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EXAMINING THE RELATIONSHIP BETWEEN BUDGETING AND
PROFITABILITY IN SUGAR FACTORIES IN KENYA
A CASE STUDY OF MUMIAS SUGAR COMPANYLIMITED.
BY
REV. KITERE WILSON AGGREY OGAMA
REG.No. MBA199401521DF
A RESEARCH THESIS SUBMITTED TO THE SCHOOL OF POST-GRADUATE
STUDIES RESEARCH AND EVALUATION CENTRE IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE
AWARD OF THE DEGREE OF MASTERS IN BUSINESS
ADMINISTRATION (FINANCE AND ACCOUNTING)
OF KAMPALA INTERNATIONAL UNIVERSITY.
SEPTEMBER 2007
I~ POSTGRADUATE t~\
~ LIBRARY ~J
DECLARATION< UBRARy
/* DATE:
I hereby declare that this work is a result of my own effort and has ne~e4 been
submitted for an award in any other university or institution of higher learning. ‘~“ ~
Signed __________________________________
Rev. Kitere Wilson Aggrey Ogama
Date ____ ~ (~~7
APPROVAL
This work has been done under’my supervision as a university supervisor, and
submitted with my approval.
Signed______________________
Supervisor
Date____________
W ~-\-~
DEDICATION ~ POSTGRADUATE ~~ LIBRARy ~?~2.* DATE:.._....
This book is dedicated to my father, David Masinde, my mother Norah~~nb~~*
(though deceased) for the condition they made in pursuit of my education.
May the Almighty God bless them.
Also dedicated to my wife Juliana Nafoyo Kitere for the financial and spiritual
support and my beloved friends, Timothy Wekesa Karandini,
Christabel.W.Karandinj, the Christian community of Kenya Assemblies of God
and Mabanga church who have been supportive throughout the study outside my
mother country.
Thank you.
Acknowledgement
The researcher wishes to acknowledge and show recognition to all those
individuals and the management of Kampala International University for making it
possible for him to carry out this study and complete it successfully.
First and foremost, to my supervisor Dr. Isaac Kayonga for being actively involved
in positive criticism, encouragement and guidance throughout the study. This
made the researcher more confident and encouraged to accomplish the study
with high morale.
Furthermore, I wish to appreciate the contribution rendered by his colleagues at
Kampala International University in terms of financial and material support and
advice. May the Lord reward them abundantly.
I further pay tribute to the respondents of Mumias Sugar Company limited and
the members of the community for being very cooperative and giving honest
answers to the researcher that facilitated the successful completion of the
research.
Last but not least, I wish to thank lecturers, Dr. Nyaboga Benjamin and Dr. John
Opio for their encouragement and support during this hard struggle to achieve
success in his studies.
Rev. Kitere Wilson Aggrey Ogama
September 2007
Table of Contents
CHAPTER ONE: INTRODUCTION
1.0 Introduction i
1.1 Background i
1.2 Statement of the problem 3
1.3 Purpose of the study 4
1.4 Objectives of the study 4
1.5 Research questions 5
1.6 Hypothesis 5
1.7 Scope of the study 5
1.8 Significance of the study 5
1.9 Theoretical Framework 7
CHAPTER TWO: REVIEW OF LITERATURE
2.0 Introduction 10
2.1 The meaning of budgeting at MSC Ltd 10
2.2 The Advantages of budgeting and profitability in MSC Ltd 13
2.3 The administration of budgeting process and profitability in
MSC Ltd 16
2.4 Master budget preparation and profitability in MSC Ltd 20
2.5 Profit 30
CHAPTER THREE: METHODOLOGY
3.1 Introduction 32
3.2 Research design 32
3.3 Study Population 32
3.4 Sampling Design 33
3.5 Study area 34
3.6 Data collection instruments 35
3.7 Data collection procedures 35
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3.8 Data Processing and analysis .36
3.9 Validityof the research...j 36
3.10 Data Presentation 36
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS & INTERPRETATION
4.0 Introduction 38
CHAPTER FIVE: DISCUSSIONS, CONCLUSIONS & RECOMMENDATIONS
5.0 Introduction 70
5.1 Discussions of findings 70
5.2 Conclusions 73
5.3 Recommendations 74
5.4 Areas of future research 77
References 78
Appendix
I
List of tables“~ L8R1~~~
Table 1.1 ............... Showing the number of respondents selected from MS~ bt4F.
—.Table 1.2 Respondents’ knowledge about relationship betwe~9flOfl ‘~ ~
budgeting and profitability at MSC Ltd.
Table 1.3 Respondents’ knowledge about advantages of budgeting atMSC Ltd.
Table 1.4 Respondents’ understanding whether MSC Ltd administersbudgeting and profitability.
Table 1.5 Respondents’ response concerning their participation inbudgeting at MSC Ltd.
Table 1.6 Respondents’ understanding whether MSC Ltd has abudget committee, budget directors, budget manual.
Table 1.7 Respondents’ understanding whether MSC Ltd has abudget period.
Table 1.8 Respondents’ understanding of a master budget.
Table 1.9 Respondents’ understanding of MSC Ltd preparation ofsales budget.
Table 1.10 Respondents’ understanding of MSC Ltd preparation ofproduction budget.Table 1.11 Respondents’ understanding of MSC Ltd preparation ofdirect labour budget.
Table 1.12 Respondents’ understanding of preparation of cost of salesbudget at MSC Ltd.
Table 1.13 Respondents’ understanding of MSC Ltd preparation ofending inventory budget.
Table 1.14 Respondents’ understanding of preparation of manufacturingbudget at MSC Ltd.
Table 1.15 Respondents’ understanding of MSC Ltd preparation of costof goods sold budget.
Table 1.16 Respondents’ understanding of MSC Ltd preparation ofmarketing and administrative expenses budget.
VII
Table 1.17 showing MSC Ltd preparation of budgeted income statement.
Table 1.18 showing MSC Ltd preparation of cash budget
Table 1.19 Respondents’ understanding of MSC Ltd preparation ofbudgeted balance sheet.
Table 1.20 Respondents’ understanding whether budgeting enablesMSC Ltd earn profits.
Table 1.21 showing whether MSC Ltd has been• reporting profitsbetween 2002-2006.Table 1.22 showing budgeted and actual earnings before interest andtaxes at MSC Ltd between 2002-2006.
Table 1.23 respondents’ response pointing to zero base method,preparation of budget in June and qualified staff.
Table 1.24 Respondents’ response pointing to full participation ofbudgeters, CEO’s sales and departmental needs idea.
Table 1.25 respondents’ response pointing to lack of adequate time,poor administration and shortage of manpower.
Table 1.26 respondents’ response pointing to lack of standard rates,unimplementation of budgets and CEO’s interference.
Table 1.27 respondents’ response about improvement of MSC Ltdbudgeting system pointing to allocation of more time, recruitment of more staffand change of budget period.
Table 1.28 respondents’ response pointing toadoption of standard costing, participation of farmers and hire of external staff.
viii
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r~4(IUList of Figures ~~~OSTGF?ADuATE~
~Figures / -~
Fig 1.1 showing master budget
Fig 1.2 showing planning inflows and outflows of an enterprise
Fig 1.3 showing respondents’ knowledge about meaning of budgeting atMSC Ltd.
Fig 1.4 showing respondents knowledge about advantages of budgeting.
Fig 1.5 showing respondents’ understanding concerning administration ofbudgeting.
Fig 1.6 showing respondents’ understanding whether MSC Ltd has budgetcommittees, budget directors, budget manual.
Fig 1.7 showing respondents understanding whether MSC Ltd has abudget period.
Fig 1.8 showing respondents’ understanding of a master budget.
Fig 1.9 showing respondents’ understanding of MSC Ltd preparation ofproduction budget.
Fig 1.10 showing respondents’ understanding of direct material budget atMSC Ltd.
Fig 1.11 showing respondents’ understanding of direct labour budget.
Fig 1.12 showing respondents’ understanding of preparation of cost ofsales budget at MSC Ltd.
Fig 1.13 showing respondents’ understanding of preparation of marketingand administrative expenses budget at MSC Ltd.
Fig 1.14 showing respondents’ understanding of preparation of budgetedincome statement at MSC Ltd.
Fig 1.15 showing respondents’ understanding of MSC Ltd preparation ofcost budget.
Fig 1.16 showing respondents’ understanding of MSC Ltd preparation of abalance sheet.
Fig 1.17 showing respondents’ understanding whether budgeting enablesMSC Ltd to earn profits.
Fig 1.18 showing respondents’ understanding whether MSC Ltd has beenreporting profits between 2002-2006.
Fig 1.19 showing budgeted and actual earnings of MSC Ltd before interestand taxes between 2002-2006.
Fig 1.20 showing respondents’ response pointing to budgeters’ fullparticipation, CEO’s idea and departmental heads idea about preparation ofbudgets.
Fig 1.21 showing respondents’ response pointing to lack of adequate time,poor administration and shortage of manpower for preparation of budgets atMSC Ltd.
Fig 1.22 showing respondents’ response pointing to allocation of time,recruitment of more staff and change period for preparation of budgets at MSCLtd.
Fig 1.23 showing pointing to adoption of standard costing, participation offarmers and hire of external staff for preparation of budgets at MSC Ltd.
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Acronyms!Abbreviations
1. CSR — Corporate Social Responsibility
2. MSC — Mumias Sugar Company
3. LTD — Limited
4. KSB — Kenya Sugar Board
5. W.W.F — World Wide Fund
6. CEO — Chief Executive Officer•
7. KRA — Kenya Revenue Authority
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CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
Budgeting in the 21st century is considered a pilgrimage to corporate
image, vision and mission. It is a tool that ignites management toward
overall goal of profit sustainability and a pivot on which other factors revolt.
Horngren and Foster (1997), state that budgeting is becoming increasingly
important, growing in prominence in the operations of both profit seeking
and non-profit seeking organizations. Because of perpetual changing
technology and management information systems globally, academicians,
strategists and stakeholders are being challenged to consider budgeting
as a contemporary factor on which other organizational factors cluster.
On the basis of this, there is great need to undertake a comprehensive
study of Mumias Sugar Company Limited (MSC ltd) budgeting strategies
and to examine how this helps management in p~ofit sustainability. The
thrust of this study is to examine whether budgeting paradigm is
appropriate to MSC Ltd and whether there is a positive linkage between
budgeting and profitability in the organization. Affirmatively, it is significant
to understand the theoretical framework of budgeting and worth still to
validate this with profitability at MSC Ltd.
Wangara (2006) states that MSC Ltd is the largest sugar factory in Kenya
and produces 65% of the locally consumed sugar. It has the most
competitive remuneration package among all sugar factories within the
Republic of Kenya. It falls under group “B” according t~the ranking of
factories in the industrial sector. MSC ltd is the key of Kenya as far as
production of sugar for local consumption and export purposes are
concerned.
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MSC Ltd has won several awards. It earned awards as best company iV~ ~~jp~TE~\
environmental management and marketing in 2006. The CEO, Dr. Evan~ LiBR1’~ _.1)
Kidero was declared CEO of the year during the same period. In 2005~~ ~ • /
MSC ltd earned best management awards performance and was ranked n~
most respected company in East Africa in Agricultural services
management. During the same period it acquired ISO 91001/ 2000
enabling it to sell its products anywhere in the world. In 2004 MSC ltd was
ranked the best company in corporate governance in the country. In 2002
MSC ltd earned the best award in human resource management. The
organization is outstanding in the provision of corporate social
responsibility (CRS) in the country through support of education,
construction of roads, support of Agriculture and sports and games.
During the periods stated above (2002 — 2006), the company had a lot of
retrenchments. This was attributed to adverse weather conditions,
importation of cheap sugar, dysfunctional management, and poor
budgeting, particularly 2003 which was the exit of the management of the
white CEO. In the same year the profitability of the company went into
negativity and Profit recovery was realized in 2004 — 2006, the period
during which MSC ltd reported the highest profits since its inauguration in
1973. This profitability was attributed to the entry of an African CEO who
was vision driven and mission oriented.
MSC Ltd is a subsidiary of BOOKER TATE international company based
in the United Kingdom. It is situated in western Kenya and it is about 53
km from Busia boarder toward the eastern direction from Busia town of
Kenya.
Oringe (2006) states that MSC Ltd has a vision, mission, and values.
