ADDIS ABABA UNIVERCITY SCHOOL OF COMMERCE

DEPARTMENT OF ACCOUNTING AND FINANCE

RESEARCH PROPOSAL ON:

BUDGET ADMINISTRATION PRACTICES AND ITS CHALLENGES IN THE CASE OF
BOLE SUB-CITY

PREPARED BY: HENOK ATRSAW

ID NO: BER/9343/08

ADVISOR: DEREGE GELANA

March 2018

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 1. Introduction
1.1. Background of the Study
Historically, the scripture made us to believe that budget originates as far back as the Stone Age
period, when the early man failed to get all his needs he was forced to plan and manage the little
he had in terms of foods and other essential things.

Modern day budgeting started during the Egyptian and Roman civilization periods around
2500BC and 500BC respectively. Then the merchants belief in drafting all expected expenditure
against expected income in respect of their businesses so as to be able to know the kind of
venture that would be profitable.

Formal presentation and preparation of budget started during the middle age in England when the
Chancellor of the Exchequer, British equivalent of our Minister of Finance, used to pre-pare his
annual account to be read to the parliament in a scroll, usually put in a bag. During the time for
discussion on the finances of the state he used to open his bag containing the statement of
accounts to be read to the parliament.

The Oxford Advanced Learners‟ dictionary defined budget as an estimate or plan of the money
available to somebody and how it will be spent over a period of time.
(http://www.borjournals.com/a/index.../942)

Budget provide a basis for directing and evaluating the performance of individuals or segment of
organizations and also will structure the decision making environment (Bruns & Waterhouse,
1975), so they appear to be appropriate as a control devices impacting performance of
organizations. Therefore, a considerable stream of research (Schiff & Lewin, 1970; Onsi, 1973;
Brownell, 1985;

A budget has been defined by Chartered Institute of Management Accountants (CIMA), as “a

financial or qualitative statement prepared and approved prior to a defined period of time for the
purpose of attaining a given objective. Lucey (2010), in support of the CIMA's definition defined
budget to be a plan quantified in monetary terms, prepared and approved prior to a defined
period of time.(http://www.borjournals.com/a/index.../942)

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 1.2 Evolution and development of budget in Ethiopian context

During 1950s and 1960s, the country has engaged in detailed planning exercise, which was the
main instrument for resource allocation. It has under-gone significant change in the area of
policy and planning, revenue collection and expenditure allocation, and overall financial
management. As Ghirmai (1990) noted, for the first time government budget was published in
Ethiopia in 1945. The budget format that was established during the time was used for a long
period of time. The 1955 constitution specified the definition of powers of Ministries, Council of
Ministers, and Legislative body with regard to budget preparation and execution..

After the military government took power, major industrial and financial activities came under
the state control, which were the causes for the creation of huge public sector and expenditure.
This policy has created a condition to mobilize major public resources for the establishment and
strengthening of public enterprises and corporations. This results in large growing of government
expenditure and budget deficit.
During second half of the 1970s, the country faced the economic crisis which is partly explained
by the over centralization and over regulation of the economy. After the fall of the Derg regime
in 1991, the Government of Ethiopia initiated a broad spectrum of economic reforms. The main
policy instruments to reduce poverty are increasing resource allocation towards poverty-oriented
programs.
Therefore, public finance management in Ethiopia gets into more complex process because of a
radical program of decentralization to regions and lower tiers of the government, civil service
reform, including a variety of measures to strengthen expenditure management and control, and
sector development programs (World Bank, 1999).

In order to administer and manage economic and social development, different proclamations
issued in 1992. Proclamation No. 7/1992 provided the basis for the establishment of regional
governments and the right to prepare, approve and implement their own budget. The
proclamation provided the basis for the sharing of revenue between the Federal and Regional
Governments.
In 2004 Proclamation No. 60 issued that the city budget administration shall follow the budget
principles of the Federal Government.(Federal Negarit Gazeta- No. 60 30th July, 2004...P.2833)

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 1.3. Statement of the Problem
For every organization budget plays a key role in order to make in ordinary course of action.
Budget is useful to plan any economic activities because it usually represent a detailed analysis
of how a company expects to spend in future time periods, to provide a method of allocating and
using resources within the organization, to show employees an overall picture of the organization
which can motivate staff, to help monitoring and controlling operations, to help co-ordinate
different departments and align them towards shared objectives and it uses as a tool for decision
making for business, government agencies and individuals.

