BUDGETING PRACTICES AND CHALLENGES IN DAIRY CO-OPERATIVE

SOCIETIES IN KENYA.
BY
GATHIGE SIMON NDUNGU
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTERS OF BUSINESS
ADMINISTRATION (MBA), SCHOOL OF BUSINESS UNIVERSITY OF NAIROBI
OCTOBER 200
DECLARATION
This Project is my original work and has not been submitted for a degree in any other
university.
GATHIGE I!"# #$%#G%
$&'()**+(,--&
igned .................. $ate .........
This /roject has been submitted for e0amination with my a//roval as a university su/ervisor.
SUPERVISOR! J.O. ADUDA
S"#$%&'() *************** D%&)*************..
S+,--. -/ B'0"$)00
U$"1)(0"&2 -/ N%"(-3"
ii
DEDICATION
I dedicate this work to the 1ord God Almighty who generously /rovided me with good
health and all the resources I re2uired during my /eriod of study. I also dedicate it to my wife
Grace3 my daughter 4oy and son Praise3 for their encouragement3 su//ort3 /atience and
/erseverance throughout the course.
iii
ACKNO4LEDGEMENT
I wish to register s/ecial gratitude to my su/ervisor and 5hairman of the 6inance and Accounting
$e/artment !r. 4.". Aduda3 for his guidance3 encouragement and /atience in reading3
correcting3 re7reading and refining this work. I highly acknowledge my /arents for im/lanting
the seed of knowledge in me and my family for their continued su//ort and missing my
/resence.
Thanks to all my lecturers in all the subjects for delivering learning with all the humour which
made it a joy to learn. Thanks to my colleagues for often taking me as a team member in the
various assignments and sharing the workload together.
A number of /eo/le contributed to the success of this research /a/er. !y sincere thanks go to
many /eo/le who hel/ed me directly and indirectly with the /re/aration of the research /roject
/articularly the res/ondents who made time to answer the lengthy 2uestionnaire.
iv
ABSTRACT
Poor financial /erformance in business is attributed to /oor business /lanning3 unrealistic and
conflicting goals and targets3 absence of stringent monitoring and evaluation of activities.
However3 through effective budgeting and stringent budgetary control /rocess3 these activities
can be efficiently and effectively managed. The situation amongst the dairy co7o/erative
societies in 8enya is not different and more often we have had various co7o/eratives close down
due to /oor financial management.
The objectives of the study were to establish the budgeting /ractices and challenges facing dairy
co7o/erative societies in 8enya. The study targeted a sam/le of *9 dairy farmers: co7o/erative
societies in 5entral /rovince out of whom *' res/onded giving a res/onse rate of )).9;.
6rom the findings3 the study established that )*.<; of the dairy co7o/erative societies
considered budgeting as very im/ortant to their success. The study also established that all
societies undertook some initial /re/arations and analysis before undertaking the budget /rocess.
However3 it was also established that ,9; of the societies did not /re/are cash budgets3 +=; did
not /re/are budget for ac2uisition of fi0ed assets and 9=; did not /re/are income and
e0/enditure budget. The study also established that the /roduction managers and ales !anagers
were not fully involved in budgeting hence com/romising the com/leteness and usefulness of
the /rocess. The study also established that the budgeting tools mostly used in dairy co7o/erative
society was the budget committee3 followed by budget manual and interde/artmental discussion
grou/s in that order. The study also established that ++.=; of the dairy co7o/erative societies did
not educate their budget officers in the area of budgeting and that <*.9; of the dairy co7
o/erative societies used addition of some /ercentage on the /revious years budget as an a//roach
to budgeting3 while justification of all costs as if /rograms was in use in 9'.&; of the societies.
tandards to com/are with actual total cost /er litre of milk sold were not in use in =9.,; of the
co7o/eratives societies. #egotiation of budgets between higher level managers and de/artmental
heads and communication of budget information down to lower level em/loyees was done by
nearly all the dairy co7o/erative societies. Escalation of costs beyond antici/ation was the
greatest challenge faced by the dairy co7o/erative societies. "ther challenges facing them are
lack of education for all involved3 lack of /artici/ation by all individuals and budget com/le0ity.
v
TABLE OF CONTENTS
DEDICATION .............................................................................................................................. """
ACKNO4LEDGEMENT ........................................................................................................... "1
ABSTRACT .................................................................................................................................... 1
TABLE OF CONTENTS ............................................................................................................. 1"
LIST OF TABLES ....................................................................................................................... "5
LIST OF ABBREVIATIONS ....................................................................................................... 5
CHAPTER ONE ............................................................................................................................ 6
INTRODUCTION TO THE STUDY ........................................................................................... 6
'.' >ackground of the study ........................................................................................................ '
'., tatement of the /roblem ....................................................................................................... =
'.* "bjectives of the study ........................................................................................................... 9
'.= ignificance of the study ............................................................................................... 9
CHAPTER T4O ........................................................................................................................... 7
LITERATURE REVIE4 ........................................................................................................ 7
,.- Introduction ........................................................................................................................... &
,.' >udgeting3 budgetary control and res/onsibility centers ..................................................... &
,., Im/ortance of budgeting ...................................................................................................... +
,.,.' 5oordination .................................................................................................................... +
,.,., 6ramework for 4udging Performance .............................................................................. +
,.,.* !otivating !anagers and "ther Em/loyees ................................................................... )
,.,.= Human as/ects of budgeting ............................................................................................ )
,.,.9 Goal congruence .............................................................................................................. <
,.,.& Partici/ation ..................................................................................................................... <
,.,.+ !otivation ..................................................................................................................... <
vi
,.,.+ Goal definition ........................................................................................................... '-
,.,.) 5ommunication ............................................................................................................ '-
,.* Ty/es of budgets .................................................................................................................. '-
,.*.' Incremental >udgeting .................................................................................................. '-
,.*., Activity >ased >udgeting ?A>>@ .................................................................................... ''
,.*.* Planning Programming and >udgeting ystems ?PP>@ .............................................. ''
,.*.= Performance >udgeting ................................................................................................ ''
,.*.9 Aero7>ased >udgeting ?A>>@ ....................................................................................... ',
,.*.& trategic /lan and 5a/ital budget .................................................................................. '*
,.*.+ !aster >udget ................................................................................................................ '*
,.*.) 5ontinuous or Bolling budgets ...................................................................................... '=
,.=. The >udgeting Process ........................................................................................................ '=
,.=.' The ales >udget ........................................................................................................... '=
,.=., The /roduction >udget .................................................................................................. '9
,.=.* The !anufacturing or Production 5ost >udget ............................................................ '9
,.9 $isadvantages of >udgets .................................................................................................... '9
,.+Theories of budgeting ............................................................................................................ '+