VISION: To be a leading Kenyan manufacturing company that
efficiently and profitably prqduces and markets sugar and related products
to world class standards.
MISSION: To satisfy customer needs for sugar and other products
through efficient and innovative production and marketing practices while
meeting the diverse expectations of all stakeholders.
VALUES:
> To consistently offer quality products and services to customers, being a
customer driven company.
> To encourage team work and positive contribution from motivated and
innovative work force.
> To contact business with employees, customers and other stakeholders in
an honest, fair and caring manner.
> To have an equal opportunity employer guided by international labour
organization conventions.
> To practice fair competition.
> To at all times observe good corporate governance.
> To uphold excellence in performance as the basis of employee rewards.
~> To be caring and supportive to the local community.
> To embrace internationally accepted health, safety and environmental
practices in operations.
1.2 PROBLEM STATEMENT
There was no proper budgeting in relation to profitability at MSC Ltd
between 2002-2006 as pointed out by employees within the organization.
This scenario seems to adversely affect profitability, which is evidenced by
the employees’ outcry owing to rampant retrenchment schemes that have
seen so many workers out of the company between 2002-2006. Being
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part of the MSC Ltd stakeholders, no definite explanation has b~~n give W
to them as contributing ~o this anomaly. Whereas those ~ ~RADUATEIBRARY —
retrenched are given their terminal benefits, the remaining emplo~e~A~e\ * ..flflflS........ *
living in fear and unaware of their fate. Some employees attrib~~this“~
situation to poor profitability due to poor budgeting, while some feel botn
profitability and budgeting are in place but the move is particularly tribal
and aimed at clearing a specific species.
Although there are five other sugar factories in Kenya that have a similar
problem, the researcher chose MSC Ltd in particular because it is the
largest sugar factory in the country and produces 65% of Kenya’s locally
consumed sugar. This study looked at budgeting and how this influences
profitability at MSC Ltd. The comprehensive study of MSC will be
representative of all other sugar factories in Kenya. MSC Ltd is also the
focal point of the government of Kenya and a backbone of Kenya Sugar
Board Authority. The problems manifested with poor budgeting seemed to
be declining in profitability which resulted in employee retrenchment to
reduce costs in order to increase profitability at.MSC Ltd. This and other
related factors have precipitated the study.
1.3 PURPOSE OF THE STUDY
The purpose of the study was to examine the relationship between
Budgeting and profitability among sugar factories in Kenya so as to reveal
its advantages and exhibit management and maintenance of a master
budget in order to create effectiveness and efficiency by correcting
negative deviations that were anticipated.
1.4.0 OBJECTIVES
1. To establish the meaning of budgeting in relation to profitability at
MSC Ltd.
To examine the advantages of budgeting in relation to profitability
at MSC Ltd.
To examine the administration of the budgeting process and
profitability in MSC Ltd.
To determine whether MSC Ltd prepares a master budget to
increase profitability.
1.5.0 RESEARCH QUESTIONS
• What is the meaning of budgeting in relation to profitability at MSC
Ltd?
What are the advantages of budgeting at MSC Ltd?
• Does MSC Ltd administer a budgeting process and profitability?
• Does MSC Ltd prepare a master budget to increase profitability?
1.6.0 HYPOTHESIS
There is strong relationship between Budgeting and profitability among
sugar factories in Kenya.
1.7.0 SCOPE OF THE STUDY
The study focuses on examining the relationship between budget planning
and profitability at MSC Ltd. MSC Ltd is situated 53 km on the eastern
direction of Busia town —Kenya. The research is limited to 5 years. It is to
examine the budgeting phenomenon of MSC Ltd between 2002-2006.
This is the period during which retrenchments were rampant at MSC Ltd
pointing to poor profitability as a result of poor budgeting.
1.8.0 SIGNIFICANCE OF THE STUDY
The study was urgent and critical in examining the budget planning
process and assessing profitability of MSC LTD.
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It was widely believed by staff and the community around MS~.1td th~!!~ POSTGRADUATEthe company was not progressing well; it was needed that wó\~stab1L~RARY ~5why this trend was so, and devise ways and means of making it~
The findings of the study may be of benefit to a number of stakeholders in
Kenya:
Sugar factories in Kenya may evaluate their profitability in light of
budgeting paradigm3 improving their efficiency and productivity in their
business.
Investors may be able to ascertain the profitability of sugar factories
through budgeting in order to make wise and proper investment decisions
thereby realizing profits through assessing profitability of entrepreneurial
activities.
Kenya Sugar Board Authority (KSB) may be able to provide necessary
professional advice not only to MSC Ltd but also to all other sugar
factories in Kenya plus revenue authorities, particularly, Kenya Revenue
Authority (KRA)
Future researchers shall use the findings of this study as future references
as they carryout their studies on budgeting for profitability at MSC Ltd and
other manufacturing concerns in Kenya and outside.
Future researchers shall use the study in widening the scope and faculty
of knowledge on performance improvement of factories in production of
sugar and other products.
MSC LTD would use this study to improve profitability through budgeting
and make necessary adjustment in resource mobilization, allocation and
utilization so as to increase productivity.
The organization of MSC LTD stood to lose all the above benefits if the
study did not take place; there would be poor planning, losses as a result
of poor budgeting, hasty decision making and limited information on the
topic that was investigated. It was, therefore, urgent and critical that the
study be conducted, it was also feasible in terms of financial and material
resources that were at his disposal.
1.9.0 THEORETICAL FRAMEWORK
This study is based on the planning and control theory of Fayol as
advanced by Welsch et. a! (2001). This theory states that the future
destiny of the enterprise can be manipulated; hence it can be planned and
controlled by management. The concept of comprehensive profit planning
and control rests firmly upon the planning and control theory; that is, the
primary success factor in an enterprise is the competence of management
to plan and control enterprise activities. Management earns its bread and
butter only if it can plan and control in ways that determine the long-range
destiny of the enterprise.
The foundation of profit planning and control, then, is that management
must have confidence in its ability to establish a realistic objective and to
devise efficient strategies to attain those objectives. Management can plan
and control the long-range destiny of the enterprise by making a
continuing stream of well-conceived decisions.
Gomez et. a! (2002), state that planning is a process that helps
management set objectives for the future and map out activities and
means that will make it possible to achieve those objectives. The purpose
of the elements of planning is to provide a blueprint for management
action.
\V’
I ‘(‘\I.
In the words of Griffin (2002), strategic plans are the plans de~~*~Liachieve strategic goals. More precisely, a strategic plan is a g&ieral p~1~4i?y ~
* °A1Eoutlining decisions of resource allocation, priorities, and acti~j, st~f5~
4-,necessary to reach strategic goals. These plans are set by the bo~Ift~~
directors and top management; generally have an extended time horizon
and address questions of scope, resource deployment, competitive
advantage, and synergy.
Figure 1-1
Planning inflows and oufflows of an enterprise
Managerial Manipulation of:
Source: Welsch et al (2001).
INVESTMENT
1~RETURN ON INVESTMENT
In this theoretical framework, (budgeting, planning and control) are the
independent variable, while profit is the dependent variable. This depicts that
under proper planning and control MSC Ltd is likely to achieve it’s overall goal of
profitability. Extraneous variable is investment which depends on the profitability
level of an organization.
4r
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CHAPTER T~O (~P0sTGRADuATE~
i~ LIBR~~yLITERATURE REVIEW *ATE:
2.0 INTRODUCTION
This chapter looks at the meaning of budgeting at MSC Ltd, advantages of
budgeting at MSC Ltd, administration of budgeting, master budget
preparation and profit. Information is presented as per research questions.
2.1 The meaning of Budgeting at MSC LTD
According to Pandey (1998), a budget is a comprehensive and
coordinated plan, expressed in financial terms, for the operations and
resources of an enterprise for some specific period in the future. It is a
plan of management’s intentions of attaining specified objectives. A
budget is a mechanism to plan for the firms operations or activities. The
two aspects of every operation are; revenues and expenditures. The
budget must plan for and quantify revenues and expenses related to a
specific operation. Planning should not only be done for revenues and
expenses, but the resources necessary to carryout operations should also
be planned. The planning of the resources will include planning for assets
and sources of funds.
He further states that a budget is the planning of the firm’s expectations in
the future. Planning involves the control and manipulation of relevant
variables —controllable and non-controllable, and reduces the impact of
uncertainty, It makes management active to influence~the environment in
the interest of the enterprise. A budget expresses the plan in formal terms
and helps to realize the firm’s expectations. It is a comprehensive plan in
the sense that all activities and operations are considered when it is
prepared. It is a budget for the enterprise as a whole. Budgets are indeed
prepared for various segments of the enterprise, but they are a component
10
of the total budget or the master budget. The comprehensive or master
budget is prepared after coordinating budgets for various segments of the
enterprise. If budgets for various segments of the enterprise are not
prepared jointly and in harmony with each other, the master budget will
loose much of its importance and may even prove to be harmful in
realizing the firm’s expectations.
He continues to maintain that for operational purposes, a budget is always
quantified in financial terms. Initially the budget may be developed in
terms of varieties of quantities, but finally they may be expressed in the
money unit. For example, purchase and production budgets will involve
units of raw materials and finished goods respectively, the labour hours
and the sales budget will involve territories and customers to be served.
But a coordinated and comprehensive budget can be developed only
when all these budgets are expressed in some common denominator; the
money unit undoubtedly serves as the common denominator.
He further emphasizes that time dimension must be added to a budget. A
budget is meaningful only when it is related to a specified period of time;
the budget estimates will be relevant only for some specific period. For
example, a production target of 1,000,000 units or a profit target of
$5,000,000 has no meaning unless it is stated in concrete terms. But to
achieve these qualitative expectations of the firm, the short-term
objectives or goals, expressed in quantitative terms must be related to the
time period within which they have to be achieved.
Garrison and Noreen (2002), state that a budget is a detailed plan
outlining the acquisition and use of financial and other resources over
some given period. It represents a plan for the future expressed in formal
quantitative terms.
,4~’ dL ~They further state that a budget is a detailed plan for the acquI~ J~4~ADuATE ~
use of financial and other resources over specified period. It ~sen~~f~*R’I’DATEplan for the future expressed in formal quantitative terms.Oi.
‘2Ofr~fl y~’
Williamson (2002), asserts that budget and budgetary control are a set of
knowledge and skills from which we can derive significant benefit no
matter whether we are the largest organization in the world or the poorest
individual. The act of budgeting imbues us with a sense àf discipline that
we cannot gain from anywhere else. The budget system is a feed forward
in that by using it we attempt to anticipate what we will do, what is going to
happen during the budget period. A budget is a statement setting out the
monetary or numerical aspects of an organization’s plans for the coming
year.
According to Khan and Jam (2001), budgets are an important tool of profit
planning. Budgets as a tool of planning, is closely related to the broader
system of planning in an organization. Planning involves the specification
of the basic fundamental policies that will guide it. A budget is a
comprehensive and coordinated plan expressed in financial terms, for the
operations and resources of an enterprise for some specific period in the
future.
Owler and Brown (1999), state that a budget is a plan quantified in
monetary terms, prepared and approved prior to definite 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.
According to Hilton et al (2003), a budget is a detailed plan, expressed in
quantitative terms, that specifies how an organization will acquire and use
resources during a particular period of time.
12
2.2 The advantages of budgeting and profitability at MSC Ltd
According to Pandey (1998), budgeting is a management tool; it is a way
of managing. Budgeting is a feed-forward process; it makes an evaluation
of the variables likely to affect future operations of the enterprise. It
predicts the future with reasonable precision and removes uncertainty to a
greater extent. Budgeting facilitates control by providing definite
expectations in the planning phase that can be used as a frame of
reference for judging the subsequent performance. Undoubtedly,
budgeted performance is a more relevant standard for comparison than
past performance, since past performance is based on historical factors,
which are constantly changing.
He also maintains that budgeting improves the quality of communication.
The enterprise objectives, budget goals, plans, authority and responsibility
and procedures to implement plans are clearly written and communicated
through budgets to all individuals in the enterprise. This results in better
understanding and harmonious relations among managers and
subordinates.
He further affirms that budgeting helps to optimize the use of the firm’s
resources —capital and human; it aids in directing the total efforts of the
firm into the most profitable channels.
Similarly, he states that budgeting develops an atmosphere of profit
mindedness and cost consciousness. Budgeting leads to cost control and
increases profitability in an organization. It is an important tool for profit
planning in an organization. It thus implies that an organization without
proper budgeting strategy is like a ship on the sea without a captain.