In order to ensure its existence as well as profitability, organization should have strong budget
system. However if there is ineffective and poor budget system, different problem may face like
inadequate communication of plan, the organization will be exposed for corruptions, lack of
benchmark for controlling ongoing operation and improper allocation of scarce resources. And
each budget center prepare its own budget by estimation. So that errors and inaccuracy will
talways remain since it is impossible to predict the future. Having improper budget
administration or it is called budget variance caused by bad assumptions such as using politics to
derive an unusually easy budget target, so that the baseline against which actual results are
measured is not reasonable. There is also a financial difficulty in allocating capital improvement
fund among competing projects, coordinating operations of an organization and in facilitating the
hole organization activities smoothly. These are the real facts that motivate to study the problem
that attach with budget administration.

The major problems encountered in bole sub city includes having an excess of un expected
expenditures which led to budget deficient and also ho miss utilization of budget.

Therefore, the study will try to answer for the following basic research questions

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Research questions:-

 What policies and procedures do the organization under take to administer the
budget?
 When compared actual results with budget established are variances observed?
 What are the challenges of budget administration in the organization?

1.3. Objectives of the Study

1.3.1. General Objective

The main objective of the study will be to assess the budget administration practices and its
challenges in Bole sub-city.

1.3.2. Specific Objectives

In order to achieve the general objective of the study, the researcher will consider the following
specific objectives:-

 To identify the policies and procedures that are used to under-take the budget
administration in the organization.
 To identify the problems that is encountered on the budget administration process in
the organization.
 To investigate if there are variance between the budgeted amount and actual
performance of the organization.
 To identify the challenges up on the budget administration of the org-n

1.4. Significance of the study

The significance of the research is that it will help the public and the writer to know how the
theoretical concepts are applied in actual practice. As well as the process of enriching the
knowledge of the reader, on the budget system of the organization, by giving a path for fellow
researcher to conduct detailed research on the problem. That may helps it to provide valuable
information and better approach to deal with the budget administration process and its challenges
in the organization. Furthermore It will guide the policy maker to peg where there core scraps
and disputed points are. On top of providing the public with additional information on how the
budget is encountered or endured in the case of bole sub city .and also it will help for further
study by providing information to other researcher.

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 1.5. Scope and Limitation of the Study
The study will be conducted in Bole sub-city Finance and Economy Secretariat. It is focused
mainly on budget administration and its challenges.

While doing the research the researcher will may face limitations of lack of interest to give
information by the respondents and lack of reliable information.

1.7. Organization of the study

The study will be organized into four chapters. The first chapter deals with the introduction parts
including background, statement of the problem, objectives of the study, scope and limitation of
the study and research methodology. The second chapter deals with the literature review. The
third chapter will be about the data presentation, analysis and interpretation and the last chapter
consists of summary, conclusion and recommendation.

1.8 Research Methodology

In this parts of the study, methods and procedures that are used to carry out the study are
presented.

1.8.1. Types and Source of Data

This study will use both types of qualitative and quantitative data. The qualitative data will be
expressed in terms of descriptive words and quantitative data will information about quantities;
by providing information that can be measured and written down with numbers. Both the
primary and secondary data will be used in the research.

The primary data will be collected through questionnaire and the secondary data will be collected
through the organization budget performance documents, website and other related literature
review.

1.8.2. Data Collection Tools

The primary data will be collected using questionnaire. On the other hand the secondary data will
be collected from organization's document, other related literature review, Books, Proclamations,
Internets and also the organization's budget performance documents.

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1.9 Population Sample Size Sampling Techniques

1.9.1 Population

The population of this s study is the employees (workers) of bole sub-city

1.9.2Sample

The sample of the research will be taken from finance and economic development office of bole
sub city

1.9.3 Sampling techniques

The sampling techniques that will be used to conduct this research is non random sampling
because it selects the finance department purposively

1.10 Methods of Data Presentation and Analysis

The data presentation and analysis will be in quantitative and qualitative method. In the
quantitative, the researcher will present and analyze the data that will be collected from the
respondents of the organization through testing of the research question by using tables. On the
other hand the data will be presented and analyzed in qualitative form by using descriptive
method of data analysis. In presenting the data the researcher will explain the data and try to
answer the questions “what, why and how?”