,.) Em/irical tudies on budgetary /ractices ........................................................................... ,,
,.< Em/irical tudies on challenges of budgeting ..................................................................... ,+
5onclusion from literature review .......................................................................................... ,)
C,%8&)( &,()) ............................................................................................................................... 96
RESEARCH METHODOLOGY ............................................................................................... 96
*.- Introduction ......................................................................................................................... *'
*.' Besearch $esign ................................................................................................................... *'
*., Po/ulation and am/le siCe .................................................................................................. *'
vii
*.* $ata 5ollection .................................................................................................................. *'
CHAPTER FOUR ........................................................................................................................ 99
DATA FINDINGS, ANALYSIS AND INTERPRETATION .................................................. 99
=.' Introduction .......................................................................................................................... **
=., 6indings from the survey ...................................................................................................... **
=.& 6indings on 5o7o/erative >udgeting Practices and 5hallenges .......................................... *+
CHAPTER FIVE ......................................................................................................................... :0
CONCLUSIONS AND RECOMMENDATIONS ..................................................................... :0
9., 5onclusion ............................................................................................................................ 9-
9.* Becommendations ................................................................................................................ 9'
R)/)()$+)0 ..................................................................................................................................... :;
A88)$<"5 6! QUESTIONAIRE FOR DAIRY FARMERS CO-OPERATIVES .................... :=
viii
LIST OF TABLES
Table =.'D %se of strategic /lan in the management of the co7o/erative society
Table =.,D !embershi/ of dairy co7o/erative societies
Table =.*D Total Ealue of assets owned by co7o/erative societies
Table =.=D Average milk deliveries in liters /er member in co7o/erative societies
Table =.9aD !anagerial taff em/loyed by co7o/erative societies
Table =.9bD u/ervisory taff em/loyed by co7o/erative societies
Table =.9cD 1ower level taff em/loyed by co7o/erative societies
Table =.&D Im/ortance of budgeting to the success of the dairy co7o/erative society
Table =.+aD Pre/aration of 5ash budget
Table =.+bD Pre/aration of budget for ac2uisition of fi0ed assets
Table =.+cD Pre/aration of income and e0/enditure budget
Table =.)D Partici/ation in budget /re/aration
Table =.<D >udgeting tools mostly used in dairy co7o/erative ocieties
Table =.'-D Partici/ants education in budgeting /rocess
Table =.''D >udget a//roaches used
Table =.',D %se of standard total cost /er litre to measure actual costs /erformance
Table =.'*D >udget negotiation between higher level managers and de/artmental heads
Table =.'= 5ommunicated of budgeting /rocess to Em/loyees
Table =.'9D 5hallenges faced by the res/ondents society during budgeting
ix
LIST OF ABBREVIATIONS
A>>D Activity >ased >udgeting
5I!AD 5hartered Institute of !anagement Accounting
855D 8enya 5o7o/erative 5reameries
8$>D 8enya $airy >oard
PP>D Planning Programming and >udgeting ystems
%AD %nited tates of America
A>>D Aero7>ased >udgeting
x
CHAPTER ONE
INTRODUCTION TO THE STUDY
6.6 B%+>#(-'$< -/ &,) 0&'<2
1ucey ?,--,@ defines a budget as a 2uantitative statement3 for a defined /eriod of time3 which
may include /lanned revenues3 e0/enses3 assets3 liabilities and cash flows. A budget /rovides a
focus for the organiCation aids the co7ordination of activities and facilitates control. Planning is
achieved by means of a fi0ed master budget3 whereas control is generally e0ercised through the
com/arison of actual costs with a fle0ible budget. >udgets maybe /re/ared for the business as a
whole3 for de/artments3 for functions such as sales and /roduction3 or for financial and resource
items such as cash3 ca/ital e0/enditure3 man/ower /urchases etc. The /rocess of /re/aring and
agreeing budgets is a means of translating the overall objectives of the organiCation into detailed3
feasible /lans of action.
The budgetary /rocess is an integral /art of both /lanning and control. Too often budgets are
associated with negative3 /enny7/inching control activities whereas the full /rocess is much
broader and more /ositive than that. >udgeting is about making /lans for the future3
im/lementing those /lans and monitoring activities to see whether they conform to the /lan. The
key features of a sound budgetary system include fre2uent feedback on /erformance3 fle0ible
budgeting3 availability of monetary and non7monetary incentives to motivate those involved in
the budgeting /rocess3 /artici/ative budgeting3 setting of realistic standards3 controllability of the
budgetary /rocess and the use of multi/le measures of /erformance ?Hansen et al '<<)@.
According to 1ucey ?'<<9@3 some organiCations do not obtain the range of /ossible advantages
of budgeting because their budgeting systems are narrowly conceived. !arron ?,--&@
highlighted the formidable budgeting challenges that face managers as how they should account
for long7term obligations3 how they should budget for them and how they should communicate
them. #diritu ?,--+@ concluded that although cash budget3 as a management and control tool3
was in /lace in Telkom ?8@ 1imited3 it was not effective in im/roving the management of cash.
!baru ?,--9@ found out that3 there is a huge ga/ between budgets and actual e0/enditure in
>amburi /ecial Products 1imited. "soro ?,--'@ stressed that budgetary /ractices in relief
1
organiCations are clearly different from develo/ment organiCations due to differences in donor
funding and re/orting re2uirements. The study revealed that more stringent controls e0ists in
relief /rograms than in develo/ment ones. !uleri ?,--=@ concluded that financial
mismanagement in the develo/ment /rograms ?#on Governmental organiCations@ is never taken
too seriously. "bulemire ?,--&@ found out that3 /ublic schools in #airobi use budgets mostly to
im/lement short7term o/erational /lans with majority of the long7term /lans being im/lemented
without /rior budgets.
8enya:s agricultural /olicies have been changing over the years as sti/ulated in the various
national develo/ment /lans and sessional /a/ers. 5ommon themes in 8enyaFs agricultural /olicy
have included increased food su//ly3 security and self sufficiency3 growth in agricultural
em/loyment3 e0/ansion in e0/orts3 resource conservation and /overty eradication. The release of
the wynnerton Plan in '<9= was a significant /olicy change that /ermitted indigenous 8enyanFs
to engage in commercial $airy farming and strengthened marketing of farm /roduce by small
scale farmers. These efforts saw the emergence of coo/eratives and other agencies for the
marketing of agricultural /roduce. The $airy Industry Act was enacted in '<9) mainly to /rotect
market interests of the then e0/anding large scale commercial dairy enter/rises besides the need
for a statutory body to enable continued and orderly marketing of dairy /roduce of im/roved
2uality. The dairy /roduce market was segregated into scheduled ?urban or formal@ and non7
scheduled ?rural or informal@ categories with 8enya 5o7o/erative 5reameries ?8.5.5.@ being
a//ointed as the sole agent of 8enya $airy >oard to carry out the marketing of dairy /roduce in
scheduled areas.
The immediate /ost inde/endence /eriod saw a major land transformation e0ercise in the form of
ac2uisition3 subdivision and redistribution of the hitherto large scale settler owned agricultural
farms. This /eriod also caused a major shift in dairy farming3 resulting in shar/ dro/ in the cattle
/o/ulation in large scale farms and smallholders engaging and /laying a more significant role in
dairying. This trend has continued and currently a//ro0imately &,93--- smallholders /roduce an
estimated &-; of 8enyaFs milk su//ly. In an effort to further streamline the sub sector3 the
government a//ointed a commission of in2uiry on dairy develo/ment ?The 8ibaki 5ommission@
whose recommendations included abolition of the contracted milk 2uotas and o/ening u/ of
8.5.5. to all farmers3 /rovided milk su//lied was of acce/table 2uality. 5onse2uently 8.5.5.
2
became a guaranteed market to all raw milk and buyer of last resort enjoying unlimited
government su//ort. The growth in smallholder /artici/ation was the result of a deliberate
government effort to build a strong dairy sector through the /rovision of highly subsidiCed
animal health3 /roduction and breeding services. >y '<)-Fs the interventionist /olices that
centered on subsidiCed consum/tion and /roduction services were ra/idly becoming
unsustainable resulting in the introduction of cost sharing measures. /ecific /olicy actions
included /rice decontrols3 liberaliCation of marketing divestiture3 commercialiCation and
/rivatiCation of dairy su//ort service. It was recommended that 8.5.5. be o/ened for
com/etition by allowing /rivate sector entre/reneursF /artici/ation in milk /rocessing and
marketing.
