THE EFFECT OF BUDGET AND BUDGETARY CONTROL ON EXTRACTING INDUSTRY(A CASE STUDY OF SHELL NIG PLC

THE EFFECT OF BUDGET AND BUDGETARY CONTROL ON EXTRACTING INDUSTRY(A CASE STUDY OF SHELL NIG PLC

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                                                            CHAPTER ONE

                                                             INTRODUCTION

1.0      BACKGROUND TO THE STUDY

The changing complexity of business activities and the ever changing conditions of business environment – social, economic, political and technological advancements make it ever increasingly difficult for an organization to consistently earn a profit that could be termed a fair return on the capital invested. Budgeting and budgetary control has for long been a technique of interest to management accountants, business experts and financial evaluators. Experts have conventionally accepted budgeting and budgetary control systems, which are the basic components of budgetary system, as a fundamental basis for profit planning and control in an organization.

Economic enterprises engage in many activities that require not only planning but also monitoring and co-ordination of plans. We explore the relationship among those activities in this research work. The comprehensive budget is a tool to make planning effective and provides a means where the activities are going according to plan. In a formal way the budget captures and reflects the results of planning decision, from decision about prices, product mix and cost structure, those about dividend and major new investments. Budgeting is the act of preparing and formulating a budget (Certified National Accounts, 2006). And because the  budget is a planning or more accurate, a  planning process it is the  process in which objectives, policies and policy  measures, funding requirement and sources and allocations of fund stated in the budget are  determined. The details of the activities and procedures will certainly differ from sector to sector (ANAN, journal, 2006).

Budgetary control as one of the component of budgetary system refers to the use of budgets to control the activities of the organization (ANAN, 2006). It relates the responsibilities and duties of executive to the requirement of policy and the continuous comparison of actual performance with expected results so as to secure either by individual or collective action the objective of such organizational policies or a revision there of (CIMA).

Therefore, a number of factors are to be considered and put in place for the effective use of this technique of budgeting. For instance, Babatunde R. Yusuf (2001) suggested that the decisions of corporate organizations must be well defined and apart from obtaining the support of top management echelon, the line and staff managers must secure information about the policies, preparation of a budget manual, by the budget committee etcetera. To this end, the study of impact of budgeting and budgetary control, in a Extracting industryis worth purchasing. It is hoped that, the results of this study will provide empirical evidence for the effective guidance to modify the efficiency of the system in manufacturing organization.

1.1      STATEMENT OF PROBLEM

In the light of the above arguments, budgeting and budgetary control involves putting in place every necessary requisite feature to impact favourably on the Extracting industryand to make it more effective and efficient.

The identification of those problems encountered in Shell corporation as an indefinite approach to budgeting and budgetary control vis-à-vis. The effectiveness and efficiency of the Extracting industryis another area of interest for this research study.

Also in most cases, Extracting industryin the private sector lacks the provision of standard budgetary systems put in place by which the organization’s actual performance is ascertained.

In addition to the above postulation, this research work seeks to address probable areas of threats and opportunities open to Shell corporation as may be imposed by human element. Since a sector like that depends and concentrates on human resources for the production and marketing of pharmaceutical product.

If the tradition of doing things haphazardly persists, where a particular technique is not followed and pursued as consistently as possible as it should be, the effectiveness and the efficiency of the company, Shell corporation, in terms of productivity may be adversely affected.

In view of the above, the study is aimed at proffering lasting solutions to those identified problems.

1.2      PURPOSE OF THE STUDY

This research study is aimed at critically and carefully making a consideration of the impact of budgeting and budgetary controls in a Extracting industry such as Shell, hence considering the extent to which its  effect and purpose, importance and functions can  influence and  contribute to the company.

Therefore, to accomplish the above purpose attention is directed principally on such areas so as to understand the meaning of the concepts of budget, budgeting and budgetary control, also identifying the different types of budgets and control to be applied cum their effective and efficiency.

In order to identify and investigate one relationship between the requisite feature and the efficiency of the budgeting and budgetary control, in a Extracting industrywith special reference to Shell corporation.

In the same vein, to examine the impact and the effect, whatsoever, of good budgeting and budgetary control system on the effectiveness and efficiency of a manufacturing company like Shell corporation.

It is also the objective of this study to validate whether budgeting and budgetary control system gives a standard by which the actual performance of the organization is ascertained.