Anytime the ship may sink with all the cargo aboard and in the twinkling of
an eye everything may go underground.
According to Homgren and Foster (1997), planning
watchword for business managers an.d for every individual
often, “executives practice management by crisis”. E
interfere with planning. Operations drift along until the
catches the firms or individuals in undesirable situations that should have
been anticipated and avoided. Budgets compel managers to look ahead
and be ready for changing conditions. This forced planning is the greatest
contribution of budgeting to management.
They further assert that, budgeting is an integral part of strategy and
tactics. Strategy is a broad form that usually means selection of overall
objectives. Tactics are general means for attaining strategic goals.
Similarly they argue that strategy analysis may include consideration of
such questions as the following;
1. What are the overall goals or objectives of the organization?
2. What trends will affect our markets? How are we affected by the
economy, the industry and our competitors?
3. What are the best ways to invest in our research design,
production, distribution, marketing, and administrative activities?
4. What forms of organizational structure serve us best?
5. What fundamental financial structure is desirable?
6. What are the risks of alternative strategies, and what are our
contingency plans if our preferred pans fail?
Affirmatively they maintain that budgeting is a basis for judging actual
results, budgeted performance is generally a better criteria than past
performance. Budgeting involves coordination which is the meshing and
balancing of all factors and all of the departments and functions so that the
company can meet organizational objectives. Coordination implies, for
example, that purchasing officers integrate their plans with production
requirements and that production officers use sales budget as a basis for
__ \j:~S~R~DUATE~’
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planning personnel needs and machinery use. Top managers want
systems designed so that the self-interests of all managers do not conflict
with the interests of the organization.
Arguably they state that budgets help management to coordinate in
several ways;
1. The existence of a well-laid plan is the major step toward achieving
coordination. Executives are forced to think of the relationship
among individual operations and the company as a whole.
2. Budgets help to restrain the empire-building efforts of executives.
Budgets broaden a manager’s thinking to include more than just his
or her department and remove bias —conscious or unconscious in
favour or his or her departments.
3. Budgets help to search out weaknesses in the organizational
structure. The formulation and administration of budgets identify
problems in communication in fixing responsibility and in working
relationships.
They further continue to maintain there ground by stressing that budgets
help managers but budgets need help. That is, top management must
understand and enthusiastically support the budget and all aspects of the
control system and that administration of budgets should not be rigid.
Changing conditions call for changes in plans. The budget must receive
respect, but it should not prevent a manager from taking prudent action. A
department’s need may commit to the budget, but matters might develop
so that some special repairs or a special advertising outlay would best
serve the interests of the firm. That managers should feel free to request
permission for outlays or the budget itself should provide enough flexibility
to permit reasonable discretion in deciding how best to get the job done.
Hilton et. al (2003), state that for any organization to be effective, each
manager throughout the organization must be aware ofiFiè plans made by
//~~ .1other managers. The budgeting process pulls together the~
manager in an organization. Budgeting is thus a vehicle thrc~jgh ~ ~ARYDATE “i
communication is channeled throughout the organizatT~n. An
organization’s resources are limited, and budgets provide one
allocate resources among competing uses.
They further confirm that a budget is a plan, and plans are subject to
change. Nevertheless, a budget serves as a useful benchmark with which
actual results can be compared.
Saleem (2001), states that budgeting increases the morale and thus, the
productivity of the employees by seeking their meaningful participation in
the formulation of plans and policies, bringing a harmony between
individual goals and the enterprise objectives more effectively.
According to Owler and Brown (1999), budgeting permits to focus
management attention on significant matters through budgetary reports;
thus, it facilitates management by exception and thereby saves
management time and energy considerably. Management is enabled to
direct much attention on weak and or non performing areas.
2.3 The Administration of budgeting process and profitability at MSC Ltd
Pandey (1998), states that budget preparation is a line function while the
organization and administration of budgeting is a staff function. The line
executives have the responsibility of deciding what the plans (budgets) are
to be. It is not the function of the staff organization to decide what the
plans are to be for areas of responsibility other than its own. The primary
responsibility of the staff organization is to assist line executives in
preparing budgets by providing data and technical advice and coordinating
the budgets of various departments.
He- also affirms that a joint effort of all managers is needed to prepare
budgets. All should participate in setting goals, developing plans and
formulating policies. Generally, the administration of budgeting may be
delegated to a budget committee. The member of a budget committee
consists of executive from each department. Frequently members from
production, sales, and finance are included in the budget committee. The
budget director is the overall in-charge of the budget committee. The
overall director may be the controller or the chief accountant or an
independent person. Sometimes the membership of the budgets
committee may be confined to the budget director, the financial manager,
the managing director and the economist. Special budget committee may
also be formed —such as a production —budget committee or sales budget
committee.
He further outlines the major functions of the budget committee as
outlined below;
1. To provide general guidelines for preparing budgets.
2. To offer technical advice
3. To receive and coordinate individual budgets
4. To suggest changes
5. To reconcile divergent views
6. To coordinate budgetary activities
7. To approve budgets with or without revisions
8. To scrutinize budget reports later on.
He also states that a budget committee in fact, is a management
committee. It brings together activities of all departments in a coordinated
way and controls those activities in an effective manner.
Similarly he states that the overall responsibility of the budget committee
lies on the budget director or the budget officer. He is responsible of
drawing up a detailed timetable for the preparation of budgets and making
necessary adjustments and calculations to consolidate individual budgets
into a maser budget. The budget director is usually the controller or the
LIBRARy ~:* DATE.
/~V ~ c
chief accountant. He should be unbiased and objective in his
He is a staff expert, who provides technical assistance to fi’e Iirt~BR1~~~
executives. He should keep good rapport with his managers and
not enforce his advice upon them.
Affirmatively he maintains that it is usually desirable to express objectives,
goals, procedures, organizational structure and authority and responsibility
in writing. These matters are explicitly set out in a budget manual. The
budget manual is a written set of instructions and pertinent information
that serves as a rulebook and a reference for the implementation of a
budget programme. It tells what to do, how to do it, when to do it and
which form to do it on.
In a similar strand, he clarifies that time dimension must be added to a
budget. A budget is meaningful only when it is related to a specific period
of time; the budget estimates will be relevant only for some specific period.
A typical budget spans over a period of one year, which may be
subdivided into quarterly or sometimes monthly budgets.
Garrison and Noreen (2002), state that a standing budget committee will
usually be responsible for overall policy matters relating to the budget
program and for coordinating the preparation of the budget itself. This
committee generally consists of the president; vice presidents in charge of
various functions such as sales; production and purchasing and the
controller. Difficulties and disputes between segments of the organization
in matters relating to the budget are resolved by the budgets committee. In
addition, the budget committee approves the final budget and receives
periodic report on the progress of the company in attaining budgeted
goals.
They further state that operating budgets are ordinarily set to cover a one
year period. The one-year period should correspond to the company’s
18
fiscal year so that the budget figures can be compared with the actual
results. This approach has the advantage of requiring periodic review and
reappraisal of budget data throughout the year. This approach keeps the
managers focused on the future at least one year ahead.
They continue to affirm that operating budgets are ordinarily set to cover a
one-year period. The one-year period should correspond to the company’s
fiscal year so that the budget figures can be compared with the actual
results. Many companies divide their budget period into four quarters. The
first quarter is then subdivided into months, and monthly budget figures
established. The last three quarters are carried in the budget at quarterly
totals only. As the year progresses, the figures for the second quarter are
broken down into monthly amounts, then the third quarter figures are
broken down and so forth. This approach has the advantage of requiring a
constant review and reappraisal of budget data. He also states that
continuous or perpetual budgets are becoming very popular. A continuous
or perpetual budget is one that covers a 12-month period but which is
constantly adding a new month on the end as the current month is
completed. This approach to budgeting is superior to other approaches in
that it keeps management thinking and planning a full 12-months ahead.
Thus, it stabilizes the planning horizon.
According to Hilton et. a! (2003), a budget committee, consisting of key
senior executives often is appointed to advise the budget director during
the preparation of the budget. The authority to give final approval to the
master budget usually belongs to the Board of Directors, or The Board of
Trustees in many non-profit organizations. Usually a board has a
subcommittee whose task is to examine the proposed budget carefully
and recommend approval or any changes deemed necessary. By
exercising its authority to make changes in the budget and grant final
approach, the Board of Directors or the Board of Tru~.~es can wield
considerable influence on the overall direction the organization takes.
19
.~\~‘•‘“•
They further explain that larger organizations usually designate~a bud’ ~jdirector or chief budget officer who specifies the process by ~hf~ .Ii~4tDUATE~1
data are gathered, collects information, and prepares the mastéj j~get.
They continue to state that to communicate budget proced L~’
deadlines to employees through the organization, the budget director
develops and disseminates a budget manual. The budget manual
indicates who is responsible for providing various types, of information,
when the information is required, and what form of information is to take.
For example, the budget manual for a large manufacturing firm might
specify that each regional sales director is to send an estimate of the
following years sales, by product manual also states who should receive
each schedule when the master budget is complete.
2.4 Master budget preparation and profitability at MSC Ltd.
Pandey (1998), clarifies that a comprehensive budgeting involves the
preparation of a master budget with a complete package of the component
budgets. The three important components of the master budget include:
operating budgets, financial budgets, and capital budgets.
According to Garrison and Noreen (2002), the master budget is a network
consisting of many separate budgets that are independent.
Edmonds et at (2000), state that the master budget consists of a series of
detailed schedules and budgets that describe the company’s overall
financial plans for the accounting period. The three major budget
categories are; operating budgets, capital budgets and financial statement
budgets. The budgeting process normally begins with the preparation of
the operating budgets. Preparation of the master budget begins with the
sales forecast. The detailed budgets for inventory purchases and
operating expenses are developed on the basis of projected sales.
20
Information contained in the operating budgets is used to prepare the
financial statement budgets. Again, the number of financial statement
budgets also called proforma statements, depend on the nature and
needs of the budget entity.
They continue to maintain that the budgeting process normally begins with
the preparation of the operation budgets. An operating budget is prepared
by individual sections within a company and becomes part of thecompany’s master budget.
According to Hilton et al (2003), a master budget or profit plan is acomprehensive set of budgets covering all phases of an organization’s
operations for a specified period of time.
Horngren and Foster (1997), state that the preparation of the master
budget is fundamentally nothing more than the preparation of familiar
financial statements. Preparation of a master budget involves preparing
necessary schedules, namely; sales budget, production budget, direct
material budget, direct labor budget, factory overhead budget, ending
inventory budget, cost-Of-goods sold budget, and marketing and
administrative expense budget; budgeted income statement, the cash
budget, and budgeted balance sheet.
21 ~
If ~~posTG0~~~ ~\~ LIBR2..4. ~
Figure 1-2 Master budget
,: ~ -
~POSTG RADUAT~ LIBRARY
DATE:.................
OPERATIONALBUDGET
FiNANCIALBUDGET
Source: Horngren and Foster (1997).
Administrative IExpense Budge~J
Budgeted IncomeStatement
22
2.4.1 Sales budget
Hilton et a! (2003), state that the starting point for any master budget is a
sales revenue budget based on forecasted sales of goods or services.
Sales forecasting is the process of predicting sales of services and goods.
Sales forecasting depends on factors such as, past sales and trends,
general economic trends, economic trends in the company, other factors
expected to affect sales in the industry, political and legal events, the
intended pricing policy of the company, planned advertising and product
promotion, new products contemplated by the company or other firms,
expected actions of competitors and market research studies.
According to Edmonds et a! (2000), the preparation of the master budget
begins with the sales forecast. The accuracy of the sales forecast is
critical because it acts as the data source for all of the other budgets. If the
sales figures are unreliable, the entire budgeting process is a waste.
Affirmatively Garrison and Noreen (2000), state that the sales budget is
the starting point in preparing the master budget. The sales budget isconstructed by multiplying the budgeted sales in units by the selling price.