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 2. LITERATURE REVIEW

2.1. Definition of Budget, Budgeting and Budgetary Control

This chapter mainly given much attention to what has been said by different authors and scholars
about the budget and budgeting in different manners as stated below

Budget Cycle in Ethiopia

The budget process in Ethiopia is guided by a directive, known as the Financial Calendar, issued
to all public bodies by the Ministry of Finance and Economic Cooperation (MoFEC). The fiscal
calendar runs from July to June annually The state budget preparation is also guided by the
Macro Economic and Fiscal Framework (MEFF) document prepared by MoFEC. The MEFF
offers, among others, projections of Government revenue and expenditure, expenditure
financing, the division of total expenditure between federal and regional governments, and the
division of federal expenditure between capital and recurrent expenditures for the coming three
years. These activities take place between August and October each year. Using the approved
formula for a general purpose block grant (also referred to as a subsidy to regions), and based on
the approved MEFF,MoFEC prepares a rolling three year estimate of subsidies to each regional
government and administrative council, and notifies them of these estimates by the end of
November Simultaneously, MoFEC determines the total resources available to finance
Government expenditure in consultation with the central bank and the National Bank of
Ethiopia.(MOFEC)

Budgets are a staple in the corporate world. Without budget, it is difficult for managers and
employees to know whether they're on target for growth and spending. It provides measures of
the financial results a company expected from its planned activities. By planning, managers learn
to anticipate potential problems and how to avoid them. Instead of facing unexpected problems
managers can focus their energies on exploiting opportunities.(T.Horngren,et.al,2006,P.180)

Almost everyone makes plan shortly after waking up each morning most people think a head
about what they will to during the day. These thinking a head are a form of planning. Likewise,
most business managers naturally think ahead about how they will conduct their business.

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Unfortunately the planning is frequently as informal as making is lacks the capacity for effective
communication. The business manger knows what she/he superiors and subordinates have no
knowledge for these objective. If a mangers plans are in consistent with her/his superiors plans
considerable amounts of time and effort will likely be wanted before the disagreement is
discovered. Similarly, subordinates must what until the managers tells them what to do they have
no why to exercise self initiative because they do not know what is expected acting as a
communicates objectives to both superiors and subordinates (Managerial accounting
10thedition, 2006 p.320)of them. Budgeting attempt to solve these problems by

A budget can cover both financial and non-financial aspects as a blue print out the organization
to follow in the upcoming period. Budget covering financial aspect quantity management
expectations regarding future income, cash flow and financial position, just as individual
financial statement are prepared covering part periods. So they can be prepared covering future
periods for example a budget income statement a budget statement of cash flow, a budget
balance sheet.

Uncertainly these financial budgets can be non-financial budgets for, say units manufactured
sold head counts and number of new products being introduced to the market. (H.Garison cost
accounting 11th edition 2005)

The term budget refers to a statement showing the quantities and monetary values, relating to
specific period prepared in advance and indicating the future policy to be pursued by the
organization. Precisely, it is a plan of operation expressed in monetary terms covering a
stipulated period. Policies are relatively cleared guidelines or criteria for managerial decision-
making, on major or day to day matters. The budget portrays a particular course of action
contemplated by the management in carrying on the business. Generally speaking, these budgets
are formulated on the basis of the forecasts prepared in the light of the past and the present
achievements. They are prepared to accomplish the desired objectives or goals. They serve as
tools by means of which the management is able to obtain all the facts required for efficient
management of the business. The term 'budgeting' refers to the process of preparing the budgets.
The purpose of budgeting is to assess the extent of success of the management in their plan be
launched in case of deviations. (Dr. N. VINAYAKAM, Dr. I. SINHA, 1998, P. 16)

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A budget is a quantitative expression a set of time period of a proposed future plan of action by
management. It can cover both financial and non-financial aspect of these plans and acts as a
blueprint for the company to follow in the upcoming period. Budgets are one of the most widely
used tools for planning and controlling organizations Surveys show an almost universal use of
budgets by medium or large companies in many parts of the globe. Budgeting system turn
managers' perspective forward. A forward looking perspective enables managers to be in a better
position to exploit opportunities. It also enables them to anticipate problems and take steps to
eliminate or reduce their severity.

