ACC80008 – Managerial Accounting

Research on the implementation of budgeting

  1. What is budgeting?

–     A budget is an important financial plan that incorporates a systematic analysis and interpretation of financial forecasts in terms of products, markets, and the application of resources.

–     Budgeting is the process of expressing the predicted costs and resources for a planned course of action over a specified time period.

–     Three main purposes including:

+ a tool of management,

+ a tool of accountability and transparency

+ an instrument of economic policy.

–     Budgeting systems:

  • Traditional budgeting: estimate the coming year budget based on the current year budget.
  • Alternative approach:

+ Activity-based budgeting: estimate the coming year budget based on an activity framework.

+ Zero-based budgeting: budgeting process requires all costs to be specifically justified by the benefits expected.

  1. Zero-Based Budgeting: Nigeria Case Study
    • Motivations

Many governments use an incremental approach, which is deemed as the traditional approach. Since the traditional budgeting relies on the current budget to determine next year’s budget, it is claimed to cause many drawbacks.

–     Criticisms of traditional budgeting:

+ Fail to consider whether a particular item should be included or need justification.

+ Not incorporate a careful evaluation of the level of services being offered. Once an item appears in the budget at inception, it is automatically included in the future budget.

+ Only focus on incremental changes in the budget of two consecutive years rather than on the whole of the budget. In addition, only incremental changes in the items are taken into consideration, while some items might decrease in price.

+ Cause the unspent money, which may be used wastefully or increase corruption.

–     Alternative approach – Zero-based budgeting

+ Ensure the reassessment of expenditure annually. As a result, inefficient and wasteful spending will be eliminated.

+ Ensure a more efficient allocation of resources.

+ Take into account the changes in diverse factors in the budgeting process such as economic environment, politics, society.

+ Encourage the participation of multiple stakeholders in preparing budget proposal.

–     Nigeria case:

+ Nigeria has witnessed the underperformance in budget implementation due to its traditional budgetary approach.

+ The case study successfully provided empirical evidence of the efficiency of zero-based budgeting when compared to traditional budgeting system. In particular, by adjusting every governmental spending, the zero-base approach is proved to foster sustainable budget implementation and improve budget performance.

  • Budgeting process

The federal budget passes through four major phases:

  1. The Ministerial Approval Phase:
  • Based on Budget Call Circular, each Ministry, Department, and Agency (MDA) submits its draft budget estimates to the “Draft Committee” of FMBNP.
  • Draft Committee schedules the MDAs to defend their budget proposals. Defense outcomes are consolidated to a single document and transmitted to the president.
  1. The Executive Council Approval Phase

A Consolidated document is presented to the president. Then president presents the budget draft to the Federal Executive Council (FEC) for ratification.

  1. The Legislative Approval Phase
  • The National Assembly (NASS) takes another review of the budget draft.
  • Appropriation Committees within NASS consider the draft separately. The draft approved by the NASS is called Appropriation Bill.
  • The Bill approved by the president will become the Appropriation Act.
  1. The Implementation, Monitoring, and Evaluating Phase
  • At the implementation phase, approved funds are quarterly released to MDAs for project execution.
  • The monitoring and evaluation phase is carried out by other agencies to ensure that funds are used properly.
  1. How to improve the implementation of budgeting
  2. Training governmental personnel

Since the zero-base approach includes a huge number of complicated paperwork, combining with the constantly changing economic environment, MDAs and other governmental officers and stakeholders might not possess the needed skills and knowledge. Therefore, the key players in the budgeting process should be trained periodically on zero-based budgeting.

  1. Focusing on the Monitoring and Evaluating phase

Nigeria is rated as the world’s top corrupt nation by Transparency International (IT) for many years. The funds which are distributed to MDAs for implementing the approved projects have illegally enriched personnel. The application of zero-based budgeting allocating funds based on the efficiency and necessity of a project is an effective approach to prevent corruption. Nevertheless, to deal with the poor implementation of the annual budget, it is crucial to pay more attention to the monitoring and evaluating phase. The independent committees should be established to supervise and assess budget execution. In addition, applying the generally accepted international accounting standards will also improve financial transparency and limit the thief of government assets.

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