$es/ite a $airy $evelo/ment Policy3 the onset of liberaliCation almost brought 8.5.5. to a near
colla/se owing to the emergency of new /layers in the industry. A number of dairy co7o/erative
societies in 8enya have in the recent /ast been cri//led by financial mismanagement resulting to
losses to dairy farmers. These include the colla/se of the former Gangige $airy 5o7o/erative
ociety and the former Gatanga $airy 5o7o/erative society leading to losses to dairy farmers due
to un/aid raw milk deliveries ?8$> ,--<@. 8enya is largely self sufficient in milk /roduction
e0ce/t during dry weather s/ells. 5urrently the /roduction stands at *., billion liters /er annum.
Though this is sufficient for domestic consum/tion3 a lot more is re2uired for the e0/ort market
?8$> ,--<@.
After liberaliCation 8enya $airy >oard licensed 9, milk /rocessors. However3 only *= of these
are active /resently /rocessing '3---3--- liters /er day. However the total inbuilt ca/acity of
8enyan /rocessors is estimated at ,.9 million liters /er day. These /rocessors /roduce a wide
range of /roducts namely 6resh !ilk3 Hoghurt3 !ala3 Ice 5ream3 5heese3 %HT3 Powder !ilk3
>utter3 and Ghee. !ilk /roduction in 8enya is based mainly on cattle3 more so the dairy herd
contributing &-; of the total /roduction. !ilk is also obtained from camels and goats. 8enya
has an estimated cattle /o/ulation of '* million heads of which *.* million are dairy grade cows
and <.+ million are beef mainly Cebu ?8aranja ,--<@.
3
6.2 S&%&)?)$& -/ &,) 8(-3.)?
8a/lan ?'<<,@ found out that modern management accounting3 a disci/line that is e0/ected to
ensure that su/remacy of the budget as a control and management tool is u/held has never
/erformed to e0/ectations. This disci/line has been greatly criticiCed for /roducing re/orts that
are too late3 too com/le03 too internal3 too distorted and too summariCed to assist in decision
making. 5o/eland ?,---@ noted that /oor financial /erformance in business is attributed to /oor
business /lanning3 unrealistic and conflicting goals and targets3 absence of stringent monitoring
and evaluation of activities. However3 through effective budgeting and stringent budgetary
control /rocess3 these activities can be efficiently and effectively managed. It is with this
understanding that a lot of interest has develo/ed to find out the situation amongst the dairy co7
o/erative societies in 8enya. According to Garrison ?'<)9@ most managers have well7defined
thoughts about what they want to accom/lish and when they want them accom/lished. The
difficulty lies in how to communicate their thoughts and /lans to others3 so as to enable their
com/anies attain the desired objectives.
!anagers are faced with a formidable budgeting challenge on how they should account for long7
term obligations and how they should budget for them. 5ommunicating their vision to other
managers and members of staff and securing their su//ort is another big challenge. Even more
challenging is to translate the budgets into actual /erformance of actual results ?!arron ,--&@.
#diritu ?,--+@ evaluated how Telkom 8enya 1imited has em/loyed a cash budget as a
management tool and the effectiveness of cash budgeting in im/roving the management of cash.
!baru ?,--9@ investigated the ga/ between budgets and e0/enditure in >amburi /ecial
Products 1imited. The two studies revealed e0istence of many /itfalls with loose controls that
make it im/ossible to use budgetary /rocess to guide and control o/erations. They also revealed
/oor coordination between the various o/erational related de/artments vested with management
of cash. Their findings led to call for stringent budget management /ractices in the organiCations
studied. "soro ?,--'@ and !uleri ?,--=@ studied budgetary control and budgetary /ractices
res/ectively3 in #G"s in 8enya. "soro ?,--'@ found that budgetary /ractices in relief
organiCations are clearly different from develo/ment organiCations due to differences in donor
funding and re/orting re2uirements. The study revealed that more stringent controls e0ists in
relief /rograms than in develo/ment ones. !uleri ?,--=@ revealed that financial mismanagement
4
in the develo/ment /rograms ?#on Governmental organiCations@ is never taken too seriously.
"bulemire ?,--&@ found out that3 /ublic schools in #airobi use budgets mostly to im/lement
short7term o/erational /lans with majority of the long7term /lans being im/lemented without
/rior budgets. This /osition is contrary to !baru P.. ?,--9@ findings that confirms e0istence of
ca/ital budgets in >amburi /ecial Products 1imited3 but /ointed out that the highest level of
achievement was about +; of 5a/ital budget. The above studies reveal that the /ractices ado/ted
by various organiCations and the challenges of budgeting faced are different. There is need to
establish the budgeting /ractices and the challenges of budgeting in the dairy co7o/erative
societies in 8enya.
6.9 O3@)+&"1)0 -/ &,) 0&'<2
The objectives of this study wereD
'. To establish the budgeting /ractices among dairy co7o/erative societies in 8enya.
2. To establish the challenges of budgeting among dairy co7o/erative societies in 8enya.
6.; S"#$"/"+%$+) -/ &,) 0&'<2
The recommendations of this study will benefit government /olicy makers in /olicy formulation
aimed at enhancing financial management and /erformance of the dairy sector of the economy.
$airy farmers in the country will also benefit through higher returns to their investment as sound
budgetary /ractice and stringent controls will reduce e0cessive overhead costs and hence avail a
greater /ro/ortion of the milk /roceeds for /ayment for milk deliveries. The general /ublic will
also enjoy the benefits of higher returns to investment in the dairy sector as more and more
/eo/le will be encouraged to engage in dairy farming resulting to increased direct and indirect
em/loyment. As more /eo/le engage themselves in dairy farming3 the country will move
towards food self sufficiency. This study will also form a basis for academics and further
research and knowledge on the subject of budgeting and hence will benefit researchers in the
area of budgeting.
5
CHAPTER T4O
LITERATURE REVIE4
2.0 I$&(-<'+&"-$
>udgeting is one of the finance to/ics that have been e0tensively studied. This cha/ter defines
budgeting3 budgetary control and res/onsibility centers as outlined by various authors. The
cha/ter also outlines the im/ortance of budgeting3 ty/es of budgets3 the /rocess of budgeting3
disadvantages of budgeting3 budgeting challenges and finally reviews some of the em/irical
studies that have be carried out both locally and world wide.
2.6 B'<#)&"$#, 3'<#)&%(2 +-$&(-. %$< ()08-$0"3"."&2 +)$&)(0
A budget is a 2uantitative e0/ression of a /ro/osed /lan of action by management for a s/ecified
/eriod. It is also an aid to coordinating what needs to be done to im/lement that /lan. A budget
generally includes both financial and nonfinancial as/ects of the /lan3 and it serves as a blue/rint
for the com/any to follow in an u/coming /eriod. A financial budget 2uantifies management:s
e0/ectations regarding income3 cash flows3 and financial /osition. 4ust as financial statements
are /re/ared for /ast /eriods3 so can financial statements be /re/ared for future /eriods I for
e0am/le3 a budgeted income statement3 a budgeted statement of cash flows3 and a budgeted
balance sheet. %nderlying these financial budgets are nonfinancial budgets for say3 units
manufactured or sold3 number of em/loyees3 and number of new /roducts being introduced to
the market /lace ?Horngren et al ,--9@.
