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Budgeting as an Instrument of Internal Control Research Paper

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Introduction

A Manufacturing organization is any type of business that relies on components and raw material to make finished goods. Such organizations operate in an environment characterized by uncertainties caused by several factors including political, social, competition, and technological advancements.

According to Joppen et al. (2019), the performance index of most of these manufacturing organizations shows a lot of failures and losses due to poor planning against the aforementioned uncertainties. Joppen et al. further observed that with proper planning, businesses can reduce the uncertainties: the management will have a clear direction on where it is headed to. However, without effective leadership, these enterprises may fail to achieve their set goals and objectives. Leadership is effective if it accomplishes the objectives with minimum efforts and costs as well as within the specified timeframe. For instance, the management can decide to use budgeting to achieve these objectives.

Budgeting can simply be defined as the process of creating a plan to spend money and resource. While there are different types of budgets, they all aim at helping the organization determine in advance whether it has enough cash to complete various tasks. Budgeting in simpler words refers to the course of action taken by organization in completing the set goals and objectives. According to Barbosa et al. (2020), the main role of budget planning is to guide the organization in making accurate and reliable decisions. With effective budget planning therefore, the company will manage to resolve any emerging uncertainties. In essence, budgeting is critical in manufacturing companies because most of them have limited resources. It is this scarce resource that hinders the firms from accomplishing what it was set out to achieve. This includes maximizing profit, achieving high level of performance, avoiding risk and ensuring its continued survival. Therefore, the aim of this term project is to find out whether the manufacturing companies such as the General Motors Company, do budgeting. More specifically, this paper will critically make a consideration of the impact of budgeting as an instrument of internal control in the General Motors Company.

Overview of General Motors (GM)

General Motors (GM) originally known as General Motors Corporation, is an American based cooperation that was once the world’s largest motor vehicle manufacturer: for a better part of 20th and 21st centuries. GM prides itself as one of the oldest manufacturing companies in the U.S (Helper and Henderson, 2014). It owns several manufacturing and assembly plants as well as multiple distribution centers in different countries including the U.S and Canada. The company is known for products such as automotive components, automobile and trucks and engines. Besides this, General Motors Company also engages in financial services.

Early History

The General Motors Company traces its origin back in 1908 under the leadership of William Durant. It was founded with the aim of consolidating different motorcar companies. Later in 1912, GM became the first company to introduce electric self-starter which saw the hand crank become obsolete. In 1916, it was reincorporated and renamed General Motors Corporation (Helper and Henderson, 2014). Two years, the company partnered with Chevrolet Auto Company and Delco Products: Fisher Body Company and Frigidaire them later in 1919.

In 1920, the company made some changes in its leadership positions with Alfred Sloan replacing Durant as the president. He served for a period of 14 years before he was transferred to the board of directors as its chairman. Sloan spent most of his years reorganizing the company into a single entity with several automotive divisions. These divisions were Cadillac, Buick, Pontiac, Oldsmobile, and Chevrolet they were under the leadership of central corporate office. Sloan introduced the concept of decentralization which later replicated in many industrial enterprises in the U.S.

Global Expansion

In 1929, GM was ranked as the leading automotive manufacturer in the U.S, the position previously held by Ford Motor Company. This came after it expanded it operation in several countries such as England and German. It is these three companies that saw GM emerge the world’s largest manufacturer of motor vehicles in 1931. By 1944, it became the world’s largest industrial corporations: it was the sole manufacturer of 44 percent of all the cars in the United States.

GM continued to grow throughout the years from 1950s to 60s: it accounted for 45 percent of the total automotive sales in the U.S. In 1984 the company expanded its operation further following a successful purchase of Electronic Data Systems Corporation. At this time, General Motors had started facing stiff competition from Japanese automakers. To eschew this, it introduced a new automotive division, Saturn, which relied on automated plants to manufacture subcompact cars. Two years later, the firm bought the Hughes Aircraft Company, a manufacturer of communication satellites. While its technological advancements continued to shape its operation, it was forced to close several of its plants in 1990s: it cut its workforce by 40 percent.

General Motors adopted several measures which spearheaded its recovery process. By focusing exclusively on automotive businesses, the firm was forced to sell its Electronic Data Systems in 1996. In 1997, it further sold the Hughes Electronics to Raytheon Company. With these changes, GM focused more on buying more shares: it became the sole owner of Saab Automobile in 2000. In fact, in the early 21st century, GM had already purchased several equity shares in several car companies among them Fiat Isuzu, Fuji Heavy Industries (Subaru), and Suzuki. However, the move to discontinue its Oldsmobile brand affected its operations: it was overtaken by Toyota Motor Corporation.

