005) stated that, ―a budget provides a course of action over a particular period of time, which aids the operations of the business entity.‖
―Budget serves as a tool for coordinating and assessing the performance of individuals or sections of an organisation and also structure the decision making environment (Bruns and Warehouse, 1975 cited in Kpedor, 2012).‖ Thus, they seem to be a suitable control device affecting the performance of organisations.
For a specific period's financial plan to be helpful, the real results at the end of the period must be juxtaposed with the budget. The base of comparison of the budget to the actual results obtained at the end of that particular period is what is referred to as budgetary control. CIMA (2004) defines budgetary control system as, ―the establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision.‖
―The process of comparing actual results with planned results and reporting on variations is referred to as budgetary control (Lucy, 1989 as cited in Sunkar (2005).‖
According to Wagh and Gadade (2013), ―budget and budgetary control system are the regulatory tools of an organisation‘s operations by instituting benchmarks and objectives regarding income and expenditure, and a constant monitoring and fine-tuning of performance against them.‖ ―Budget and budgetary controls provide information and data of past performance and thus helps in making reasonable comparisons between planned and actual progress. In budgetary control, adjustments sometimes made to current budget or future budgets to bridge any performance gaps that may be present (Kpedor, 2012).‖
―Budget and budgetary controls assist management to make a cautious and rational scrutiny of all current operations so as to justify the need to expand, eliminate, restrict or diversify the current practice Fisher, et al, (2000) cited in Igbinosun and Ohiokha (2012).‖
According to Steven (2002) as cited in Igbinosun and Ohiokha (2012), ―budget and budgetary control involves a particular outline of choices in an organisation which is fit for determining
its targets, purposes or objectives, and how these objectives are accomplished by establishing key policies and plans‖
According to Bierman (2010); and Bonner (2008) as cited in Raghunandan, Ramgulam and Raghunandan-Mohammed (2012), ―the budgeting process includes strategic goals and objective setting, development of revenue, cost, production and cash flow forecasts by setting up the investment and financing strategy. This will aid the finance function in deciding on the choice of investments to be made and the means of financing these investment choices‖.
―Budgeting pulls together choices with respect to capital budgeting, capital structure and working capital (Drake and Fabozzi 2010 cited in Raghunandan et al. 2012).‖
The end result of the procedure is the creation of the formal report referred to as a ―budget‖ (Raghunandan et al. 2012).
Every organisation, notwithstanding its size, sophistication or segment, depends strongly on budgets and budgetary controls to accomplish strategic objectives (Raghunandan et al. 2012).
―The achievement and significance of budgeting relates to the identification of organisational goals, sharing of responsibilities regarding achieving these goals, and hence its execution (Shah, 2007); Robinson 2007; Drake and Fabozzi 2010 cited in Raghunandan et al., 2012).‖ According to Raghunandan et al. (2012), one of the most successful and useful management accounting techniques, budget and budgetary control, if properly understood and implemented can yield good results for organisations. Budget and budgetary control is a management role that encourages individuals to plan and formally accomplish their plans quantitatively.
Thus, it is an essential instrument that management uses to co-ordinate an organisation‘s numerous activities.
Spending plan preparation is seen as a serious component of management (Otley&Pollanen, 2000 and Otley, 2003 as cited in Kpedor, 2012). As budget and budgetary control give the requisite benchmarks against which performance could be measured, the budget can therefore be used to assess the performance of the organisation.
It is therefore against this background that this study seeks to study budget and budgetary control as a tool for the evaluation of management performance.
Problem Statement
Budgets are very essential to judiciously manage limited financial resources and equally serve as a medium of approval, regulation and assessment of expenditure. Income generating establishments; consider budgets and budgetary controls as significant components in their strategy development. Budget can therefore shape the direction of firms and thus make firms successful or fail. The failure or success of an organization hinges generally on budget preparation and powerful budgetary controls.
The absence of or weak budgets and budgetary controls in most organisations characterized by managerial, financial, administrative and production constraints has led to failure of these organisations recently (Bradstreet, 2004).