1ucey ?,--,@ defines a budget as a 2uantitative statement3 for a defined /eriod of time3 which
may include /lanned revenues3 e0/enses3 assets3 liabilities and cash flows. A budget /rovides a
focus for the organiCation3 aids the co7ordination of activities and facilitates control. Planning is
achieved by means of a fi0ed master budget3 whereas control is generally e0ercised through the
com/arison of actual costs with a fle0ible budget. >udgets maybe /re/ared for the business as a
whole3 for de/artments3 for functions such as sales and /roduction3 or for financial and resource
items such as cash3 ca/ital e0/enditure3 man/ower /urchases etc. The /rocess of /re/aring and
6
agreeing budgets is a means of translating the overall objectives of the organiCation into detailed3
feasible /lans of action.
The budgetary /rocess is an integral /art of both /lanning and control. Too often budgets are
associated with negative3 /enny7/inching control activities whereas the full /rocess is much
broader and more /ositive than that. >udgeting is about making /lans for the future3
im/lementing those /lans and monitoring activities to see whether they conform to the /lan
?1ucey ,--,@. !anagers monitor organiCation functions through res/onsibility centers. A
res/onsibility center is any functional unit headed by a manager who is res/onsible for the
activities of that unit. These centers com/rise of Bevenue centers3 e0/ense centers3 Profit centers
and Investment centers ?5arter et al3 '<<+@.
2.2 I?8-(&%$+) -/ 3'<#)&"$#
Horngren et al ?,--9@ asserts that budgets are an integral /art of management control systems.
Ghen administered thoughtfully by managers3 budgets /romote coordination and communication
among subunits within the com/any3 /rovide a framework for judging /erformance and motivate
managers and other em/loyees.
2.2.6 C--(<"$%&"-$
5oordination is meshing and balancing all as/ects of /roduction or service and all de/artments in
a com/any in the best way for the com/any to meet its goals. 5ommunication is making sure that
those goals are understood and acce/ted by all em/loyees. 5oordination forces e0ecutives to
think of relationshi/s among individual de/artments and the com/any as a whole3 and across
com/anies ?Horngren et al ,--9@.
2.2.2 F(%?)A-(> /-( J'<#"$# P)(/-(?%$+)
Plans enable a com/any:s managers to measure actual /erformance against budgets. >udgets can
overcome two limitations of using /ast /erformance as a basis for judging actual results. "ne
limitation is that /ast results often incor/orate /ast miscues and substandard /erformance. The
other limitation of using /ast /erformance is that future conditions can be e0/ected to differ from
the /ast. However3 it is im/ortant to remember that a com/any:s budget should not be the only
7
benchmark used to evaluate /erformance. !any com/anies also consider /erformance relative to
/eers as well as im/rovements over /rior years. The /roblem with evaluating /erformance
relative only to a budget is that it creates an incentive for subordinates to set a target is relatively
easy to achieve. "f course managers at all levels recogniCe this incentive3 and therefore they
work to make the budget more challenging to achieve for the individuals who re/ort to them.
#egotiations occur among managers at each of these levels to understand what is /ossible and
what is not. The budget is the end /roduct of these negotiations ?Horngren et al ,--9@.
2.2.9 M-&"1%&"$# M%$%#)(0 %$< O&,)( E?8.-2))0
Besearch shows that challenging budgets im/rove em/loyee /erformance. That is because falling
short of budgeted numbers is viewed by em/loyees as failure. !ost em/loyees are motivated to
work more intensely to avoid failure than to achieve success. As em/loyees get closer to a goal3
they work harder to achieve it. Therefore3 many e0ecutives like to set demanding but achievable
goals for their subordinate managers and em/loyees. 5reating a little an0iety im/roves
/erformance3 but overly ambitions and unachievable budgets increase an0iety without
motivation I that:s because em/loyees see little chance of avoiding failure. General Electric:s
former 5E"3 4ack Gelch3 describes challenging budgets that subordinates buy into as
energiCing3 motivating3 and satisfying for managers and other em/loyees3 ca/able of unleashing
out7of7the7bo0 and creative thinking ?Horngren et al ,--9@.
2.2.; H'?%$ %08)+&0 -/ 3'<#)&"$#
According to 1ucey ?,--,@ the behavioral as/ect of budgeting is of su/reme im/ortance but3 as
with many as/ects of human behavior3 they are com/le03 often contradictory and im/erfectly
understood. 5onsiderable research has been carried out on this as/ect of budgeting3 but broad
generaliCations are difficult to make. "n one /oint there does seem to be agreement. That is3 that
budgeting is not considered by /artici/ants as a neutral3 objective3 /urely technical /rocess
which is a view ado/ted by many accountants. The human3 subjective as/ects cannot be
overem/hasiCed and are dealt with below in detail under the following headingsD goal
congruence3 /artici/ation3 motivation3 goal definition and communication.
8
2.2.: G-%. +-$#(')$+)
The ideal budgeting system is one which encourages goal congruence. This sim/ly means that
the goals of individuals and grou/s should coincide with the goals and objectives of the
organiCation as a whole. This is an ideal that is difficult to achieve com/letely but recognition
must be given to the fact that organiCational objectives cannot be im/osed through the budgeting
system without consideration of the influences of the local grou/ and de/artmental objectives.
There is growing evidence that authority im/osed from above is less effective than authority
acce/ted from below and that goal congruence is enhanced when there is a more /artici/ative
management style rather than the traditional style of management with its em/hasis on hierarchy
and authority ?1ucey ,--,@.
2.2.7 P%(&"+"8%&"-$
>udgets can be im/osed by to/ management u/on the budget holders or they may be evolved
following /artici/ation of budget holders in the budget /re/aration. Partici/ation /romotes
common understanding regarding objectives and makes the acce/tance of the organiCational
goals by the individual much more likely. The control /rocess is also assisted by /artici/ation of
the budget holders into the investigation of solutions to the /roblems which may arise. If /eo/le
are genuinely involved the feel /art of the team and become more highly motivated. Ghen there
is genuine /artici/ation in the budgeting the /rocess become known as bottom7u/ budgeting
which is defined by 5hartered Institute of !anagement Accounting as Ja budgeting system in
which all budget holders are give the o//ortunity to /artici/ate in setting their own
budgets: ?1ucey ,--,@.
2.2.= M-&"1%&"-$
The whole /rocess of budget /re/aration and subse2uent /erformance evaluation by budgetary
control needs to be carried out so as to motivate managers rather than create resentment and
adverse reactions. If the /rocess is designed to be /artici/ative3 encourages initiative and
res/onsibility3 is not seen merely as a /ressure device3 then the motivation of individuals will be
strengthened. An em/hasis on im/ossible targets3 over em/hasis on the short run3 im/erfectly set
and understood objectives will cause motivation to be stifled. Besearch has shown that
9
motivation is increased when the reward7/enalty system of the organiCation is consistent with the
organiCation control system of which budgetary control is a /rimary e0am/le. It the control
system is seen to be unconnected to the reward7/enalty system3 ?ie3 /romotions 3 salary increases3
bonuses3 J/erks3@ then the control system will be /erceived to be of little im/ortance by the
managers concerned and conse2uently it will be ignored and so3 by inference3 will the
organiCation:s objectives ?1ucey ,--,@.
2.2.= G-%. <)/"$"&"-$
In general3 /eo/le work more efficiently when they have clearly defined targets and objectives.