The company, after being overtaken by Toyota Motors Corporation, opted to reduce its financial service holdings that were undertaken through several deals with General Motors Acceptance Corporation (GMAC). GMAC was introduced in 1919 with the main aim of financing and insuring all the installment sales of different GM products. GM made a bold decision in 2006 to sell 51 percent stake in GMAC to Cerberus Capital Management. The company went ahead to change of GMAC to Ally Financial.

Literature Review

Description of Budget Manual (BM)

A budget manual (BM) can be described as a set of rules and instructions prepared by accountants to guide large organizations to make their budgets and other related reports. The manual, as explicated in McGinnis and Faust’s (2019) study highlights the procedures and objectives involved in the budgeting process. Similarly, it acts as an important source of information for those involved in the budget preparation. In addition to this, most budget manuals contain a time table outlining the order of preparing the budget and the exact dates of presenting it to the budget committee. It is imperative to ensure all those involved in preparing the budget have access to this manual.

Another important aspect of the budget manual is that it strives to improve communication. According to McGinnis and Faust (2019), the manual should be produced earlier so that everyone involved in budget making has enough time to read through the information about budgetary process. In other words, BM is largely an instructional manual with detailed information on how the budget should operate within the organization. Bartocci et al. (2018) emphasized further the need to come up with a budget that prioritizes the following key elements: the specific objectives of the business, the procedures that must be followed in the budget making process, and the role played by budgeting control in developing the budgets. The other element for consideration is the specific functions undertake by budget committee and budget officer and their relationship with different levels of management.

Why Budgeting is Important to a Business

According to available research, majority of the small businesses do not have a formal budget. In the survey carried out by Nikodijević (2021), about 62 percent of small businesses had no plans or measures in place of creating a functional budget. As the authors rightly observed, companies without budgets may not understand how well their businesses are performing. Therefore, the main reason why organizations create budgets is to ensure they understand the amount of money they have, already spent and needed in future operations. In line with this, a formal budget is critical in driving important decisions such as increasing staff, buying new equipment and cutting down on unwanted expenses.

Additionally, budgeting is important especially when the business has insufficient funds: it can guide the management in making some changes to the business plan as well as prioritize spending. Olaf et al. (2019) went ahead to discuss some common advantages of budgeting. They include: stating company’s expectations in clear terms, providing a detailed plan of action for eliminating uncertainty, and coordinating the activities to ensure the resource is used accordingly. Other advantages include providing a means of measuring performance of individuals and units, guiding the business to focus on important matters through budgetary process and measuring efficiency and inefficiency in operations.

Budget and Budget Planning

Budget can simply be defined as a financial plan for specific period such as one year. According to Nikodijević (2021), a good budget should consist of one or all of the following elements: planed sales volume and revenues, assets, liabilities, cash flows and resource quantities. A budget also shows a clear picture of planning income that should be generated or expenditure incurred in a given period as well as the capital required to meet specific objectives. Simply put, a budget refers to a plan of a company’s future expectations. It therefore follows that budget planning should entail the control and manipulation of the reliable variables: they can be controllable or uncontrollable. A company with a bigger budget is capable of getting more people to work on a project and complete it within the specified timeframe. This essentially explains why every project plan depends more on the budget.

Budget planning can either follow a top-down or bottom-up approach. Budget planning that follows a top-down approach is where the budgetary process is initiated by the senior management in line with the company’s objectives. The department managers have a role of ensuring it is implemented within the indicated period. The main advantage of following this approach as observed by Mah’d (2020) is that it allows every department to come up with their own budget based on the company’s broader budget allocation. Bottom up approach is where the budget planning process is initiated by the departments and then move up to higher levels of management. Here, every department has a responsibility of developing plans for its proposed activities as well as estimating the cost it will incur. The main disadvantage of this approach is that it can be lengthy and time consuming. Overall, budgets can be prepared for the entire business, for departments, for key functions such as production and sales or for financial components including cash and capital expenditure manpower.

Types of Budgets

The budgeting process follows a chronological order depending on the methods and techniques employed by an organization. While there are many types of budgets, this review will highlight only the most commonly applied ones. Some of these budgets as discussed below deal with income from dividends, sales and interests. Other budgets provide critical information about sources of expenditure such as selling costs, purchases and labor.