Budgeting is a common accounting tool company’s use for implementing strategy. Budgeting
aids in planning and controlling the actions companies must undertake to satisfy their customer
to and succeed in the marketplace. (T. Horngren, et.al, 2006, P.180)

2.2. Objectives of Budget

The objectives of budget and budgetary control are discussed below:-

 To improve the operational efficiency of the divisions, departments and cost centers of a
plant;
 To impose adequate and satisfactory norms of performance over the various activities of
the unit, to ensure that the valuable assets and resource of the of the enterprise are utilized
most efficiently and effectively;
 To enlist the co-operation and commitment of organizational members to the
achievement of the predetermined goals of the organization. (Dr. N. VINAYAKAM, Dr.
I. SINHA, 1998, P. 17-18)

2.3. Characteristic of Successful Budget and Budgetary Control

To be successful a budget must have the following Characteristic:-
 The budget must address the enterprise's goal:
 The budget must be a motivating tool:
 The budget must have the support of management:
 The budget must convey a sense of ownership:

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  The budget should be flexible:
 The budget should be a correct representation:
 The budget should be coordinated:
(www.cmacoach.com/cma-exam-study-notes characteristics-of-successful-budgeting/)

2.4. Types of Budget

Budget is performed planning and control purposes. Budgeting allows identifying and setting
business objectives and goals. There are variety of budgets. The most common types of budget
are master budget and capital budget.

2.4.1. Master Budget

A master budget is a set of interconnected budgets of sales, production costs, purchases,
incomes, etc and it also includes pro forma financial statements. A budget is a plan of future
financial transactions. A master budget serves as planning and control tool to the management
since they can plan the business activities during the period on the basis of master budget. At the
end of each period, actual results can be compared with the master budget and necessary control
actions can be taken. (accountingexplained.com/managerial/master-budget/). Master budget has
two major sections which are the operational budget and the financial budget.

1 Operational Budget
Is short-term budget, usually prepared annually, based on estimates of income and expenses
associated with the organizations operations? (www.investorwords.com/19317/operational-
budget.html).

2 Financial Budget
The term financial budget refers to projections on an organization's income and expenses both on
a short-term basis and long-term basis. According to the Entrepreneur, short-term plans should
cover at least one financial year, while long-term plans ought to cover at least three years.
(www.ask.com/business-finance/financial-budget-6858b8a350f1bfe0).
Financial budget includes:-

2.4.2. Capital Budget

Capital budgeting is the process in which a business determines and evaluates potential expenses
or investments that are large in nature. These expenditures and investments include projects such
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as building a new plant or investing in a long-term venture. Often times, a prospective project's
lifetime cash inflows and outflows are assessed in order to determine whether the potential
returns generated meet a sufficient target benchmark, also known as "investment appraisal."
There are three common capital budgeting decision tools:

2.5. Budget Cycle

The federal budget cycle, like that of state and local governments, has four phases this are
preparation, approval, execution, and reporting.

2.6. Advantage of Budget

An organization that adopts formal budgeting usually becomes rapidly convinced of its
helpfulness and would not consider regressing to its old fashioned, non budgeting days. The
benefits of budgeting almost always clearly outweigh the cost and the effort. Some kind of
budget program is bounded to be useful to any organization, regardless of its size or its
uncertainty. The major benefit are:-

2.7. Limitation of Budget

In all business concerns where the budgetary system is adopted, cost are kept at a minimum level
and the standards of performance are continuously improved which result in optimum utilization
of all input such as money time and resources. However, budget and budgetary control are not an
mixed blessing and they suffer from following serious limitations:

(1) Budgets based on estimates: Since all budget framed are based on forecasted and estimates,
absolute accuracy in the achievements of the targets cannot be ensured. The successful
implementation of any budgetary program in turn depends upon the extent of the accuracy with
which the estimates are made. Again, planning cannot be indulged in vacuum ignoring the
budgeted figures.

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(2) Prohibitive cost: The cost involved in installation as well as maintenance of the budgetary
system becomes too heavy and only large sized concerns can afford to install it for reaping the
benefits. Small concerns can ill afford to install such a system, as there should be some
correlation between the cost of the system and the benefits obtained from it.

(3) Extreme rigidity: As budgets are expressed in quantified terms with relevant data, there is a
tendency to attach some sort of finality to budgeted figures, despite the fast changing conditions
in the business. Budgets would lose much of their significance when they are enforced with
rigidity. Thus it is clear that the budgetary program must be constantly reviewed and adapted to
changing conditions in the business unit.