In a /erfect world /ersonal goals would coincide with organiCational goals so that motivation
would be at the highest and targets would be totally acce/ted and com/letely defined. uch an
ideal is unattainable3 but the im/ortance of goal definition and of ensuring that individual
as/irations and goals are considered is an im/ortant /art of enlightened budget /re/aration.
5learly defined goals3 agreed and acce/ted by the individuals concerned3 will encourage goal
congruence and increased motivation ?1ucey ,--,@.
2.2.B C-??'$"+%&"-$
The /rocess of communication3 between and across the layers in the organiCation3 is an im/ortant
factor in all /lanning and control systems. If any control system3 including budgetary control3 is
not acce/ted by the /eo/le who have to o/erate it they will ham/er and obstruct the flow of
information so that realistic /lanning and control decisions will be difficult to take. Besearch has
shown that fre2uent3 u/ to date feedback of information to a manager regarding his /erformance
has a motivating effect. %ndue delay3 inaccurate data3 re/orts containing details of items over
which the manager has no control3 all reduce motivation and severely restrict the usefulness of
the information system ?1ucey ,--,@.
2.9 T28)0 -/ 3'<#)&0
2.9.6 I$+()?)$&%. B'<#)&"$#
According to $rury ?,--,@ this a//roach /re/ares the ne0t annual budget by taking the e0isting
o/erations and the current budgeted allowance for e0isting activities as the starting /oint. The
10
base is then adjusted for changes which are e0/ected to occur during the new budget /eriod. The
concern is on incremental o/erations and e0/enditure in the ne0t budget /eriod. In this a//roach
/ast inefficiencies and waste inherent in the current way of doing things are /er/etuated.
2.9.2 A+&"1"&2 B%0)< B'<#)&"$# (ABB)
A>> aims at managing costs effectively by authoriCing su//ly of only those resources that are
needed to /erform activities re2uired to meet the budgeted /roduction and sales volume. 5ost
objects are the starting /oint. Their budgeted out/ut determines the necessary activities which are
then used to estimate the resources that are re2uired for the budget /eriod. It involvesK estimating
the /roduction and sales volume by individual /roducts and customer3 estimating the demand for
organiCational activities3 determining the resources that are re2uired to /erform the
organiCational activities3 estimating the 2uantity of each resource that must be su//lied to meet
the demand and lastly3 taking action to adjust the ca/acity of resources to match the /rojected
su//ly ?$rury ,--=@.
2.9.9 P.%$$"$# P(-#(%??"$# %$< B'<#)&"$# S20&)?0 (PPBS)
PP> involvesK establishing the overall objective3 identifying the /rograms to achieve these
objectives and determining the costs and benefits of each /rogram so that budget allocations are
made on the basis of costs and benefits of the different /rograms. This a//roach is more
a//licable in non7/rofit organiCations as it enables management to make more informed
decisions about the allocation of resources to meet their objectives ?$rury ,--=@.
2.9.; P)(/-(?%$+) B'<#)&"$#
Performance budgeting is a system of /lanning3 budgeting3 and evaluation that em/hasiCes the
relationshi/ between money budgeted and results e0/ected. Performance budgetingK focuses on
results3 holds de/artments accountable to certain /erformance standards i.e. there is a greater
awareness of what services ta0/ayers are receiving for their ta0 dollars3 is fle0ible3 often allocate
money in lum/ sums rather than line7item budgets3 giving managers the fle0ibility to determine
how best to achieve results3 is inclusive and involves /olicymakers3 managers3 and often citiCens
in the budget LdiscussionM through the develo/ment of strategic /lans3 identification of s/ending
/riorities3 and evaluation of /erformance. Performance budgeting also has a long7term
11
/ers/ective by recogniCing the relationshi/ between strategic /lanning and resource allocation
and focuses more attention on longer time horiCons. 5ommon characteristics of /erformance
budgets includeK agency identification of mission3 goals3 and objectivesK 1inkage of strategic
/lanning information with the budgetK develo/ment and integration of /erformance measures
into the budgetK and disaggregation of e0/enditures into very broad areas ?such as /ersonnel3
o/erating e0/enses3 and ca/ital outlays@ rather than more s/ecific line7items. 4ordan and
Hackback ?'<<<@ defines Performance budgeting as N/re/aring the budget document with
identified /erformance measures ?Alberta ,--<@
2.9.: C)(--B%0)< B'<#)&"$# (CBB)
According 1ucey ?,--,@ Cero based budgeting is a cost benefit a//roach whereby it is assumed
that the cost allowance for any item is Cero3 and will remain so until he manager res/onsible
justifies the e0istence of the cost item and the benefits the e0/enditure brings. In this way a
2uestioning attitude is develo/ed whereby each cost item and its level has to be justified in
relation to the way it hel/s to meet objectives and how the e0/enditure benefits the organiCation.
This is a forward looking a//roach as o//osed to the all too common method of e0tra/olating
/ast activities and costs3 which is a feature of the incremental budgeting a//roach. A>> was
/ioneered by P. Phyrr in the %nited tates in the early '<+-s and has gained wide acce/tance
/robably because it is a sim/le idea obviously based on common7sense.
Aero based budgeting is concerned with the evaluation of the costs and benefits of alternatives
and3 im/licit in the techni2ue3 is the conce/t of o//ortunity cost. a//roach does re2uire e0/licit
decisions to be made about what /riorities the organiCation thinks are the most im/ortant. A>>
can be a//lied in both /rofit seeking and non7/rofit seeking organiCations. The techni2ue gained
wide /ublicity when the then President 5arter directed that all %nited tates government
de/artments ado/t Cero based budgeting. In a manufacturing firm3 A>> is best a//lied to service
and su//ort e0/enditure includingK finance and accounting3 /roduction /lanning and so on.
These activities are less easily 2uantifiable by conventional methods and are more discretionary
in nature. !anufacturing costs such as direct materials and labour and /roduction overheads can
be more easily controlled by well established methods which com/are /roduction out/uts with
resource in/uts rather than using Cero based budgeting.
12
A>> can successfully be a//lied on service industries and to a wide range of non7/rofit seeking
organiCations. 6or e0am/le3 local and central government de/artments3 educational
establishments3 hos/itals and so on. According to Horngren ?,--,@ there are several different
ty/es of budgets used by business. These includesK strategic /lan3 ca/ital budget3 master budget3
and continuous budgets.
2.9.7 S&(%&)#"+ 8.%$ %$< C%8"&%. 3'<#)&
trategic /lan is the most forward looking budget. It sets out the overall goals and objectives of
the organiCation. The strategic /lan leads to long7range /lanning3 which /roduces forecasted
financial statements for five7 to ten7 year /eriods. $ecisions made during long range /lanning
include addition or deletion of /roduct lines3 design and location of new /lants3 ac2uisitions of
buildings and e2ui/ments3 and other long term commitments.
1ong7range /lans are coordinated with ca/ital budgets3 which detail the /lanned e0/enditures for
facilities3 e2ui/ment3 new /roducts3 and other long term investments. 1ong 7range /lans and
budgets give the com/any direction and goals for the future3 while short7term /lans and budgets
guide day7to7day o/erations. !anagers who /ay attention only to short7term budgets will 2uickly
lose sight of long term goals. imilarly3 managers who /ay attention only to the long7term
budgets could wind u/ mismanaging day7to7day o/erations. There has to be a ha//y medium
that allows managers to /ay attention to their short7term budgets as while still kee/ing an eye on
long term7 /lans ?Horngren ,--,@.