2.4.2 Production BudgetsGarrison qnd Noreen (2002), state that the production budget is prepared
after the sales budget. The production budget lists the number of units that
must be produced during each budget period to meet sales needs and to
provide for the desired ending inventory. Production needs can be
determined as follows;
Budgeted sales in units xxxx
Add desired ending inventory xxxx
Total needs XXXX
Less beginning inventory xxxx
Required production xxxx
23
UBRP’~ •
;~. ü~tE ••••~~•~•
Pandey (1998), affirms that production budget is prepared after
budget. It is based on sales forecasts to prepare the production’~
the sales forecasts for each product are combined with ir
the beginning level and the expected level of ending inventories of
finished products. The units of budgeted products may be calculated as
follows;
Budgeted Production Units = Sales Estimate + Expected Ending
Inventory - Beginning inventory
Hilton ef a! (2003), maintain that production budget shows the number of
services or goods that are to be produced during a budget period.
Production budget is ascertained by the following formula;
Sales in units + Desired inventory of finished goods = Total units required:
Total units required — Expected beginning inventory of finished goods =
Units to be produced.
2.4.3 Direct Material Budget
Hilton et al (2003), state that direct material budget shows the number of
units and the cost of material to be purchased and used during a budget
period. It is calculated by the following formula;
Raw material required for production + Desired ending inventory or
raw material = Total material required; Total material required —
expected beginning inventory of raw material Raw material to be
purchased.
Edmonds et al (2000), assert that meeting the sales demand requires
having enough inventory to cover expected sales and future sales
between recorder points. Accordingly, the total amount of inventory
needed for each month equals the amount of budgeted sales plus the
desired ending inventory. The total amount of inventory needed can be
24
*
obtained from two sources. First, the company can use existing stock. In
other words, customer demand can be satisfied with goods needed and
the beginning inventory is the amount of goods to be purchased.
Accordingly, the purchases budget follows a logical format that is
summarized here below;
Cost of budgeted sales xxxx
Plus: Desired ending inventory xxxx
Inventory needed xxxx
Loss: Beginning inventory xxxx
Amount to purchase xxxx
Affirmatively Garrison and Noreen (2002), state that the direct materials
budget details the raw materials that must be purchased to fulfill the
production budget and to provide for adequate inventories. The required
purchases of raw materials are computed as follows;
Raw materials needed to meet the production schedule xxxx
Add desired ending inventory of raw materials xxxx
Total raw materials needs xxxx
Less beginning inventory xxxx
Raw materials to be purchased xxxx
According to Pandey (1998), after having prepared the production budget,
the materials usage and the purchasing budget can be easily constructed.
The material usage depends upon the level of production and levels of
beginning inventory and desired ending inventories. The units to be
purchased can be determined as follows;
Purchases (units) = budgeted usage + Desired inventory(Material) — Beginning inventory (material)
25
r ,~
2.4.4 Direct Labour Budget - LPOSTGRADUATE~/ LIBRARY ~
Pandey (1998), states that a direct labour schedule can also be Ø~epaneti.............. ~j/from data given in the production budget. The direct labour hour~~
spent depend on the units to be produced and the labour hours required
per unit of production.
According to Garrison and Noreen (2002), the direct labour budget is also
developed from the production budget. Direct labour requirements must
be computed so that the company will know whether sufficient labour time
is available to meet production needs. By knowing in advance just what
will be needed in the way of labour time throughout the budget year, the
company can develop plans to adjust the labour force as the situation may
require. Firms that neglect to budget run the risk of having to hire and
layoff at awkward times. To compute direct labour requirements, the
number of units of finished product to be produced each period (month,
quarter, and so on) is multiplied by the number of direct labour hours
required to produce a single unit. Many different types of labour may be
involved. If so, then computations should be by type of labour needed.
Hilton et. a! (2003), affirm that the direct labour budget shows the number
of hours and the cost of the direct labour to be used during a budget
period.
2.4.5 Manufacturing —Overhead budget
Hilton et a! (2003), state that the manufacturing overhead budget shows
the cost of overhead expected to be incurred in the production process
during the budget period.
26
Affirmatively, Garrison and Noreen (2000), agree that the manufacturing
overhead budget provides a schedule of all costs of production including
direct materials and direct labour.
2.4.6 Ending Finished Goods Inventory Budget
Garrison and Noreen (2002), state that the carrying cost of unsold units is
computed on the ending finished goods inventory budget.
Williams et a! (2002), maintain that in a merchandising company, inventory
consists of all goods owned and held for sale to customers. Inventory is
expected to be converted into cash within the company’s operating cycle.
In the balance sheet, inventory is listed immediately after accounts
receivables, because it is just one step farther removed from conversion
into cash than customer receivables.
2.4.7 Cost-of-goods-sold Budget
Hilton et a! (2003), state that the budgeted schedule of cost of goods
manufactured and sold details the direct material, direct labour, and
manufacturing overhead costs to be incurred and shows the cost of goods
to be sold during a budget period.
2.4.8 Marketing and Administrative expense budget
According to Garrison and Noreen (2002), the selling and administrative
expense budget lists the budgeted expenses for areas other than
manufacturing. In large organizations, this budget would be a completion
of many smaller, individual budgets submitted by department heads and
other persons responsible for selling and administrative expenses. For
example, the marketing manager in a large organization would submit a
budget detailing the advertising expenses for each budget period.
27 /~,/~- ___
~POSTGRADUATELIBRARY
~ DATE .._,__...
IThey affirm that the selling and administrative expense budget~
list of anticipated expenses for the budget period that will be ir~urre~I~~” .~)areas other than manufacturing. The budget will be made up ~f
smaller, individual budgets submitted by various persons h~In~0 ~
responsibility for cost control in selling and administrative matters, If the
number of expense items is very large, separate budgets may be needed
for the selling and administrative functions.
2.4.9 Budgeted Income Statement
Garrison and Noreen (2002), state that a budgeted income statement can
be prepared from the data developed from sales-marketing and
administrative expense budget. The budgeted income statement is one of
the key schedules in the budgeted process. It is the document that tells
how profitable operations are anticipated to be in the forthcoming period.
After it has been developed, it stands a benchmark against which
subsequent company performance can be measured.
According to Hilton et. a! (2003), the budgeted income statement shows
the expected revenue and expenses for a budget period, assuming that
planned operations are carried out.
Edmonds et. a! (2000), affirm that the budgeted income statement
provides insights into the new stores expected profitability. If expected
profitability is unsatisfactory, management may decide to abandon the
project or to alter planned activity.
2.4.10 The Cash Budget
Garrison and Noreen (2002), affirm that a cash iudget pulls together
much of the data developed in the previous steps. The cash budget is
composed of; receipt section, the disbursement section, the cash excess
or deficiency section, and the financing section. The cash excess or
deficiency section is computed as follows;
28
Cash balance, beginning xxxx
Add receipts xxxx
Total cash available before financing xxxx
Less disbursements xxxx
Excess (deficiency) of cash available
Over Disbursements XXJO(
Hilton et. a! (2003), similarly confirm that the cash budget details
the expected cash receipts and disbursements during a budget
period.
Higgins (2004), states that a cash budget is a list of all anticipated
receipts and disbursements of cash over the forecast period. It can
be thought of as a detailed cash flow forecast in which all traces of
accrual accounting have been eliminated.
2.4.11 The Budgeted Balance Sheet
Garrison and Noreen (2002), state that the budgeted balance sheet
is developed by beginning with the current balance sheet adjusting
it for the data contained in the other budgets.
According to Hilton et a! (2003), the budgeted balance sheet shows
the expected end-of-period balances for the company’s assets,
liabilities, and owners equity, assuming that planned operations are
carried out.
Balance sheet Dec. 31, 20x = Expected changes in accountbalance during 20 x I
= Balance sheet Dec. 31, 12 xl
29
2.5 Profit
According to Crystal and Lipsy (1997), a firm’s profits are the
between the revenue it receives from selling its outputs and its’
producing that output. Firms seek profits by producing and
products. The materials and factor services used in the production
process are called inputs and the productions that emerge are called
outputs.
The main objective of a business is to maximize its profits. The conditions
for profit maximization are practiced and implementable in a wide range of
different business situations. Basically, for profit to be at a maximum, there
has to be equality incremental costs and incremental revenues, (equality
of marginal costs and marginal revenues) which is achievable through
budgeting.
Saleem (2001), states that profit is the difference between selling price
and cost of production.
Khan and Jam (2001), state that budgets are an important tool of profit
planning, are closely related to the broader system of planning in an
organization. Planning involves the specification of the basic objectives
that the organization will pursue and fundamental policies that will guide it.
According to Garrison and Noreen (2002), a budget is a step taken by
business organizations to achieve their desired levels of profits. This
process is generally called planning. Profit planning is accomplished
through the preparation of a number of budgets, which when brought
together, form an integrated business plan known as the master budget.
The master budget is an essential management tool that communicates
management’s plans throughout the organization, allocates resources,
and coordinates activities.
30
Edmonds et a! (2000), state that planning is critical to the operations of a
profitable business. The area of planning that is associated with financial
matters is commonly called budgeting; which involves coordinating the
finances of all areas of the business. The planning or budgeting area of an
organization is responsible for the profits an organization makes or
achieves.
Wangara (2007), editor of Natural Sweetness, the in-house Journal of
Mumias Sugar Company, profits out that the profitability of an organization
is interwoven in a proper budgeting planning. The expectations of an
organization during a given financial period are set out and quantified in
financial terms in a planning format called budgeting. The relationship
between budgeting and profitability is so strong and intertwined in nature
that one cannot exist without the other. Organizations that anticipate
profitability must have a sound budgeting staff.
Otieno (2007), Chief Executive Officer of Kenya Sugar Board Authority
and Member of Editorial committee of Sukari Yetu, a quarterly journal for
the Kenya Sugar industry, states that budgeting is a critical path to an
organization’s profitability. Organizations that do not achieve profitability
are those whose budgeting environment exhibits a lot of weakness and
where top officials consider budgeting a management preserve. The
potentiality of an organization to achieve profitability lies primarily in a goal
budgeting planning and management should therefore coordinate all
activities thereby allowing all stakeholders take a participative role in the
planning process of an enterprise.
~
~ LIBRARY .1~?
* DATE... *
~
11
JCHAPTER THREE /
/ ~METHODOLOGY ~
DATE:—‘p
3.0 INTRODUCTION ~l~f) ~
This chapter discusses the methodology used in the study. It expounds on
research design, study population, sampling design, study area, data
collection instruments, data collection procedures, data processing and
analysis, validity of the research and limitations of the study.
The task of collecting data commenced after getting a letter of introduction
from the director of postgraduate school, research and evaluation centre
of Kampala International University on 12/0112007. On deciding the types
of methods to be used in data collection, the researcher used both primary
and secondary data collection methods.
The choice of respondents was based on understanding is a vital tool for
profit sustainability. More importantly the involvement of all stakeholders is
pivotal for the achievement of the objectives and goals of MSC Ltd.
3.2 RESEARCH DESIGN
This study employed descriptive survey method to examine therelationship between budgeting planning and profitability at MSC Ltd. This
design was considered because of its ease to collect original data from the
population. This design was used by selecting a representative sample
from all the departments at MSC Ltd that included departmental head line
managers, superintendents, supervisors and general staff.
3.3 STUDY POPULATION
MSC Ltd has 1949 regular employees. 100 questionnaires were prepared
and administered to 100 employees that included heads of departments,
32
line managers, superintendents, supervisors and general staff to examine
the relationship between budgeting, planning and profitability at MSC Ltd.
3.4 SAMPLING DESIGNRespondents were selected from each stratum within the organization at
senior, middle and lower levels to constitute a sample.
Stratified random sampling was used to select the respondents that
included; heads of departments, line managers, superintendents,
supervisors and general staff, all totaling to one hundred (100)
The decision to have a sample size of 100 respondents out of 1949
employees of MSC Ltd was reached after due consultation with the
management and Kenya Sugar Board Authority (KSB). Both authorities
agreed on a common number of 100 people from which data would be
collected for in-depth study concerning the relationship between budgeting
and profitability. They desired 100 people to be a representative sample of
the whole population of the company staff and results obtained to berepresentative of all other sugar factories in Kenya. The sample size of
100 respondents had been used by other researchers in other field of
study at MSC Ltd and gave positive results. The sample size of 100 is also
in who recommend that either 53 or 10% of the target population can beselected for in depth study.
MSC Ltd has 15 departmental heads, 40 line managers, 85superintendents, 120 supervisors and 1689 general staff. Webi, (2006).
These categories formed a basis for each stratum which the researcher
included in the study.