Also, to find out and state the effect of  the human element on budgeting system and lastly to determine the extent to which organizational goals and objectives are achieved vis-à-vis budgeting and budgetary control as a technique.

RESEARCH OBJECTIVES

a) To combine  ideas of all levels of management in the preparation of budget;

b) To Coordinate  various activities in business organisation;

c) To Reveal  where an  organisation  needs to remedy a situation;

d) To Plan and   controll   all income and expenditure to achieve maximum benefits for the organisation;

e) Provision of yardstick against which actual result can be compared along with predetermined result;

f) Channelization of capital expenditure in most profitable manner

 1.3      RESEARCH QUETIONS

Research questions are those interrogative statements that arise often from the course of study, such questions are meant to provide information to the study. In order to achieve the purpose of this research study, the study will attempt to provide answers to the following research questions.

a)      What importance does budgeting technique serve in a manufacturing company in Nigeria?

b)     How does budgeting aid the planning of a manufacturing compnay profit in Nigeria?

c)  How does budgetary control affect the working performance of employees in a manufacturing company in Nigeria?

d)  Why do manufacturing companies in Nigeria lack adequate skill for planning and controlling policy formulations and implementations?

e)   In what way do inadequate data and records create problems for manufacturing companies in formulating effective budgeting?

 1.4      HYPOTHESES  FORMULATION

Hypothesis is an assumption, a statement made about the value of a parameter or the observed fact of a distribution put forward to be tested and proven so as to reject or accept the preconceived concept. To provide answer to the research questions arising from the study, the following hypotheses are postulated.

a) Ho1: There is no significant relationship between budgetary planning and control on organisation performance;

b) Ho2: Effective budgetary control does not influence the result achieved;

c) Ho3: Budgeting technique is of no importance in a manufacturing firm;

d) Ho4: Budgetary control does not affect the working performance of an employee in a

 1.5      SIGNIFICANCE OF STUDY

This significance of the research project is to provide both theoretical and practical lasting solution to problems encountered by managers in instituting control in proposed plans of the organization in order to achieve the corporate objectives and to aid management efficiency.

This study also is expected to supply the relationship between the necessary requisite features to be put in place and the efficiency and effectiveness of budgeting and budgetary control system in an organization like Shell corporation.

Also, this research project will among other things to be expected to put forward the relationship between a good budgetary system and the efficiency of a Extracting industry like Shell corporation.

Another importance of this study is it shall establish the fact that budgeting and budgetary control give standards by which the organizational actual performance is ascertained.

Lastly this study is aimed at appraising the effect human elements have on the process of budgeting and budgetary control.

 1.6      METHOD TO BE USED IN CARRYING OUT THE RESEARCH

Research methodology deals with the description analysis and interpretation of various methods employed for collecting relevant information necessary for research work this research study is concerned with the impact of budgeting and budgetary control system in a manufacturing organization. For the purpose of collecting necessary data for this research work, primary and secondary data collection method will be used. The primary data collection method will be through the following:

1.        Structured questionnaire

2.        Personal unstructured interview

3.        Observation

The secondary data will be collected from reports and documents from the company. Also, reports outside the company and from library and desk research literatures will be used.

In this study, descriptive method will be used to analyze data and also in resting hypothesis, chi-square (X2) will be employed. Findings from this research study will be discussed in the light of the research problem hypothesis, purpose research questions, literatures of the research and other relevant issues conclusions will be drawn and recommendations and suggestions also will be made.

1.7      SCOPE AND LIMITATION OF STUDY

The premise on which this study is based is that, organizational performance of manufacturing companies is dependent upon efficient and effective budgeting and budgetary control system of Extracting industry one private sector with special reference to Shell corporation, an extracting company like shell. The study will also touch briefly the budgetary control process of related companies in the industrial sector.

The study will further identify the fundamental limiting factor which most managers usually encounter in the preparation of the organizational budget.

LIMITATIONS

In the course of conducting this research work it is expected that the following will constitute impediments to the effective conduct of the study

a)        Time constraint within which the study must be completed.

b)        Financial constraint

c)         Inaccessible and inadequate data

d)        Also, combining project work with several other activities is another stressful task that may not allow me to cover research materials extensively.

Nevertheless, I believe the above limitations will in no way affect the reliability and validity of the research study.

1.8      DEFINITION OF TERMS

1.        Budget: According to CIMA, it is defined as a future plan of action or an approved estimate stated in both financial and quantitative term, prepared and approved prior to a definitive period of time of the policy to be pursued in order to achieve an objective during that period.