2.9.= M%0&)( B'<#)&
The master budget is an e0tensive analysis of the first year of the long7range /lan. A master
budget summariCes the /lanned activities of all subunits of an organiCation7 ales3 /roduction3
distribution3 and finance. The master budget 2uantifies target for sales3 cost7driver activity.
Purchases3 /roduction3 net income3 cash /osition and any other objective that management
s/ecifies. It e0/resses these amounts in the form of forecasted financial statements and
su//orting o/erating schedules. These su//orting schedules /rovide the information that is too
highly detailed to a//ear in the actual financial statements. Thus a master budget is a /eriodic
business /lan that includes a coordinated set of detailed o/erating schedules and financial
13
statements. It includes forecasts of sales3 e0/enses3 cash recei/ts and disbursements and balance
sheets ?Horngren ,--,@.
2.9.B C-$&"$'-'0 -( R-.."$# 3'<#)&0
5ontinuous or rolling budgets are a very common form of master budgets that sim/ly add a
month in the future as the month just ended is dro//ed. >udgeting thus becomes an ongoing
instead of /eriodic /rocess. 5ontinuous budgets force managers to always thing about the ne0t
twelve months3 not just the remaining months in a fi0ed budgeting cycle. As they add a new
twelfth month to a continuous budget3 managers may u/date the other eleven months as well.
Then3 they can com/are actual monthly results with both the original /lan and the most recently
revised /lan ?Horngren ,--,@.
2.;. T,) B'<#)&"$# P(-+)00
Ghitehead and %/son ?'<),@ assert that before o/erations for a /eriod starts3 the budgets are
summariCed and the details /rovide information which is used to /re/are the master budget. This
budget is a forecasted Profit and 1oss account and balance sheet. The master budget incor/orates
the following budgetsD
2.;.6 T,) S%.)0 B'<#)&
The /re/aration of this budget begins with a sales forecast. It is on this budget that many of the
other budgets are based. To develo/ a sales budget one re2uires the following dataD
?i@ %nit sales by /roduct line
?ii@ ales e0/ected in each area or country
?iii@ ales of each month
?iv@ ales to customers or through agents at non7standard /rices.
The initial forecast will be in 2uantities or units which will later be evaluated by using standard
or budget /rices or3 where a//licable3 non7standard /rices.
14
2.;.2 T,) 8(-<'+&"-$ B'<#)&
According to Ghitehead and %/son ?'<),@ the /roduction budget is based on the sales budget
and this relationshi/ re2uires a co7ordination of sales and /roduction /olicy so that sales targets
can be aligned with the /roduction ca/acity of the factory3 after allowing for the available stocks
and for su//lies that can be obtained outside the factory. A /roduction /rogram has to be drawn
u/ which will indicate in terms of the out/ut the hours of work e0/ected from each de/artment
and cost centre. The objects are to manufacture the /roducts so that they are available on the
dates s/ecified by the customer or the sales de/artment and3 at the same time3 to maintain a
reasonably low level of stocks in order to avoid e0cessive obsolescence.
2.;.9 T,) M%$'/%+&'("$# -( P(-<'+&"-$ C-0& B'<#)&
This budget sets out the allowed e0/enditure for the out/ut indicated in the /roduction budget.
As this is a cost of /roduction budget it is closely linked with the cash budget and the master
budget. There are subsidiary budgets for direct materials3 direct wages and overhead e0/enses3
and the /roduction budget referred to above could3 if desired3 be included under the heading of
this section. "ther ty/es of budgets in the master budget include the selling and $istribution cost
budget3 the /urchasing budget3 the cash budget.
2.5 Disadvantages of Budgets
A budget /romotes manager:s gamesmanshi/3 knowing they will be reduced3 or they are in effect
rewarded by getting what they /robably really wanted. A budget may reward managers who set
modest goals and /enaliCe those who set ambitious goals that are missed. There is judgment and
subjectivity in the budgeting /rocess. A budget does not consider 2uality and customer service.
>udgets can be seen as /ressure devices im/osed by management3 thus resulting in bad labor
relations. >udget could result to de/artmental conflict arising due to dis/utes over resource
allocation3 and de/artments blaming each other if targets are not attained. It is difficult to
reconcile /ersonal(individual and cor/orate goals. >udget could forces managers may
overestimate costs so that they will not be blamed in the future should they overs/end ?websiteD
htt/D((www.accounting7financial7ta0.com(,--)(-+(@
15
2.7 C,%..)$#)0 -/ B'<#)&"$#
Porter ?,--)@ outlines the challenges of budgeting as emanating from the a//roach to budgeting
where incremental budget increases lead toK budgets that are not focused on the schools system:s
current technology re2uirements3 inade2uate account management can result in e0/enditures that
are unrelated to the items in the budget a//roved by the >oard of Education3 technical staff may
not have needed skills causing e0cessive reliance on contracted services3 staff training may not
match system /riorities3 and no technology refreshment /lan. "n the other hand3 use of Aero
>ased >udgeting a//roach may lead toK develo/ment of strategic /lans aligned with the school
system:s educational strategies3 strategic /lans that clearly identify /rojects ?current and
envisioned@ and maintenance of service efforts3 directors building budgets from the ground u/ I
from Cero I that are focused on the /rojects and maintenance efforts in the strategic /lans3
budgets being reviewed by the entire leadershi/ team3 regular review of strategic /lans3
/erformance results3 and s/ending. Another budget strategy includes centraliCe account
management to ensure /ro/er oversight3 then decentraliCed after Cero7based budgeting3 realigned
staff to fulfill strategic /lans and address /rogram /riorities3 abandon /rojects if they were not
aligned with system /riorities3 training /lan should be centraliCed for oversight3 alignment3 and
leveraging skills and im/lementation cost3 !arketing cam/aign to raise awareness of staff3
community3 and /olitical leaders to the need for technology3 e0ternal reviews and
recommendations for o/erations e0cellence3 Increase efforts to secure grant and cor/orate
su//ort3 restructuring technology funding through bonds or s/ecial ta0es3 Increase in
entre/reneurial activity3 and ensuring A>> efforts are s/onsored and su//orted at the to/. To
ma0imiCe su//ort and understanding3 ma0imiCe involvement in the /rocess. The challenge in
Cero based budgeting is how to achieve new /riorities3 retain essential /rograms3 and Lthrow
e0tra baggage off the wagonM. The other challenges of A>> include oversights which
necessitates a contingency fund to cover them es/ecially in the first year ?Porter ,--)@.
According to !inister for 6inance3 Be/ublic of outh Africa ?,--=@ the challenges of budgeting
in a develo/mental state do not sto/ at the need to get money to the school. The challenge is to
ensure that the money is translated into 2ualified teachers3 school books3 water3 electricity and
s/orts e2ui/ment. The challenge even goes further. It is to ensure that education that is relevant
and of a high 2uality gets to the children in the school. This is indeed a tough challenge. In
16
investing in e0/anding economic o//ortunities3 we also have to be mindful that we must invest
both in the long7term ability of societies to work3 /ro/er and invest and more immediate means
of raising economic growth and em/loyment. "ften3 investments in education and skills
develo/ment take generations to yield an im/act. 6ocus must also be on the shorter7term
measures to boost growth. This re2uires careful regulation of markets3 investment in roads3 /orts
and rail systems3 research and develo/ment and e0/anding energy ca/acity. "ne of the criticisms
of our /resent budget framework is that we have not focused sufficiently on ensuring that our
state enter/rises are efficient3 that our markets are functioning without being burdened by red
ta/e3 that we have the /orts to take the goods we make3 roads that link the /laces of /roduction
with markets. In yielding to Patrick Heller:s call to manage the delicate balance between growth
and social develo/ment3 my worry is that at the /resent time3 we are strong on social
develo/ment3 strong on long7term human develo/ment3 but weak on investing in economic
growth in the medium term.