According to Amin (2004) the formula for ascertaining the stratified sample
size is given as ~ = f;N
33
L
Where:
n = desired sample size
k = population of the stratum (~‘posTGRATE ~
N = total population of the study DATE• *1”*
f = sampling fraction (fraction of the desired sample size) ~ )lflnfl.v~.
For example, if the desire population is 150 and population of a given
stratum and target population are 6 and 1500 respectively•
Then f150x6 zI1500
The researcher used this formula to calculate the stratified sample size of
every stratum as shown in the table below.
Tablel :1: Category and number of respondents selected from MSC Ltd
staff
rSIN Category No. of Respondents ILi Departmental Heads I
Line Managers 2
~ SuperintendentS 4
F~ SupervisOrs 6Junior Staff 87
TOTAL 100
3.5 STUDY AREA
The study was carried out on examining the relationship between
budgeting and profitability at Mumias Sugar Factory Kenya, an area that
did not attract researchers to deal with the challenges there, because of its
outward reputation of excellence in sugar production, yet there was the
need to critically look at its budget visa avis profits and advise the
company on future improvements.
34
3.6 DATA COLLECTION INSTRUMENTS
The researcher used both primary and secondary data in this study. Theprimary data collection instruments that were used in this study were
mainly research questionnaires. The researcher presented them to
various respondents at MSC Ltd to be filled and returned to him. The
sample population comprised of 100 respondentS, all employees of MSC
Ltd.
The secondary data collection instruments were company journals, MSC
Ltd budgeted statements and annual reports and Kenya Sugar Boardannual reports and journals that were included in the study.
These instruments were a vital source of information which the researcher
used in the study on examining the relationship between budgeting andprofitability at MSC Ltd.
The questionnaires were both open and closed ended. The open endedquestions required respondents to fill in their opinions while the closed
ended questions required respondents to choose the most appropriate
alterative. The choice of using questionnaires in this study, particularly the
closed ended ones, is because they are easier to analyse since they are
in an immediate usable form, they are easier to administer because each
item is followed by alternative answers and because the are economical in
terms of time and money. (Mugenda G.M.& M.O, 2003)
3.7 DATA COLLECTION PROCEDURES
The researcher took an introduction letter from the school of PostGraduate Studies and evaluation centre of Kampala International
University on 12th January to the Chief Executive Officer MSC Ltd seeking
for his approval to interview various officers in the organization concerning
the relationship between budgeting planning and profitability.
35
I,
Upon approval, schedule was prepared and questionnaires pr~testec~jU ~\before administering them ~o the chosen respondents to estab~s~i0l~J DUATE’~LRAF?y
effective questionnaires were in collecting information from resp6~n~f~ts.
Thereafter, questionnaires were given to respondents to fill at thh~wnf,l,nI.~ v~~’?~
free time.
Both primary and secondary data was collected using questionnaires,
Kenya Sugar Board Authority and MSC Ltd journals.
After receiving back the questionnaires, data was processed, statistically
treated, results interpreted and arranged in order and finally analyzed.
3.8 DATA PROCESSING AND ANALYSIS
The researcher developed questionnaires with both closed and open
ended questions. The questionnaires were presented to MSC Ltd in
person. After being filled, they were sorted out and results were compared
and analyzed accordingly.
The researcher used the computer program SPSS (statistical package for
social science) to process and analyze data. The data was manually
entered and stored in the SPSS worksheet and by the advantage of
statistical tests excel analytical tools, information was generated through
graphical presentations and statistical inferences.
3.9 VALIDITY OF THE RESEARCH
The researcher increased validity and reliability of results by including the
use of triangulation, for example, using several methodologies in the
research.
36
The research instruments, for example, questionnaires were pre-tested on
30 participants before being taken to the field to be filled by differentrespondents.
The researcher ensured that required respondents fully participated inanswering questionnaires in order to increase reliability of results. In a
similar strand, the researcher made sure good representation of the
respondents in terms of age, gender, departments, and positions held was
taken into consideration.
In a nutshell, this study was valid because key personalities at MSC Ltdparticipated in answering questionnaires honestly. The friendly
atmosphere the researcher created to the management of MSC Ltd
attracted good quality and validity of this study.
3.10 DATA PRESENTATION
The data was presented using tables, pie charts and graphs and wasinterpreted by use of percentages to make meaning.
CHAPTER FOUR
PRESENTATION, ANALYSIS AND INTERPRETATION OF
4.0 INTRODUCTION
This chapter looks at the research presentation, analysis andinterpretation of the research findings concerning the relationship betweenbudgeting, planning, and profitability at Mumias Sugar Company Limited(MSC LTD).
Questionnaires were distributed to respondents that included Heads ofdepartments, line managers, Superintendents, Supervisors and generalstaff. 100 questionnaires were distributed and all were answered andreturned representing 100% of the respondents. These questionnaireswere open and closed ended. They had two sections: section one requiredrespondents to tick against the most appropriate alternative and sectiontwo required respondents to fill in their opinions in the open-endedquestions.
The findings were as follows:-
When asked to give responses of their knowledge about the meaning ofbudgeting, the respondents gave their views as indicated below:
Table 1-2: Respondents’ knowledge about the relationship betweenbudgeting and profitability at MSC Ltd
N=1 00S/N Alternatives Frequency Percentage
I YES 60 60%2 NO 25 25%3 NOT SURE 15 15%
TOTAL 100 100%
Source: Field data
38
S
Figure 1—3: Showing Respondents’ knowledge about the relationshipbetween budgeting and profitability at MSC Ltd
The research established that 60% of MSC Ltd respondents haveprofound knowledge about meaning of budgeting, 25% have noknowledge while 15% are not sure about meaning of budgeting. Thisindicates that MSC Ltd management through the support of the C.E.Oeducates employees of all departments about budgeting and its meaningthereof.
The response elicited from the study was a vital tool in examining therelationship between budgeting and profitability at MSC Ltd.
This is in agreement with Khan and Jan (2001), who note that budgets arean important tool of profit planning.
When asked about their knowledge of advantages of budgeting, therespondents gave their views as presented on table I -3 below:
Source: Field Data
39
Source: Field data
Fig.1—4: Showingbudgeting
Source: Field data
about~~ L..I~F?ARy ~I* D,1TE ~JI
N=1 00 •
______________ _____________ ~ ~
respondents’ knowledge about advantages of
The research revealed that 75% of the employees know the advantages ofbudgeting, 14% don’t know the advantages of budgeting while 11 % arenot sure of the advantages of budgeting. This indicates that MSC ltdmanagement plays a vital role in educating its employees aboutadvantages of budgeting. This information was pivotal in assessing theprofitability of MSC Ltd in the context of budgeting.
Table 1-3: Respondents’ knowledgebudgeting and profitability at MSC Ltd.
SIN Alternatives Frequency PercentageI YES 75 75%2 NO 14 14%3 NOTSURE 11 11%
TOTAL 100 100%
El YES~NO
NOT SURE
40
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/~• N~ib/~pOSTGRADUATE~\~ LIBRARY ~I
DATE ,...,.,..o.a
A
I.
a —
.
IA
= — • 1= —
I
Percentage
65%20%15%
100%II
I II ••
I..
/-~‘ [mu ~
Table 1 —5: Respondents’ response concerning their~budgeting at MSC Ltd. / LIBRARY ~•
N1 00 * DATE:
~SIN Alternatives Frequency Percentage
I YES 44 44%2 NO 40 40%3 NOT SURE 16 16%
TOTAL 100 100%
Source: Field data
The study established that 44% of the employees participate inpreparation of budgets, 40% don’t participate while 16% are not surewhether they participate or not. This study helped in assessing that MSCLtd does not involve all employees in preparation of budgets.
This disagrees with Pandey (1998), who notes that the primaryresponsibility of the staff organization is to assist line executives inpreparing budgets by providing data and technical advice and coordinatingthe budgets of various departments.
When the respondents were asked on whether MSC had a budgetcommittee, budget director and budget manual, their responses were asshown intablel —6:
Table I — 6: Showing respondents’ understanding whether MSC Ltdhas a budget committee, budget director, and budget manual
N=100SIN Alternatives Frequency Percentage
I YES 72 72%2 NO 15 15%3 NOT SURE 13 13%
TOTAL 100 100%
Source: Field data
42
Figure 1 —6: Showing respondents’ understanding whether MSC Ltdhas a budget committee, budget director and budget manual
Source: Field data
This study established that 72% understand that MSC Ltd has a budgetcommittee, budget director and budget manual, 15% does not understandthis idea while 13% are not sure of anything. This information assisted inestablishing that MSC Ltd has a budget committee, budget director, andbudget manual.
This concurs with Garrison and Noreen (2000), who maintain that anorganization must have a budget committee, budget director, and budgetmanual in order to appropriately budget for its operations.
When asked on whether MSC Ltd had a budget period, the respondents,gave their responses as shown on table 1-7 below:
15%
YES~NO
NOT SURE
43
I —~
(~POSTGRADULIBRARY
DATE•
F.
I I II •
.- I
— . ._ —
=
I
I
I
II
II
Percentage70%
20%10%
100%
.111~pOSTG ~DUATE-,
IBRARY4“~ DATE. * I
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44
- _.. . — th on the end as the current month is
• .——.
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- • • .et, the respondents
. . •
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- I •I~ • • -....t, — — •
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45
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poSTGRADU~~TE/
3 LiBRA~L DAT~~
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Percentage47%24%29%100%
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Edmonds et al (2000), who affirm that a master budget consists ~ a serieS~ -ç<poSTGR~~ -
of detailed schedules and budgets that describe the compa ~s ovej~fl~ARY-q
financial plans for the accounting period. ~ o~-ri~
)flf~(~~~
A master budget comprises of a sales budget, production budget, direct
material budget, direct labour budget, ending inventory budget,
manufacturing overhead budget, cost of goods sold budget, marketing and
administrative expense budget, budgeted income statement budget, cash
budget and budgeted balance sheet. These are the budgets that the study
looked to examine the relationship between budgeting and profitability at
MSC Ltd.
46
Master budget
OPERATIONALBUDGET
FINANCIALBUDGET
Source: Sukan Yetu Journal
“P
ProductionBudget
4,Direct Labor
Budget
4,Factory
OverheadBudget
AdministrativeExpense Budget
Budgeted IncomeStatement
N
47
/~ fr~ ~-~C)\When the respondents were asked about their~
preparation of sales budget, their responses were given as foll~,s:- LIBRARY~ DATES
-~ ~ *1
understanding of MSC, Ltd ~~ ,, ~.
Table 1-9: Showing respondentspreparation of sales budget.
N=1 00
SIN Alternatives Frequency PercentageI YES 67 67%2 NO 13 13%3 NOT SURE 20 20%
TOTAL 100 100%
Source: Field data.
The study established that 67% of respondents understand that MSC Ltd
prepares a sales budget, 13% have no understanding and 20% are not
sure. This information assisted in assessing that MSC Ltd prepares a
sales budget. This agrees with Hilton et al (2003), who maintain that sales
forecasting is the process of predicting sales of sources and goods.
When asked to give their comments on their understanding of MSC Ltd
preparation of production budget, they gave their responses as follows:
Table 1- 10: Respondents’ understanding of MSC Ltd preparation ofproduction budget.
N=1 00
SIN Alternatives Frequency PercentageI YES 62 62%2 NO 20 20%3 NOT SURE 18 18%
TOTAL 100 100%
Source: Field data
48
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49
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50
Figure 1 —11: Showing respondents’ understanding of preparation ofdirect labour budget at MSC Ltd.
Source: Field data
The study established that 64% of the respondents understand that MSCLtd prepares a direct labour budget, 26% have no knowledge while 11 %are not sure. This indicates that MSC Ltd prepares a direct labour budget.This concurs with Pandey (1998), who maintains that the direct labourhours to be spent depend on the units to be produced and the labourrequired per unit of production.
When asked on their understanding of preparation of Ending Inventorybudget at MSC Ltd then responses were as shown on table 1-13 below:
Table I — 13: Respondents’ understanding of MSC Ltd preparation ofending Inventory budget.