Master Budget

A master budget is a financial document with specific information on the amount of money an organization intends to make and spend over a fiscal year: this is usually broken down into quarterly or monthly. This type of budget is made up of all the lower-levels budgets within the organization. Other elements included in the budget are cash flow forecasts, financial plan and budgeted financial statements. Its main advantage is to provide the business with a blueprint of the daily operations and expenditure either quarterly or monthly (Stephenson and Porter, 2019). In essence, master budget comprises of all the lower-level budgets within the operating and financial budgets.

Operating Budget

Operating budget is concerned mainly with the income-generating activities within the organization. It is further made up of two parts: programme and a responsibility budget. The former looks at the projected revenues and costs associated with specific programs the organization plans to complete. The latter provides guidelines on the activities that should be undertaken. As Jansen, (2020) observes “it is a statement of performance that is expected of each responsibility center manager” (p. 249). According to the authors each manager has a responsibility of preparing the parts of the operating budget that aligns to their area of specialization. The responsibility budget can be prepared as either a variable or flexible budget in the event the total costs in a specific center end up varying with changes in volumes: this is common in production responsibility centers.

Financial Budgeting

In financial budgeting, the focus is mainly on predicting the income and expenses of a business for both short and long-term basis. With accurate cash-flow projections, the business will be able to meet its targets within a specified period. Financial budget exists to help organizations around the globe manage cash flows better. It allows businesses to come up with efficient planning mechanism to control inflows and outflows. The financial budget preparation entails the following: budget balance sheet, cash flow budget, the source of income and the business’ expenses. It is important for the management to ensure income and expenses are evaluated on monthly, quarterly or yearly basis. This type of master budget plays an important role of ensuring the company achieves its long-term objectives.

The financial budget preparation process should only start after the operating budget has been completed. This is necessary because it ensures the organization is in a better position when it comes to predicting the sales and production expenses. In essence, this budget should only be undertaken after the organization has conducted a careful planning of different financial activities in operating budget. In Rhanoui et al. (2019) study, the authors focused more on discussing the different sections of a financial budget. They include capital expenditure budget, budget income statement and budgeted balanced sheet.

Firstly, capital expenditure budget is concerned with the expenses or capital asset of a business. This budget, as explicated by Nikodijević, (2021), estimates the expenses that would be incurred in the event the existing plant is replaced. Secondly, budget income statement exists to help companies compare between the actual and budgeted data. Lastly, budgeted balance sheet consists of many different budgets. It is an estimated balance sheet that gives an organization the indication on how its finances will look like in the future. It also helps firms make several changes in advance to ensure it remains competitive.

Cash Budget

Many companies use cash budgets as a way of ensuring sufficient cash is available when needed to meet the activities outlined in different budgets. In the view of Jansen (2020), cash budgeting is a matter of uncertainty which explains why companies are advised to allocate more than the required amount of money to address any errors in planning. In essence, this type of budget exists to help ensure the management put in place measures to invest the surplus cash in more profitable investments. The paragraphs below discuss some of the issues that must be considered when preparing a cash budget.

Firstly, the management should consider the issue of depreciation which occurs whenever there is no movement of cash. “It is usually taken of the wear and tear on an asset resulting from use”(Kareem et al., 2019, p.532). It is imperative for the management to ensure depreciation does not appear on cash budget as an expense. Another issue for consideration when preparing cash budget is dividend. It is important to ensure dividend proposed do not appear on the cash budget. However, the dividend paid should be included in the period in which the actual payment was completed. Thirdly, the management should pay a close attention on the information indicated on the receipts from debtors and payment to suppliers in order to avoid unnecessary mistakes. Other issues to consider include redemption of preference shares, and minimum cash balance.

Effective Internal Control System

Internal control system exists to help regulate the business activities as well as reduce the necessity of protracted detailed works. More specifically, internal control can be defined in terms of internal check and internal audit. These two are put in place to ensure the management performs its activities in an orderly and efficient manner. According to Rahim et al. (2018), internal check is a method used in organizing all the operations of the business at the departmental level. It also plays an important role in minimizing fraud as well as preventing errors from occurring. Internal audit offers a review of all the operations and records completed within the organization. In fact, most organizations have an internal unit headed by a chief internal auditor whose main role is to monitor and verify the effectiveness of the internal audit system.