"ne of the key strategic decisions we need to take in budgeting over the ne0t few years will be to
im/rove the balance in our /resent budget structure3 moving resources towards investing in
economic growth and fostering the ty/e of growth that can increase em/loyment. It is not about
either ( or. The challenge of budgeting is not about all on social grants or all on road buildingK it
is not about just s/ending on education versus s/ending all our money on fi0ing the /orts. It is
about managing this delicate balance. He concluded that managers have a critical role to /lay in
translating financial resources into real in/uts. Hou have the task of ensuring that these real
in/uts lead to better 2uality education3 an im/roved health /rofile and in the final instance3
genuine em/owerment of /eo/le to lift themselves out of /overty ?!inister for 6inance Be/ublic
of outh Africa ,--=@. !arron ?,--&@ highlighted the formidable budgeting challenges that faces
the country as how should they should account for long7term obligations3 how they should
budget for them and how they should communicate them.
2.= T,)-(")0 -/ 3'<#)&"$#
2.=.6 G%(3%#) C%$ 3'<#)&"$# &,)-(2
According to Beddick ?,--*@ The garbage can theory was first develo/ed by 5ohen et al. ?'<+,@
to describe decision7making in colleges. It articulates that these educational institutions face
17
decision situations involving unclear goals3 unclear technology3 and fluid /artici/ants. In this
model3 active decision7makers and /roblems track one another through a series of choices
without great /rogress in solving /roblems. The most im/ortant feature of the garbage can theory
entails four inde/endent streams of decision7makingD /roblems3 solutions3 /artici/ants3 and
choice o//ortunities. This kind of organiCation is a collection of choices looking for /roblems.
$ecision7makers have already devised strategies to solve /roblems3 but are waiting for the
a//ro/riate time and /lace to im/lement them. Issues in the organiCation are available to be
solved and the decision7maker must be 2uick to note any window of o//ortunity. The garbage
can theory is clearly not a rational7com/rehensive decision making a//roach such as /rogram
budgeting. In this former a//roach3 /eo/le do not set out to solve /roblems. >y contrast3
solutions usually search for /roblems. Peo/le work on /roblems only when a /articular
combination of /roblems3 solutions3 and /artici/ants in a choice situation make it /ossible.
2.=.2 B'<#)&%(2 I$+()?)$&%."0? &,)-(2
Beddick ?,--*@ argues that the literature on budgetary decisions in the /ublic sector is dominated
by the theory of incrementalism and its various meanings. This theory suggests that /olicy
makers use Jrules of thumb: in order to deal with the technical com/le0ity of e0/enditure
decisions. The nature of these sim/le decision rules has been investigated by studies of
budgeting in international organiCations3 national governments3 and state and local governments.
A recent a//lication of incrementalism at the sub national level was an e0amination of local
government e0/enditures in the %8. The /eo/le who design the budget are concerned with
relatively small increments to an e0isting base denoted as the fair share. It follows that budgeting
is incremental to the e0tent that it results in marginal changes in e0/enditure. Evidence of
substantial annual shifts in s/ending would count as evidence of non7incremental budgeting.
Incrementalism has two core attributes I marginality and regularity in out/uts.
2.=.9 S,-(&-('$ "$+()?)$&%. &,)-(2 -/ 3'<#)&"$#
Beddick ?,--*@ defines short7run incrementalism as a /rocess in which the relationshi/s between
actors are regular over a /eriod of years3 and a nonincremental/rocess is one in which this
relationshi/ is irregular 3 The siCe ?or lack thereof@ of the increment or the method of calculation
used does not matter3 so long as the relationshi/s between bureau0 and 5ongress remain regular.
18
Incrementalism suggests that /olicy makers use JJrules of thumb:: in order to deal with the
technical and /olitical com/le0ity of e0/enditure decisions. Incremental budgeting occurs when
actors in the /rocess have many interests to fulfill and roles to /lay. To accom/lish these tasks in
a timely fashion3 they rely on regular changes from the e0isting base of resources. This aid for
calculation of incremental theory reduces the com/le0ity of s/ending decisions. It is very
unlikely that decisionmakers weigh all the costs of benefits of decision in the short7run when
they determine ne0t year:s budget. This would be too time consuming and take u/ too may
resources3 es/ecially in a /olitical setting. Begular changes3 which incrementalism /redicates3 are
much easier to make.
2.=.; L-$#-('$ )D'"."3("'? &,)-(2 -/ 3'<#)&"$#
According to Beddick ?,--*@ the second view of budgetary decision7making e0amines it as a
long7run event. In this view when the budget is in deficit ?or sur/lus@3 there is a correction on
either the revenue and or e0/enditure side to restore balance. This ty/e of JJforce:: /ushes a
budget in deficit towards balance over the longrun.
2.=.: R%&"-$%. B'<#)& T,)-(")0! P(-#(%? B'<#)&"$# %$< CBB
According to Beddick ?,--*@ a normative theory of budgeting is uto/ian in the fullest sense of
that wordD its accom/lishment and acce/tance would mean the end of conflict over the
government:s role in society . In the '<&-s and '<+-s Gildavsky was best known as a critic of
e0ecutive budget reforms such as /erformance budgeting3 PP>3 and A>>. He believed that
these reforms were wrong because they were not based on a satisfactory understanding of the
budgetary /rocess. Gildavsky believed that studies based on efficiency criteria were useful and
there was a definite need for /olicy analysis. The /roblem was that with /rogram budgeting3 no
one could do PP> because of the /olitical nature of the budgetary /rocess ?4ones3 '<<&@. In
addition to Gildavsky:s criticism3 we have recently witnessed resurgence in rational
e0/lanations as budgetary a//roaches. 6or instance3 Gilloughby and !elkers ?'<<)@ argued that
=+ of the 9- states used some sort of /erformance measures in their budgetary systems. Their
survey findings indicated that states have a continued commitment to develo/ing /erformance
measures and willingness to use /erformance budgeting systems. A recent study by 1ee and
>urns ?,---@ re/orts that there is an ebb7and7flow in terms of state use of rational techni2ues
19
such as /erformance budgeting. In their study3 they have noticed that backsliding has occurred
with some states moving away from this techni2ue3 which is going against the national trend.
These authors s/eculate that states may not feel as com/elled to jum/ on the reform bandwagon.
Institutional memory reminds current /artici/ants in the budget /rocess of /ast failures to
im/lement PP> and A>> ?1ee and >urns ,---@.
6orsythe ?'<<+@ argues that budget /ractitioners often become star struck by some new budget
system. The most famous were PP> in the '<&-s and A>> after 4immy 5arter became
President. !ost recently3 /erformance budgeting has been /ro/osed and ado/ted in many states.
According to 6orsythe3 all of these techni2ues have one core element in common with each
other. They are rational and believe in the /roactive stance of budget /ersonnel in searching for
targets3 efficiency and effectiveness in budgeting ?6orsythe '<<+@.