N=100
SIN Alternatives Frequency PercentageI YES 49 49%2 NO 38 38%3 NOTSURE 13 13%
TOTAL 100 100%
Source: Field data
(~PosTcRAD~,ATE~
O~TE\k
~I YES~ NO.C NOT SURE
,%~? ~
The study established that 49% of Respondents understanding ~t M~P~?$Ltd prepares an Ending Inventory budget, 38% have no knowl - e w~-~ •..‘ ~
13% are not sure. This data helped in assessing that most emp ..~s~ ~/MSC Ltd do not understand ending inventory budget. This contradicf’~’~itM~Williams et a! (2002), who maintain that in a merchandising company—inventory consists of all goods owned and helped for sale to customersand must be known by all stakeholders of the company because it isexpected to be converted into cash within the company’s operating cycle.
The respondents’ understanding of preparation of manufacturing overheadbudget at MSC Ltd was presented as follows:
Table I — 14: Respondents’ understanding of MSC Ltd preparation ofmanufacturing overhead budget.
N=1 00
SIN Alternatives Frequency PercentageI YES 73 73%2 NO 16 16%3 NOTSURE 11
TOTAL 100 100%
Source: Field data
The study revealed that 73% of the respondents understand that MSC Ltdprepares a manufacturing budget, 16% don’t understand that MSC Ltdprepares a manufacturing budget while 11 % are not sure. This informationshows that MSC Ltd prepares a manufacturing overhead budget. This is inagreement with Hilton et al (2003), who affirm that manufacturingoverhead budget shows the cost of overhead expected to be incurred inthe production process during the budget period.
The respondents’ understanding of preparation of cost of goods soldbudget at MSC Ltd was as presented on table 1-15 below:
52
• • ••••
A —
.
.
I• ••
. • • ••-
.1
II
II
Percentage60%15%25%100%
• • .•.
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53
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Frequency Percentage58%12%
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54
The respondents’ understanding of preparation of budgeted incomestatement at MSC ltd as presented on table 1-17 below:
Table 1—17: Showingstatement.
MSC Ltd preparation of budgeted income
N=l00SIN Alternatives Frequency Percentage
I YES 65 65%2 NO 20 20%3 NOT SURE 15 15%
TOTAL 100 100%
Source: Field data
Figure 1—14: Showing respondents’ understanding of preparation ofbudgeted income statement at MSC Ltd.
Source: Field data.
This study established that 65% of the respondents understand that MSCltd prepares a budget income statement, 20% have no knowledge, and15% are not sure. This data helped in assessing that M Ltd prepares abudgeted income statement. This concurs with Garrison (2002), whomaintains an organization should prepare a budgeted income statement
55
LIE3RARY ~:OAT
,‘ ~,
15%
20%
YESNONOT SURE
from the data developed from sales-marketing and administrati ~~p~ADuATE~budget. ~ LIBRARY ~
flAT~ * /The Respondents’ understanding of MSC Ltd preparation of ~ cashbudget as presented on table 1-18 below. -
Table 1 -18: Showing MSC Ltd preparation of cash budget.N=100
SIN Alternatives Frequency PercentageI YES 67 67%2 NO 10 10%3 NOT SURE 23 23%
TOTAL 100 100%
— . _. —I • . — .. .— — I
I ~ — — — . ..— eel I. I I ~ —
I •I~ — -I — — I •I~ — — I ••~
— — I—. — . — I • ~ — I •I~
I II II~ I I — I •~ I • I ••~ —
Source: Field data
I I
I ••. I.
— I •~ —
56
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Percentage77%10%13%
100%
:1
.1
I
I =• -
~
cJflPOSTGRADUATE~\
LIBRARY ~)L* * i
I
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- I I =11=
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12%27%100%
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— • •_ —
58
The study revealed that 61 % of respondents understand that budgetingenables MSC Ltd to earn profits, 12% have no knowledge while 27% arenot sure. This data indicates that MSC Ltd earns profits due to goodbudgeting. This concurs with Pandey (1998), who states that budgetingdevelops an atmosphere of profit mindedness and cost controlconsciousness.
When the respondents were asked if MSC Ltd had been reporting profitsbetween 2000-2006, their responses were as shown on table 1-21 below:
Table I — 21: Showing whether MSCbetween 2002—2006.
ltd has been reporting profits
N=100SIN Alternatives Frequency Percentage
I YES 65 65%2 NO 17 17%3 NOTSURE 18 18%
TOTAL 100 100%
Source: Field data
Figure 1 — 19: Showing respondents’ understanding whether MSCLtd has been reporting profits between 2002 — 2006.
Source: Field data.
NO0 NOT SURE
/
59
The study established that 65% of respondents understandbudgeting has enabled MSC Ltd earn profits between 2002 — ~06, ~ARY Ehave no knowledge while 18% are not sure. This informatio ~e~cLJnestablishing that MSC ltd has been earning profits between 20Q~~006. /
N2o o~0~This concurs with (Pandey 1998), who states that budgeting i~
important tool for profit planning in an organization.
When asked researcher perused through the natural sweetness journal tocheck on budgeted vs actual earnings of MSC Ltd, it was revealed asfollows:
Table 1:22: Budgeted and actual earnings of MSC Ltd between 2000 -
2006YEAR BUDGETED NET EARNINGS BEFORE ACTUAL NET EARNINGS BEFORE
JUNE INTEREST & TAXES (EBIT) INTEREST AND TAXES (EBIT)
2002 KSHS. 1 16,168~889.00 KSHS. 104,552,000.00
2003 KSHS. 272,062,222.00 KSHS. (244,856,000.00)
2004 KSHS. 1,265,055,556.00 KSHS. 1,138,550,000.00
2005 KSHS. 2,048,201,111.00 KSHS. 1,843,381,000.00
2006 KSHS. 2,466,543,333.00 KSHS. 2,219,889,000.00
Source: Natural Sweetness Journal
60
Source: Natural sweetness journal
The study established that in 2002, budgeted earning’s before interest and taxes1~ i4~;v~ ~--~ .~
~er~ Ksh~ •116,168,889 while actual eamihgs’ béforé~ inté~é~t3and;~taxe~. wéré-. ~
Kshs. 104,552,000, 2003 were Kshs 272,062,222 and (Kshs; 244,85~000), 2004— ~ ‘?~
Kshs 1,265,055,556 and Kshs 1,138,550,000, 2005 Kshs Z048,201,ii1 and
Kshs 1,843,381,000, 2006 Kshs 2,466,543,333 and 2,219,889,000 respectively
This study has helped in determining that MSC Ltd earns profit due to budgeting.
This concurs with Pandey (1998), who states that budgeting is a tool profit
sustainability. In a general sense MSC Ltd achieves 90% of its budgeted
income.
Figure 1 — 19: Bar graph shc~wing budgeted and actual net earnings of
MSC Ltd before interest and taxes between 2002 — 2006
3,000,000,000.00
2,500,000,000.00
2,000,000,000.00
1,500,000,000.00
1,000,1.0,000.00
500,000,000.00
0.00
-500, 000, p00. 00
Budgeted• Earnings
,~tualEarnings
It seems established that 2003, the MSC Co. Ltd incurred a significant loss of
Kshs 244,856,0.. emanating from poor budgeting and adverse climatic
conditions. This necessitated making several adjustments in budget planning to
increase on profitability.
Two things respondents consider impressive about MSC Ltd budgeting system
was revealed during the interaction of the researcher with the respondents.
DATE•
~ .,
Table 1—23: Respondents response pointing to zero bas ~~RADUATE~~ Ll~RARY (/_),
preparation of budget in June and qualified staff. ~. DATE: •
N=100~OOq0 K~’~SIN Alternatives Frequency Percentage
I YES 70 70%2 NO 12 12%3 NOT SURE 18 18%
TOTAL 100 100%
Source: Field data.
The study established that 70% states that MSC Ltd uses zero basemethod of budgeting 12% stated that MSC Ltd prepares its budget inJune, while 18% stated that MSC Ltd has qualified staff. This informationhelped in ascertaining that one of the things that is impressive about MSCLtd budgeting system is its use of zero base method in its budgetingapproach. This concurs with Saleem (2001), who states that budgets bringharmony between individual goals and the enterprise objectiveseffectively.
When asked on whether the budgeters were fully involved in budgetpreparation, the respondents gave their responses as follows
Table I — 24: Respondents’ response pointing to full participation ofbudgeters in budget preparation, CEO’s idea and departmentalheads’ idea
S/N Alternatives Frequency PercentageI FULL PARTICIPATION OF BUDGETERS 64 64%2 C.E.O’s IDEA 10 10%3 DEPARTMENTALHEADS IDEA 26 26%
TOTAL J 100 j 100%
Source: Field data
62
Figure 1-20:involvementheads’ idea.
Showing respondents’ response about budgeters fullin budget, preparation, CEO’s idea and departmental
Source: Field data
The study established that 64% of respondents’ state that there is fullparticipation of budgeters in preparation of budgets at MSC Ltd 10%stated that it’s all the C.E.O’s idea while 26% stated that it’s adepartmental heads idea. This information helped in establishing thatMSC Ltd considers full participation of budgeters as something impressiveabout its budgeting system. This is the second impressive thing aboutMSC Ltd budgeting system. This agrees with Pandey (1998), whomaintains that full participation of budgeters is necessary for the successof budgeting.
Following a discussion held with the respondents, it was revealed thatthere were two things which were unsatisfactory about MSC Ltd given asfollows;
26%
Fullpaiticipalion
E0jc1~~ Dept Heads
ideas
63
- I. ••
- I.. . . _.-.
I.
.
I.
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a •.•— • - •. -
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•
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• =11
.1 -
A — =
• .
A A~ 0 ~
•••~ Al A •SHO ~cEO~F MANPOWER
• 0p~t~•~~ %~
-1’20000 ~‘~‘Frequency Percentagè~’
75%10%15%
100%
64
budgeting system. This reveals that budgeting is done in a hurry. Thisdisagrees with Pandey (1998), who maintains that adequate time must beallocated for budget preparation.
Table I — 26: Respondents response pointing to lack of standardrates, un implementation of budgets and CEO Interference
Source: Field data
N=100
The study establishes that 64% stated that standard rates are lacking,20% stated that budgets are usually unimplemented while 16% stated thatC.E.O normally interferes with budgets. This study helped to determinethat the second unsatisfactory thing about MSC Ltd budgeting system islack of standard rates. This is not in agreement with Brown and Owler(1999), who affirm that standard rates are appropriate budgetingtechniques.
When they were asked to give their views on solution to the stated issuestheir responses are as presented on table 27 below:
Table I — 27: Respondents response about improvement of MSC Ltdbudgeting system
N=100
SIN Alternatives Frequency PercentageI ALLOCATION OF MORE TIME 66 66%2 RECRUITMENT OF MORE STAFF 24 24%3 CHANGE OF BUDGET PERIOD 10 10%
TOTAL 100 100%
Source: Field data
S/N Alternatives Frequency PercentageI LACKOF STANDARD RATES 64 64%2 UN IMPLEMENTATION OF BUDGETS 20 20%3 C.E.O’s INTERFERENCE 16 16%
TOTAL 100 100%
65
.
I ••~
I
I
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. - . .
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—. _..
II •~ •~ -
_... . — ._. . . .
— ~II .I~
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I
I
.I
— —. — ..,I • — I• I— — I—
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I — ~I I ~I I II — —
. II~ I — — I— •_ •I; . I
—— — .—_ . I ~ • II •I~
66
— . ._ —
.1• .••• I I I. •
• - I • • I-
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. •. = — . • 11= • —
67
.1 -
I
—- II ••
I. • •
—
.
.
A • • • I
. _
Frequency Percentage
ADOPTION OF STANDARD COSTING 62%
18%
100%
•
I..
I
‘I
I
I
I
I
— . ., _-• - _••• I I — •=• I
;)e _—. — ._ 1=• I — — — I
— I.. _. • — -• I — I = = — —
— _••• I I - •~• • I — —
II= I = — — I I =1 • =1
U~RP~R’(
\:~L~~ ~\~_~
(2001), who maintains that standard costing is a vital tool in,environment.
Summary of FindingsThe research found out that:
1. Budgeting enables MSC Ltd to achieve its overall goal of profitability andthat without budgeting the organization cannot be held together.
2. MSC Ltd doesn’t allow equitable participation of all stakeholders inpreparation of budgets because it still considers budgeting a managementpreserve.
3. MSC Ltd, doesn’t use standard rates in carrying out budgeting but useslocal currency in its forecasts.
4. MSC Ltd doesn’t adopt standard costing techniques to compare actualperformance and the standards to enable it take corrective measureswhenever variances arise in the course of operations preferably due to itsexceptional performance which is normally 90% of the budgetedestimates.