Components of internal control system

Control Environment (CE)

Control environment (CE) refers to the attitude toward internal control developed and regulated directly by the employees and the management of the organization. It can also be described as the attitude of employees regarding the need for internal controls. Therefore, if the management takes controls seriously, it stands a high chance of benefiting from an improved system (Rahim et al., 2018). However, if it opts to work around the system of controls, the employees may end up ignoring the controls. The organization structure and accountability relationships remain to be the two most critical factors in the control environment.

Risk Assessment

Risk assessment process aims at reviewing the business with the aim of identifying risks and designing controls to address them. Based on Pence and Mohaghegh’s (2020) research, the assessment should be carried out regularly in order to address any new emerging risks. This is necessary for those organizations interested in changing its products and acquiring other businesses. In fact, it is the activities undertaken in the acquisition process that introduce new risks.

Control Activities

Control activities refer to the tools, both manual and automated, adopted by the organization to prevent the risks that hinder the accomplishment of company’s objectives. Some common example of these tools includes accounting systems and information technology. For example, a company can use accounting system to conduct both the inventory and fixed asset audits. Therefore, the management should establish control activities in order to meet the set objectives and goals.

Monitoring

Monitoring allows organizations to evaluate and determine whether or not their internal controls are functioning well. It strives to review the activities and transactions of an organization to assess its overall quality of performance. Rahim et al. (2018), advices managers to direct monitoring efforts towards meeting the set objectives. For monitoring to be successful, the employees and managers should have a clear understanding of their responsibilities and risk tolerance levels.

Interpretation of the Project

The sources of data for this project are primary and secondary data. The former is collected through responses from questionnaire and interviews. The questionnaire remains to be the main instrument used to collect primary data. For the purpose of this project, the questionnaire contains a series of questions on budgeting as an instrument of internal control in medical facility: A total of 10 questions are used in gathering the necessary data from a sample size of 78 staff members of Evans Medical Plc.

Question 1: Is the budget planning and control very useful in your organization?

Type of ResponseTotal numberPercentage
1Strongly Agree2228.2
2Agree3241.0
3Strongly Disagree810.3
4Disagree1114.1
5Not Sure56.4
Total78100

The table above shows clearly that 22 respondents strongly agreed that budget planning and control is very important to their organization. The same extents to another 32 respondents who stated that they agree budget planning is critical. 8 and 11 respondents strongly disagreed and disagreed respectively with the remaining 5 being undecided.

Question 2: Is there adequate budgeting and budgeting control within the organization?

Type of responseTotal numberpercentage
1Yes5266.7
2No2025.6
3Not sure67.7
Total78100

It is clear from the table that 6.7 percent of the respondents believe that there is adequate budgeting and budgeting control in their organization. Another 25.6 percent believe that budgeting is not adequate while only 7.7 percent remained unsure.

Question 3: Is budgeting considered a control measure in your organization?

Type of ResponseTotal numberPercentage
1Strongly Agree22.6
2Agree7089.4
3Strongly Disagree00
4Disagree67.7
5Not Sure00
Total78100

It is clear from the above table that only 2 of the 78 respondents strongly agree that budgeting is a control measure in the organization. However, the majority of the respondent, 70 agree with only disagree with the question.

Question 4: To what extent do you use budgetary control in your organization?

Type of responseTotal numberpercentage
1Large3038.5
2Moderately4659
3Rarely22.6
Total78100

A large percentage of the respondent 58.9% believe that budgetary control is being used moderately within the organization. Similarly, a total of 30 respondents representing 38.5% are of the opinion that budgetary control is used to a larger extent. However, only 2 respondents were of the contrary opinion regarding the same.

Question 5: Is there a communication gap between the budget committee and different divisions during the budget presentation?

Type of ResponseTotal numberPercentage
1Strongly Agree1823.1
2Agree1012.8
3Strongly Disagree4051.3
4Disagree1012.8
5Not Sure00
Total78100

From the table, majority of the respondents, 40 representing 51.3% strongly disagree that there is a communication gap between budget committee and different divisions during its presentation. On the contrary, 18 respondents strongly agree with another 10 agreeing with the question. Lastly only respondents, accounting for 12.8 percent of the total sample disagreed with the question.

Question 6: Is there an execution of the budget for the year within the organization?