2.        Budgeting: This is simply a process of preparing a detailed short term plan (budget). It is the process in which objectives policies and policy measure, finding requirement and source and allocation of funds stated in the budget are determined.

3.        Budgetary Control: Simply put, it is the use of budget or budgets to control operations and activities of the organization. It refers to the continuous comparison of a level with targeted result so that corrective action could be taken in the adverse variances while actions taken to the advantage of favourable variance.

4.        Budget Committee: This is a committee responsible for the preparation of the organization’s budget. It usually comprises of executive management, senior budget holders and accounting officers.

5.        Budget Manual: This document describes the objectives and procedures involved in budgeting. It provides a useful reference source for managers responsible for budget preparation.

6.        Budgetary System: This according to UMA represents an amalgamation of three major components parts of budgeting, budget and budgetary control.

7.        Fiscal Policy: Refers to government budgeted measures to regulate the macro variables and economic activities through her expenditure and taxation.

8.        Standard: This is a predetermined level of activity.

9.        Rolling Budget: UMA defines it as the continuous updating of a short term budget by adding say a further month or quarter so that the budget can reflect current condition.

10.      Zero Based Budgeting (ZBB): This requires a budget center to justify the entire budget from the scratch (Zero) in each year of budget formulation.

 1.9      HISTORICAL BACKGROUND OF SHELL CORPORATION NIG PLC

First Steps 

  • 1936 - The Royal Dutch/Shell Group founded Shell D'Arcy, the first Shell company in Nigeria.
  • November 1938 - Shell D'Arcy was granted Exploration licence to prospect for oil throughout Nigeria
  • January 1956 - First successful well drilled at Oloibiri by Shell D'Arcy
  • April 1956 - Changed name to Shell-BP Petroleum Development Company of Nigeria Limited

First Oil

  • February 1958 – The first shipment of oil from Nigeria
  • April 1961 - Shell's Bonny Terminal was commissioned
  • September 1971 - Shell's Forcados Terminal was commissioned

Agreements

  • April 1973 - First participation agreement; Fed. Govt. acquires 35% shares in the Oil Companies
  • April 1974 - Second Participation Agreement; Federal Government increases equity to 55%
  • July 1979 - Third Participation Agreement (through NNPC) increases equity to 60%
  • August 1979 - Fourth Participation Agreement; BP's share holding nationalised; NNPC = 80%, Shell = 20%

Changes

  • December 1979 - Company name changed to Shell Petroleum Development Company of Nigeria (SPDC)
  • August 1984 - Agreement consolidating NNPC/Shell Joint Venture
  • January 1986 - Signing of Memorandum of Understanding (MOU)
  • June 1989 - Fifth Participation Agreement; (NNPC = 60%, Shell = 30%, Elf = 5%, Agip = 5%)
  • July 1991 - Signing of Memorandum of Understanding & Joint Venture Operating Agreement


New Frontiers

  • April 1993 - Production Sharing Contracts signed - SNEPCO
  • July 1993 - Sixth Participation Agreement; (NNPC = 55%, Shell = 30%, Elf = 10%, Agip = 5%)
  • April 1995 - SNEPCO starts drilling first Exploration well at Bonga (Nigeria's first deepwater oil field)
  • November 1995 - NLNG Final Investment Decision taken
  • March 1998 - Shell Nigeria Gas Company established
  • December 2002 - Commencement of production from EA field

One Million Barrel Mark

  • October 2003 - Achievement of 1 million + barrels of oil per day production from SPDC operations.

A New Face of SPDC

  • January 2004 - THE NEW SPDC - A restructuring exercise; Nigerians placed in top positions of Management.
  • January 2005 - New SPDC launched, Basil Omiyi appointed first Nigerian MD.
  • September 2005 -  Basil Omiyi became Country Chair, Nigeria; oversees all Shell Companies in Nigeria as well as Shell interests.
  • November 2005 - SNEPCO began oil and Gas production at Bonga

Challenges and Rebirth

  • February 2006 – SPDC suspended operations in western Niger Delta due to increasing militant attacks. Production at EA was also suspended due to security concerns.
  • June 2006 –The Shell Companies in Nigeria committed to Nigeria Content Development - to maximise the participation of Nigerian businesses in all operations, thereby contributing to the development of Nigeria's industrial capabilities and competences, and supporting the nation's economy.
  • January 2008 – Mutiu Sunmonu was appointed as the Managing Director of SPDC.

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