5. MSC Ltd doesn’t compare its budgeting system with budgets of othercompanies of equal standing with which it can compare itself.
6. There is lack of dissemination of budgeting information to MSC Ltdstakeholders before implementation owing to management’s personalinterests in budgeting seemingly.
7. MSC Ltd offers budgeting information to a few of its employees particularlyfrom supervisory level to senior management but general staff are left out.
8. There has been a high rate of employee retrenchment between 2002 —
2006.
9. MSC Ltd allows full participation of budgeters in preparation of budgets.
68
10. MSC Ltd uses zero base method in preparation of budgeters fully justifytheir budget figures. /
11. There is normally very little time allotted to budgeters during budgetingperiod.
12. MSC Ltd has a budget directors, budget committee and budget periodwhich help the organization in budgeting planning.
69 10N
<poSTGRA~~~TE,
/....,. -
II —.j ~ —
CHAPTER FIVE ~POSTGRADUATE~~ LIBRARY ~i
CONCLUSION, RECOMMENDATIONS AND AREAS OF FUTURE RE~EARChL~
5.0 Introduction:This chapter presents the summary of the research findings, conclusion,and recommendations based on findings of the research and areas offuture research.
5.1 Discussions of the finding
According to Webi (2007), since its official inception in 1973, MSC Ltd hasbeen practicing budgeting and considers it a core of its operations and ayardstick for measuring its performance and a vital tool toward its profitsustainability. MSC. Ltd management believes that since heaven andearth can not meet without the supernatural intervention of God in similarway profitability and budgeting cannot meet without planning by functionalmanagement of the organization. Time and again the management ofMSC Ltd meets regularly to plan for its profitability ahead of time. This hascontinued to be the case because of the competent management thatMSC Ltd has had over the years.
MSC Ltd has never drifted from its vision, mission and values. Thebudgeting environment at MSC Ltd has given it an advantage over the restof the sugar factories and even other manufacturing industries In Kenya.Due to an active budgeting system, the company has participated inseveral corporate social responsibility activities. These include support ofeducation in the community, construction of roads, support of Agriculture,provision of health care facilities, participation in afforestation plus sportsand games. The company maintains 4,800 kms of the road network withina 40km radius from the factory. The roads are maintained to facilitate easytransportation of cane from the fields to the factory. MSC Ltd has a socialcentre which is used for a variety of sporting activities, It is the house toMumias Sugar Football Club which currently leads in the premier leagueholding unbeaten record. The company has put up three primary schoolsin the estate. MSC Ltd has a number of other corporate socialresponsibility (CSR) on environment, health, infrastructure and education
70
including bursary schemes for projects within and outside the MumiasSugar Zone. Presently, Mumias in Collaboration with World Wide Fund forNature (W.W.F.) is sponsoring the Mau forest conservation project.
Since the commissioning of the Factory on July 1, 1973, the financialperformance which is attributable to proper budgeting planning hasdeveloped steadily. The gross turnover has increased from Kshs. 40million in 1973 to Kshs. 10,814,529,000 last financial year.
Owing to proper budgeting that has contributed to profitability over theyears, the company has imp!emented various innovative sales andmarketing programmes to sustain market leadership of the Mumias SugarBrand. The sales and marketing department was established in June,1998 and since then the company has been able to introduce 1/4, %, 1 kgand 2kg pillow packs. These have raised the marketability of MSC LtdSugar to more than 100%
Currently, the company is budgeting for increased production anddiversification, Its budget is to produce 500 tonnes of cane per hour byend of next year and it is also budgeting to generate 35 mega watts ofelectricity, 20 of which shall be available for sale to the National grid, and15 for internal use. It has also budgeted for Kshs. 100,000,000 from thisyear’s budget to carry out feasibility study in Tana River District with aview of starting another factory there. Proper budgeting has also enabledthe company to construct a bridge on River Nzoia to connect Matawa andIndangalasia shopping centres which will also reduce cane transportationcosts for farmers and improve the economic status of the two places.
Budgeting enables MSC Ltd to achieve its overall goal of profitability. Thisfinding is in agreement with penalty (1988), who confirms that budgetingdevelops an atmosphere of profit mind ness and cost controlconsciousness.
The fact that MSC Ltd doesn’t allow equitable participation of allstakeholders in budget preparation contradicts Owler and Brown (1999),who affirm that all stakeholders have an equal say in the budgeting of an
(~i~°~ LIBRARy\~
* DATE:\4,.
inilorganization and therefore failing to allow them share their ~ws ~
RADUAT~denying an organization productivity and high quality products. ~P0STG RARV 2~ LIB
~)€ üP~TEIt is a great danger fro MSC Ltd to fail to use standard rate ~ its
-1-budgeting. This kind of budgeting practice doesn’t concur with Salee~W’~ ‘~
(2001), who maintains that standard rates in budgeting help to justify
budgeters figures in the event of inflation.
MSC Ltd violates the management principle of exception by failing to
adopt standard costing techniques in budgeting which is against Horagten
and Faster (1997) who assert that standard costing is inevitable in a
budgeting environment so that actual performance can be compared with
standards in order to correct variances that appear in the course of
operations.
Similarly, it is an act of treason for an international factory like MSC Ltd to
fail to disseminate budgeting information to its stakeholders before
implementation. Khan and Jam who are against this kind of practice point
out that before management implements a budget, stakeholders must be
fully aware of what they expect during the year under review.
In a management context, all employees must be well versed with
budgeting. MSC Ltd acts ultravitely and goes against the
recommendations of Griften (2000), who states that all people in the
organization have a right to budgeting information.
Employee retrenchment is not the only factor of increasing profitability.
Many factors could be in play which has to be studied and addressed.
Retrenchment of employees goes against a management principle
advanced by Mesia and Balken (2002), who assert that employee
retrenchment doesn’t lead to profitability but it ropes an organization of
expertriates.
72
MSC Ltd excels in allowing full participation of budgeters and zero bas
method in preparation of budgets which is in agreement with Garrison and
Norcen (2002) who note that budgeters must use zero base method in
preparation of their budgets. This without doubt is a good step the
company takes and is acceptable by management professionals.
Allotting limited time to budgeters during budgeting period creates room
for fictions figures in budgeting in many organizations. MSC Ltd goes
against the professional recommendations of Edmonds (2000), who points
out that for a budget to make meaning, enough time should be given to
budgeters during the budgeting period.
5.2 CONCLUSIONMSC Ltd has been practicing budgeting since its inception in 1973 and
considers it a core of its operations and a yardstick for measuring its
performance and a vital tool toward its profile sustainability. The slogan of
MSC Ltd is “Heaven and earth cannot meet without the supernatural
intervention of God and in a similar way, budgeting and profitability cannot
meet without proper budgeting by functional management of an
organization.
The findings of the research reveal that MSC Ltd has really embraced
budgeting. This is evidenced by respondents’ responses which pointed
out vividly that MSC Ltd carries out budgeting before setting out any
operations. All interviewed staff members, for example, heads of
Departments, line managers, superintendents, supervisors, and general
staff consent that MSC Ltd prepares a master budget. The study has also
established that MSC Ltd earns profits due to its budgeting and that
without proper budgeting MSC Ltd can not be held together. In a similar
strand, the study found out that MSC Ltd employees have profound
knowledge and exhibit a lot of understanding about budgeting which was
established by the way they answered research questions.
4.,73 7s~.
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The research findings revealed that there is a positive
between budgeting and profitability. If proper budgeting\* DATE
profitability is likely. According to Khan and Jam (1998), budge~re ~04.
important tool of profit planning and budgets as a tool of planning~’°l~n ~‘
closely related to the boarder system of planning in an organization.
Saleem (1998), maintains that budgeting increases the morale and thus,
the productivity of the employees by seeking their meaningful participation
in the formulation of plans and policies, bringing a harmony between
individual goals and the enterprise objectives more effectively thereby
enhancing profitability. Budgeting is thus a ship through which profitability
sails.
5.3 Based on the findings of the research, the following recommendations areconsidered necessary for budgeting at MSC Ltd:
5.3.1 Participation of all stakeholdersAccording to Pandley (1998), employees at all levels of an organizationmust take an active participation in the preparation of budgets. Thisreduces doubts and creates a sense of belonging among employeesbecause they are considered the most important stakeholders of anorganization. Therefore MSC Ltd should bring on based representativesfrom all departments to take part in budgeting so that every employee feelshe is part and parcel of the organization. Some employees feel thecompany is in a financial crisis for lack of understanding of key budgetingissues around them.
5.3.2 Addition of more time for budgeting:According to Garrison and Noreen (2000), operating budgets are ordinarily
set to cover a one- year period and the one-year period should correspond
to the company’s fiscal year so that the budget figures can be compared
with the actual results. This approach has the advantage of requiring
periodic review and reappraisal of budget data throughout the year
keeping the managers focused on the future at least one year ahead.
74
Since a budget is a vehicle of the operations of an organization during a
given fiscal year, proper time should be allocated to it. This will enable
budgeters to think through what the organization intends to achieve within
a period of one year before operations officially take place.
On this aspect, MSC Ltd should allocate more time to budgeting.
Budgeting in a hurry causes a lot of loopholes that may not be easily filled.
The budgeting staff should be added more time to integrate their issues
well enough in time to avoid unnecessary mini-budgets which may
contradict the initial objectives of an organization within the financial
period under review.
5.3.3 Use of Standard rates.The company should use standard rates in budgeting instead of using local
rates. For example, a budget quantified in local currency may be very
difficult to justify in the event of inflation. If local currency drops against a
dollar, budget implementation may become very difficult. This may prompt
preparation of Mini-budgets to cater for the drop in the value of the local
currency.
MSC Ltd. should therefore adopt the usage of a dollar in preparation of itsbudgets so that it gains an international advantage since it is aninternational corporation. This will enable it to embrace its core values witha lot of ease.
5.3.4 Adoption of standard costingSaleem (2001), states that standard costing is a technique of costaccounting which compares the standard cost of each product or servicewith actual cost to determine the efficiency of operation so that anyremedial action may be taken immediately. In the words of Owler andBrown (1999), standard costs are pre-determined, or forecast estimates ofcost to manufacture a single unit or a number of units of a product, during a
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specific future period so that actual costs, asL.Ir~compared with standards.
* DATE:
MSC Ltd should adopt standard costing techniques so that fro~rF~k!p1e to•~% %j~’~
time in the course of operations actual costs of production can
compared with standards in order to take the necessary immediate action
in case variances begin to be noticed. This has the advantage of ensuring
cost efficiency and effectiveness within the organization.
5.3.5 Budget comparison with other companiesThe company should freely compare its budgeting with the budgeting of
other companies of its nature in Africa and outside. Company budgeters
should freely share budgeting information with budgeters of other
companies and discuss modalities of improvement at international
standards.
5.3.6 Dissemination of Budgeting informationJust as audited accounts are published, budgeted information should alsobe published before implementation. This will give stakeholders anoverview of what the organization intends to do during a given financialperiod. This has the advantage of giving team time to study the budget andair their views accordingly. This is in agreement with the budgeting strategyof the government.
5.3.7 Budget educationThe company should be able to give budget education to its employees
much more that it has been doing to avoid eye brows and shoulder
brushing between senior and junior staff in the event that the company fails
to achieve profitability or when profitability declines.
5.3.8 Communication of Budget information to employees.There should be free budget communication between management and
junior employees of MSC Ltd. The gap between management and junior
staff should not be so wide to give room for doubts and evil imagination.
76
From the CEO down to the grounds men, an atmosphere of friendliness
should be encouraged and practiced as a routine in the work environment.
Managements should freely and willingly communicate budget information
to all employees in the organization in order to bring harmony within the
organization.
5.3.9 Reduction of employee retrenchment.The company should minimize retrenchment of employees as a strategy to
reduce doubts about the budgeting system. Any time employees are
retrenched, the general belief is that profitability is missing due to
haphazard budgeting. Employee workforce should only be reduced through
retirement and also when the company is unable to maintain them due to
financial constraints but for a company whose net earnings are in billions
like MSC Ltd, such a plan should be avoided as much as possible since
most employees are under 55 years and their families depend 100% on
their salaries.
5.4 Areas of Future ResearchThese research findings have created more questions than the study hastried to answer. They are not complete in themselves but are subject tofurther research, challenging and disapproval.
Some of the areas that can be researched on include;Determining the relationship between budgeting and performance ofemployees.