It is of no doubt that one of the key performance indicators of every entity is budget and budgetary control system.
Budgeting provides a suitable benchmark for measuring performance that motivates managers and employees. According to Horngren, (2003) cited in Onduso, (2013), ―budgets provide valuable data for managers to assess firm performance and inform financial allocation strategies across various components of a firm.‖
Budgets, therefore, encourage employees to contribute their best in the business which is also geared towards the achievement of the goals of the organisation.
Thus, the budget of every business organisation is the instrument of making decision, the pivot around which all decision on any venture is derived.
Realising how sensitive and the significant a budget is to every business entity, it is therefore incumbent on management of organisations to get accurate budget information that presents the real state of affairs; as the performance of management could be measured on the basis of the budget and budget control systems.
There are however lots of empirical literature that assess the performance of firms using budget and budgetary control systems as tools for the evaluation of performance. However, though the mining industry across the world also plays significant roles in the economy of countries that engage in mining, there has been scanty literature assessing how budget and budgetary control can be used as tools to evaluate the performance of management.
It is therefore on the basis of the problem above that this study seeks to assess how budget and budgetary control system can be used as a tool for the evaluation of management performance in Anglogold Ashanti.
Objectives of the Study
The general aim of the research is to ascertain how budgets and budgetary controls can be utilised as a tool for the evaluation of management performance.
The specific objectives are:
i. To ascertain the linkage between budgetary control and management
performance in Anglogold Ashanti‘s Obuasi Mine.
ii. To ascertain the challenges related with budgets and budgetary control in Anglogold Ashanti‘s Obuasi Mine.
iii. To identify ways to improve the performance of management of Anglogold Ashanti‘s Obuasi Mine through budgetary control measures.
Research Questions
The following questions conducted the study:
i. What relationship exists between budgetary control and the Obuasi Mine‘s management performance?
ii. What are the challenges related with budgets and budgetary controls in the Obuasi Mine?
iii. How can the Mine‘s management performance be enhanced by the use of budgetary control measures?
Scope of the study
The study shall concentrate on the Obuasi Mine of AngloGold Ashanti in Obuasi; in the Ashanti Region of Ghana. The research covers the budgeting processes and budgetary controls of the Obuasi Mine and how it can effectively be used to evaluate managerial performance. Within the extent of this study, the findings could not be generalised to other mining companies be it in Ghana or other parts of the world.
Limitations of the Study
The constraints of the researcher in carrying out this research were as follows:
The time used to carry out the study was limited. As a full time worker, the time was loaded with tight work schedules to be met and other academic activities. The interview responses from the management staff were also a bit slow due to the sensitive nature if the topic. Thus, the respondents feared breaching their confidentiality oath.
Only department heads relevant to the objectives of the study have been covered.
The identity and responses of the respondents will not be available due to privacy concerns.
Sampling size is too small, thus a study with different sample size or on different geographic location may present different results.
Significance of the study
This research will add immensely to research and policy.
For research, this study will serve as the foundational stone upon which further studies on the subject matter of this study in the mining industry would be built.
The study will serve as a guide for budgeting and budgetary control to the management of Anglogold Ashanti, Obuasi Mine in imminent monetary decision. It will also assist as a stimulus in the development of institutional policy framework on prudent financial management, which is relevant for survival in the turbulence (tumbling gold prices) being experienced in the Gold Mining Industry.
Organisation of the Study
The study has been grouped under five chapters. Chapter one introduced the context to the study and defined the exact problems addressed in the study, as well as importance of the study.
Chapter two presents a review of literature and applicable research related to the problem addressed in this study.
Chapter three presents the methodology and procedures used for data collection and analysis as well as the design components.
It also presents the profile of the organisation under study, Anglogold Ashanti (Ghana) limited, Obuasi Mine.
Chapter four comprises an analysis of the findings and discussion of the findings.
Chapter five presents a summary and discussion of the research findings, propositions for practice and recommendations for further studies on the topic.
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