(4) Impersonal approach: There is an erroneous impression that the budget system alone leads
to success and guarantees future profits. There is no doubt that the budget inject a sense of
clarity, direction and purpose in the actives of the organization, it is highly imperative that the
business activity should be conducted with impersonal approach supplemented with proper
management and administration. (Dr. N. VINAYAKAM, Dr. I. SINHA, 1998, P. 19)

2.8. Challenges in Administering Budgets

Budgeting is a time-consuming process that involves all levels of management. Top managers
want lower-level managers to participate in the budgeting process because lower-level managers
have more specialized knowledge and first-hand experience with day-to-day aspects of running
the business. Participation creates greater commitment and accounting ability toward the budget
among lower-level managers. This is the bottom-up aspect of the budgeting process.

The widespread prevalence of budgets in companies ranging from major corporations with
international presence to smaller local businesses indicates that the advantages of budgeting
systems outweigh the costs. (See Global Surveys of Company Practice, p. 185). To gain the
benefit of budgeting, management at all levels of a company should understand and support the
budget and all aspects of the management control system. Top management support is critical for
obtaining lower-level management's participation in the formulation of budgets and for
successful administration of budgets. Lower-level managers who fell that top management does
not "believe" in a budget are unlikely to be active participants in a budget process.. (T. Horngren,
et.al, 2006, P. 183-184)

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Time schedule

NO Activities November December January February March April May June

1 Title
selection

2 Literature
finding

3 Proposal
development

4 First draft
submitting

5 Final
proposal
submitting

6 Data
collecting

7 Data
analysis

8 Writing the
research
report

9 Submitting
&
presentation

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Cost budget

Item Quantity Per unit (Birr) Total Cost (Birr)

Paper

Flash 1 250 250

Pencil 3 3 9

Pen 5 5 25

Transportation 200

Internet 300

Photo copy 100 1 100

Printing 100 1.50 150

Other cost 50

Total cost 1084

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Refernces

 (accountingexplained.com/managerial/master-budget/)
 A .Welsch Glenn, CPA, Ronald W. Hilton, PHD, Paul N.Gordon,CPA,1997,Budgeting
Profit Planning and Control 5thedition,byAsokeK.Ghash, Prentice-Hall of India
Private Limited, M-97 Connaught Circus, New Delhi-110001. .
 Federal Negarit Gazeta, 30th July(2004), No. 60, P.2833,Ethiopia.
 (http://controller.vcu.edu/handbook/budgetadmin.html)
 (http://www.borjournals.com/a/index.../942)
 (http://www.planningandbudget.utoronto.ca/budget/administration.html)
 (ir.knust.edu.gh/.../Gershon%20kpedor.p...)
 J. Freeman Robert, Craig, D. Shoulders, Gresary, S. Allison,(2006), Governmental and
Non–Profit Accounting, 8thEdition, New Jersey, by Pearson Education, Inc.,
Upper Saddle, River, 07458
 (smallbusiness.chron.com/advantages-lineitem-budget-10404.html)
 T. Horngreen Charles, editor, 1973 -83,Introduction to Management Accounting,
6thedition, New Jersey, by Prentice-Hall, Inc, Englewood cliffs, 07632.
 T. Horngreen Charles, Gary. L. Sundem, William. O. Stratton, (2006),Introduction to
Management Accounting,13th edition, Prentice-Hall of India Private Limited New
Delhi-110001.
 T. Horngren Charles, Srikant M. Datar, George Foster,2006,CostAccountingAmanagerial
Emphasis, 12thedition, India, Prentice-Hall Private Limited New Delhi-110 001.
 Wixon Rufus, PHD, BUDGETARY CONTROL, 1973 Edition, Alexander Hamilton
Institute, New York Made in USA.
 (www.ask.com/business-finance/financial-budget-6858b8a350f1bfe0)
 (www.borjournals.com/index.../942)
 (www.cmacoach.com/cma-exam-study-notes characteristics-of-successful-budgeting/)
 (www.dineshbakshi.com/igcse-business-studies/finance-and-accounting/revision-
notes/71-budgeting)
 (www.investopedia.com/university/capital-budgeting/decision-tools.asp)

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