Examining profitability achievement through employee motivation.
Examining the relationship between profitability and corporate socialresponsibility in an organization.
If the above recommendations were implemented MSC Ltd would realize thehighest profits ever and create prosperity for the people of Kenya througheffective budgeting and implementation.
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REFERENCES ~
* DATE• ~
Amin, M.A; (2004, Pg.1~5) Foundations of statistical inference fôr~pcialscience research, Kampala: Makerere University Printery. ‘~‘°“flO. i(I~
Chrystal, A. and Richard, G. L; (1997, Pg.82) Economics for Business andManagement, New York: Oxford University Press.
Edmonds, P. et a!; (2000, Pg. 284-298) Fundamental ManagementAccounting Concepts, 1st ed. Boston: Irwin/McGraw— Hill.
Garrison, R. H. and Noreen, E. W; (2002, Pg.376 - 401) ManagerialAccounting, ~ ed. Boston: lrwinlMscGraw — Hill.
Ghosh, N. B; (1999, Pg.171) Scientific and Research ethod, 4th ed. NewDelhi — Sterling Publisher.
Griffin W. R; (2002, Pg.87) anagement 7th ed. Boston: Houghton MuffinCompany.
Hilton, R. N. et a!; (2003, Pg.275) Cost Management; Strategies for businessdecisions, 2~d ed. Boston: McGraw — Hill Irwin.
Higgins, C. R; (2004, Pg.290) Analysis for Financial Management, Boston:McGraw — Hill company.
Horngren C. T. and Foster; (1997, Pg.173-197) gth ed. Cost Accounting: AManagerial Emphasis, 11t~i ed. New Delhi: Prentice Hall of India private Limited.
Hussey, L.and Hussey, R. R; (1997, Pg.102) Business Research; A practicalguide for undergraduate and post graduate students, London MacmillanPublishers.
Kakoza, T. (1996, Pg.77) An introduction to Research methodology,Kampala: The National Adult Education Association.
Khan M. Y. and Jam P. K; (1998, Pg 16.1-16.5) Management Accoun~Zing, 3~ed. New Delhi: Yata McGraw— Hill publishing company limited.
78
Kothari, RC; (2003, Pg 105), Research Methodology; Methods andTechniques, 2i,d ed. New Delhi: New Age International Publishers.
Mesia G. L. W; and Balken, B. D.: (2002, Pg 185), Management, Boston:McGraw — Hill/Irwin.
Mugenda, G.M & M.O; (2003, Pg. 85) Research Methods: Quantitative andQualitative Approach, Nairobi: Acts Press.
Oringe,F.O; (2006), Natural Sweetness, The in house journal of Mumias SugarCompany, 2(4), pg 14-15
Owler, L. W. J; and Brown, J. L; (1999, Pg. 267), Wheldons costing simplified.9th ed. Hong Kong: Longman (FE) Ltd.
Pandey, I. M. (1998, Pg.293-305), Management Accounting, 3~ ed. New Delhi:Vikes Publishing House Pvt Ltd.
Saleem; N. A; (2001, Pg.290), Cost Accounting SimpIified~ Nairobi; N. A.Saleem Publishers.
Wangara, A; (2001), Sukari Yetu. A quarterly journal for the Kenya sugarindustry, 3(1), pg. 9-11, 14
Webi, M; (2006), Natural Sweetness, The in house Journal of Mumias SugarCompany, 6(4), pg.1 8-22, 26
Welsch, GA et al; (2001, Pg. 428), Budgeting Planning and control, ~ ed.New Delhi: Asoke K. Gosh prentice Hall of India private limited.
Williams, et al; (2002, Pg.623), Financial and managerial Accounting; Thebasis for business decisions, 12th ed. Boston: McGraw-Hill company.
Williamson, D; (1998, Pg.449), Cost and anagement Accounting 2~ ed. NewDelhi: Asoke K. Gosh prentice — Hall of India
N A4
79
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APPENDIX I
Kampala International University
School of Post-graduate Studies
Dear respondent,
REF: RESEARCH QUESTIONNAIRE FOR MSC EMPLOYEES
I am a student of the above university finalizing my masters degree in Business
Administration and currently carrying out research at Mumias Sugar Co.Ltd
entitled “Examining the relationship between Budget planning and profitability
among sugar factories in Kenya — case study of Mumias Sugar Company
Limited” in partial fulfillment of the requirements for the award of this degree.
I have chosen Mumias because it is the biggest sugar factory in the country and
this study will be representative of all other sugar factories country wide.
This is not a test and will only be used purely for academic purposes and your
responses shall be treated with ultimate confidentiality. Therefore freely answer
honestly the questionnaire as per instructions given.
Thanks in advance for your cooperation.
Yours faithfully
Rev. Kitere Wilson Aggrey Ogama
APPENDIX II
SECTION 1
Tick against the most appropriate alternative.
1. Do you understand the meaning of budgeting at MSC Ltd?
a) Yes
b) No
c) Not sure
2. Do you understand the advantages of budgeting at MSC Ltd?
a) Yes
b) No
C) Not sure
3. Does MSC Ltd administer a budgeting process and profitability?
a) Yes
b) No
c) Not sure
4. Does MSC Ltd management allow the equitable and free participation of all
stakeholders, particularly departmental heads, line managers,
superintendents, supervisors and other staff other than those from Finance
and Accounting in administration of budgeting and profitability
a) Yes
b) No
C) Not sure
5. If so, does it have a budget committee, budget direct and budget manual in
its administration of budgeting and profitability?
a) Yes
b) No
c) Not sure
,~POSTGRAQUATE~,6. A budget period refers to a specific time in a year during which a~ ~
prepared. Does MSC Ltd ihave a budget period in its ad~1~stEat~QO...ç1 ~
budgeting and profitability? ~
a) Yes
b) No
c) Not sure
7. A master budget comprises of all components or schedules of the budgetary
system. Does MSC Ltd prepare a master budget?
a)Yes
b) No
C) Not sure
8. A sales budget refers to the sales forecast during a given financial period.
Does MSC Ltd prepare a production budget?
a) Yes
b) No
c) Not sure
9. A production budget refers to a forecast of units to be produced during a
given financial period. Does MSC Ltd prepare a production budget?
a) Yes
b) No
c) Not sure
10. Direct material budget refers to the number of units of raw materials to be
used in production of required units of finished products and or amounts of
money used for acquisition of raw materials during a given financial period.
Does MSC Ltd prepare a direct materials budget?
a) Yes
b) No
C) Not sure
11. Direct labour budget refers to the number of direct labour hours used in
production of required units of finished products and or amounts of money
spent on the direct labour hours. Does MSC Ltd prepare a direct labour
budget?
a) Yes
b) No
C) Not sure
12. Ending inventory budget refers to the quantity of raw materials and or
finished products in units and monetary value held by an organization at the
end of the budgetary period. Does MSC Ltd prepare an ending inventory
budget?
a) Yes
b) No
c) Not sure
13. Factory or manufacturing overhead budgets refers to costs or overheads
incurred in the factory for the production of required units of finished
products during a given financial period. Does MSC Ltd prepare the factory
overhead budget?
a) Yes
b) No
c) Not sure
14. Cost of goods sold budget refers to the sum of opening inventory of finished
goods, direct material used, direct labour and factory overhead less closing
inventory of finished goods. Does MSC Ltd prepare a cost of goods sold
budget?
a) Yes
b) No
c) Not sure
~ POSTGRADUATE ~.
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15. Marketing and administrative expense budget refers to cost
delivery of finished products to customers or final consumers a or &sts
incurred on administrative matters or office expenses. Does ~?~Ctd
prepare a marketing and administrative office expense budget? ~20000,
a) Yes
b) No
C) Not sure
16. A budgeted income statement refers to a statement showing all operations
and net income of an enterprise during a given financial period? Does MSC
Ltd prepare a budgeted income statement?
a) Yes
b) No
c) Not sure
17. A cash budget refers to the forecasted inflows and outflows of cash during a
given financial period. Does MSC Ltd prepare a cash budget?
a) Yes
b) No
C) Not sure
18. A budgeted balance sheet refers to the forecasted assets and liabilities and
owners equity of an organization under the budgetary period. Does MSC Ltd
prepare a budgeted balance sheet?
a) Yes
b) No
c) Not sure
19. Profit means a difference between the revenues and costs of an
organization during a given financial period. Does budgeting enable MSC
Ltd to earn profits?
a) Yes
b) No
c) Not sure
20. Has MSC Ltd been reporting profits between 2002-2006 as a result of
proper budgeting?
a) Yes
b) No
c) Not sure
SECTION II
21. State in Kshs. the budget estimates of the net earnings before interest and
taxes (EBIT) and the actual net earnings accruing from the said estimates
before interest and taxes (EBIT) for each of the five years mentioned in
question (20) above.
Budgeted Net Earnings Actual Net Earnings before
Before interest and Taxes (EBIT) interest and Taxes (EBIT)
2002 KShs._______________ KShs.________________
2003 KShs._______________ KShs._______________
2004 KShs.________________ KShs.________________
2005 KShs._______________ KShs.________________
2006 KShs._______________ KShs._______________
22. In your own words, state in summary form two things you consider
impressive about MSC Ltd budgeting system.
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23. Similarly, state two things you consider unsatisfactory
budgeting system.
24. Suggest two ways you consider necessary for the improvement of budgetingsystem at MSC Ltd.
I -
P.O.BOX 20000
K1~MPA1A INTERNATIONAL KAMPALA UGANDAUNIVERSITY TEL:041-266813
GnNiftftdlt!Zln—L:o:I
- “1—,~.
OFFICE OF THE DIRECTOR
SCHOOL OFPOSTGRADUATE STUDIES l2JJanuaryl2007
The Chief Executive Officer,Mumias Sugar Company LtdMumias Kenya
RE: INTRODUCTORY LL TTER FOR REV, KITERE WILSON AGGREY
This is to introduce to you that Rev, Kitere Wilson Aggrey,of registration MBA199401521DF is a student pursuing a Masters of Business Administration Degree(MBA), specializing in Finance and Accounting
The above student wishes to carry out research on “Examining the relationshipbetween budgeting and profitability among sugar factories in Kenya”-A case studyof Mumias Sugar Company.
It would be highly appreciated if you would give him the necessary cooperation tocarry out his research study in your Organization.
Yours faithfully
Prof.Owolabi.O.. Samuel
D~ RECTOR- SCHOOL OF POSI GRADIJATh STUDIES
POSTGRADUATE~ LIBRARY
DATE:..... ••s...
/
APPENDIX ifi
MUMIAS SUGAR COMPANY LIMITED
1\1EMORANDUM
To: Management Accountant Date: 10 April 2007
From: Training & Development Manager
Sucicr-t: RESEARCH PROJECT Ref: PERIE/12B
Rev. Kitere Wilson Aggrey is an MBA student at Kampala International University
specializing in Finance and Accounting.’
He wishes to cany out his Research Project titled “Exaimning the relationship between budgeting and
profitability among sugar factories in Kenya” -- A case study of Mumias Sugar Company”.
Please arrange to have him carry out his Research Project from your Section on 10th April,
2007.
H. A. Otuko ~-~k~’f
[U lAS SUGARI4PAN$i’f’f
TO: THE DIRECTORPOSTGRADUATE SCHOOLRESEARCH AND EV ALUA TION CENTREKAMPALA ITERNATIONAL UNIVERSiTYP.O. BOX 2000KAMPALA.
FROM: TRAINING AND DEVELOPMENT MANAGERHUMAN RESOURCE DEPARTMENT MUMJASSUGAR COMPANY LIMITED
DATE:2STH MAY 2007.
SUBJECT:REV.KITRE W. AGGREY
Head OfficeP.0: Private Bag Mumias, KenyaTel: +25456641620,641621Cell: +254722203891-5,0734600334/5Fax: +25456641234email: msc(~mumias-sugarcom
Nairobi OfficeP.O. Box: 57092 City Square 00200 Nairobi, KenyaTel: +25420271 2317-8Cell: +254 720 140080Fax: +25420271 2316email: [email protected]
This is to confirm that the above named student of your university did a research at ourcompany.
The research topic was “Examining the relationship between budgeting and profitabilityamong sugar i~ctories in Kenya” A case study of Mumias sugar company limited
J ,n-1 •~
~.OTUKI
UBRARY
4 DATE’ ....•• /*