Type of ResponseTotal numberPercentage
1Strongly Agree1924.4
2Agree5064.1
3Strongly Disagree00
4Disagree911.5
5Not Sure00
Total78100

From the table, majority of the respondents 50 of them agree that there is indeed an execution of the budget for the year within the organization. A total of 19 respondents strongly agree with another 9 of them disagreeing with the question.

Question 7: How is the process of budget execution undertaken in this company?

Type of responseTotal numberpercentage
1It follows the company’s procedure6279.5
2Does not follow the company’s procedure1114.1
3No procedure completely56.4
Total78100

It is clear from the table above that majority of the respondents, 79.5 percent are of the opinion that budget execution process follows the company’s laid-down procedure. 11 respondents out of the 78 interviewed believe budget execution does not follow the company’s procedure while only of them noting that there is no procedure completely.

Question 8: How is budgeting used as an instrument of control in this company?

Type of responseTotal numberpercentage
1It is used to set a target and ensure its achieved7494.9
2It does not set any target at all00
3Not sure45.1
Total78100

The majority of the respondents interviewed, 74 of them agreed that budgeting is used as instrument of control to set targets and ensure they are achieved within the specified time. On the contrary, 4 respondents were of the opinion that budgeting as an instrument of control does not set any target at all.

Conclusion

Budget is an important aspect for all the operations undertaken by manufacturing companies such as General Motors. In fact, GM’s success can be attributed largely to its evidence-based budgeting plan. As discussed above, formal budget helps create financial stability: it allow companies to track their expenses. As further evidenced in the literature review, a good budget should consist of one or all of the following elements: planed sales volume and revenues, assets, liabilities, cash flows and resource quantities. With that said, several conclusions can be drawn from the questionnaires. Firstly, General Motors normally plan their profits in such a way that the losses only account for a small percent as per the budget estimate. Secondly, General Motors, as a manufacturing company generally do control their levels of profit making and the processes used to achieve it. Thirdly, the type of budgeting adopting by the company is efficient. Lastly, General Motors follows a laid-down procedure in budget presentation.

References

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Bartocci, L., Grossi, G., & Mauro, S. G. (2018). Towards a hybrid logic of participatory budgeting. International Journal of Public Sector Management.

Helper, S., & Henderson, R. (2014). Management practices, relational contracts, and the decline of General Motors. Journal of Economic Perspectives, 28(1), 49-72.

Jansen, T. (2020). Analysing stochastic search heuristics operating on a fixed budget. In Theory of Evolutionary Computation, 56(8), 249-270. Springer, Cham.

Joppen, R., von Enzberg, S., Gundlach, J., Kühn, A., & Dumitrescu, R. (2019). Key performance indicators in the production of the future. Procedia CIRP, 81 (4), 759-764.

Kareem, A. A., Jihad, A. G., & Nadeem, A. (2019). Preparation of the cash budget based on activities to evaluate the budget. Opción: Revista de Ciencias Humanas y Sociales, 35(20), 532-548.

Mah’d, O. (2020). Bottom-up rather than top-down: evidence from Middle Eastern and North African educational institutions. Journal of Public Budgeting, Accounting & Financial Management.

McGinnis, M., & Faust, M. (2019). Establishing, monitoring, and spending the college and university acquisitions budget. In The acquisitions budget, 34(3), 133-144. Routledge.

Nikodijević, M. (2021). Implications and challenges of using driver-based budgeting in contemporary business environment. Trendovi u poslovanju, 1(17), 49-57.

Olaf, S. S., Agnieszka, M., & Thomas, H. (2019). Beyond budgeting–a fair alternative for management control?-Examining the relationships between beyond budgeting and organizational justice perceptions. Studies in Business and Economics, 14(2), 160-180.

Pence, J., & Mohaghegh, Z. (2020). A discourse on the incorporation of organizational factors into probabilistic risk assessment: key questions and categorical review. Risk Analysis, 40(6), 1183-1211.

Rahim, N. F. A., Ahmed, E. R., & Faeeq, M. K. (2018). Internal control system and perceived operational risk management in Malaysian conventional banking industry. Global Business & Management Research, 10(1), 209-320

Rhanoui, M., Yousfi, S., Mikram, M., & Merizak, H. (2019). Forecasting financial budget time series: ARIMA random walk vs. LSTM neural network. IAES International Journal of Artificial Intelligence, 8(4), 317-349.

Stephenson, T., & Porter, J. C. (2019). Denim products incorporated: Creating and using a master budget. Institute of Management Accountants.

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