2.=.7 T,)-(2 -/ C)(- B%0)< B'<#)&"$# (CBB)
According to Gindsor ?'<),@ A>> has been widely misunderstood to mean an annual
reassessment of all e0/enditures from ground Cero. A>> was never intended to have this
connotation for the manufacturing3 ca/ital3 or service and su//ort areas. A Cero7base decision
/ackage is sim/ly the minimum level of activity as judged by the managers involvedK that
minimum acce/table level might or might not be Cero in their judgment. A Cero7base level of
activity is 2uite different from a Cero level of funding. A com/any which eliminated all service
and su//ort e0/enditures would3 over the long run3 be eroding its com/etitive /osition through3
in effect3 nonre/laced de/reciation of its human and organiCational assets. A>> was never
intended as a ground7u/ reassessment of all com/any activities on an annual basis. In the /rivate
sector3 budgeting is a reflection of management decisions regarding com/etitive o/erationsK
budgeting does not drive those management decisions. Ge sim/ly do not have an e0tant theory
of A>> as a Cero7base review in the sense of Cero7level funding. Ge may have a theory for the
a//lication of A>> to com/arable service and su//ort activities in government agencies3 as well
as to major ca/ital investment /rojects ?Gindsor '<),@ .
5once/tually3 the A>> model is as fully a//licable to service and su//ort e0/enditures in the
/ublic sector as in the /rivate sector. >ut A>> in government has not been utiliCed in this
20
fashion. "n the contrary3 A>> has been em/loyed as a form of Cero7base review for which there
is no /rivate sector model. A>B should be more /ro/erly viewed as the systematic but /eriodic
assessment of agency activities rather than as an annual budgeting techni2ue. This em/loyment
arises from the misunderstanding of A>> as beginning from a Cero7level funding of all activities
rather than3 more /ro/erly3 as an evaluation of alternative s/ending levels for discretionary or
controllable activities. A>> is theoretically transferable from the /rivate to the /ublic sector for
such activities. 4ust as in the /rivate sector3 new ca/ital e0/enditures can be handled through a
A>> /rocedure by definition3 because use of a cost7benefit criterion for /roject evaluation itself
involves develo/ment of a decision /ackage ?Gindsor '<),@.
2.=.= A &,)-(2 -/ #-1)($?)$&%. CBB
Gindsor ?'<),@ Indicates that the /rivate sector3 A>> de/ends on a managerial assessment3 via
cost7benefit evaluation in terms of contribution to /rofitability3 of the relative worth of
alternative decision /ackages and levels of activity within those decision /ackages. In the /rivate
sector3 revenues are the a//ro/riate measure of benefits for an economic enter/rise. Presumably3
the /ur/ose of A>> in the /ublic sector is to subject e0/enditures to some form of com/arable
cost7benefit evaluation. Generally3 however3 /ublic /rograms serve some constituency O even if
e0ecutive3 legislative3 or bureaucratic O that forms an interest grou/ favoring continuation of the
/articular /rogram. Programs may be organiCed de/artmentally3 functionally3 or by both modes3
without much regard for com/arability. This structural difficulty is only sym/tomatic of the
underlying /roblem of multi/le objectives and constituency attachment to s/ecific /rograms. As
a result3 decision /ackages are not e0actly com/arable in terms of net benefit. It is im/ortant to
remember that3 in addition to the fact that benefits are not fully measurable3 distribution of
benefits and costs is at stake O a /roblem /resumably not arising in economic enter/rises
/recisely because of the /rofit motivation and the tying of A>> /rocedures to com/ensation. In
/ractice3 a constituency receiving /ositive net benefits may su//ort a /rogram where the net
social benefits are negative. !oreover3 agency e0ecutives may well lose3 rather than gain3 when
their budgets are cut3 vitiating the com/ensation as/ect of A>>. 5entraliCation of /olicy7making
authority and alteration of the traditional budgetary /rocess are /recisely the heart of agency and
legislative resistance to A>> ?Gindsor '<),@.
21
2.=.B B'<#)& P)("-<"+"&2
In line with strategic /lanning and rational budget a//roaches3 state government budgets can
occur in one7year ?annual /eriodicity@ or two7year ?biennial /eriodicity@ intervals ?8earns3 '<<*@.
>iennial budget /eriodicity refers to those states that either budget for a biennium3 or draft two
one7year budgets every other year ?8earns3 '<<=@. In kee/ing with rational budget reforms3 it is
noted that states which budget over longer time horiCons should be able to act more strategically
and reduce e0/enditures com/ared to states that budget annually. ome budget decision7makers
/refer biennial budgeting because /re/aration costs3 and overall e0/enditures are all lower3 and
the o//ortunities e0ist for more long7term /lanning3 /rogram evaluation3 and legislative
deliberation of s/ending decisionsK many of these attributes are commonly associated with
rational budgeting. 6urthermore3 the generally acce/ted /rece/t of most traditional budgeting
literature is that annual budgeting results in higher government s/ending than biennial budgeting
?8earns3 '<<=@. $oes the budget /eriodicity choice e0ert a discernable and significant effect on
state s/ending when other factors are held constantP Evidence in favor of an im/act on state
s/ending of biennial budgeting bolsters further su//ort for rational techni2ues in budget systems.
Presumably states that have to budget every other year should have more time to consider /olicy
o/tions. >iennial budget should lend itself less to any incremental tendency from the increased
time horiCon. #o study3 of which we are aware3 has e0/licitly investigated the /ossibility that
budget /eriodicity influences disaggregated e0/enditures ?Beddick ,--*@
2.B E?8"("+%. S&'<")0 -$ 3'<#)&%(2 8(%+&"+)0
Hoingco and Guevara ?'<)=@ reviewed the budgetary /ractices and develo/ment in the
Phili//ines. Their research findings claim that in one decade3 the Phili//ines government was
able to introduce major reforms which under the old society would have taken three decades. In
budgeting the innovations /ermeated the whole budget /rocess. >udgeting was aligned with the
/lanning /rocess to give it a definite direction. The reforms in budget legislation were
synchroniCed with the shift to /arliamentary system of government. Ghat is also essential is the
fact that the e0/enditure /rogram is drawn and a//roved vis7Q7vis the revenue /rogram and
financial constraints. They noted that now that the innovations have been introduced3 there
should be a /ersistent effort to train those who will be involved in o/erations. The training
22
should also reach those from the local government since they are also e0/ected to carry out
budgetary im/rovements ?Hoingco and Guevara '<)=@.
Ekstrom ?'<)+@ conducted a survey of budgetary /ractices in one hundred and twenty two
smaller units of government with a /o/ulation of less than ,93--- in u/state #ew Hork. His
objective was to confirm the assum/tion that smaller units of government do not share in the
a//lication of budgetary innovations to the same degree as larger units that have greater
resources and managerial e0/ertise. 6rom the results of his survey he concluded that innovation
in the budget /rocess in less /o/ulated local governments lags be hide larger jurisdictions. He
found evidence to the effect that the budget making /rocess was ty/ically conducted in an
environment characteriCed by stability of actors and an absence of obvious fiscal stress. He
indicates that little was revealed about the factors which contribute to these environmental
conditions or how such conditions influenced budgetary decision making or the a//lication of
innovation to the /rocess ?Ekstrom '<)+@.
!elkers R Gilloughby ?'<<+@ surveyed 9- states in the %A3 to determine the e0istence of
legislative or administrative initiatives re2uiring /erformance based budgeting. Their study was
based on a literature review and a study of state administrators ?e0ecutive and legislative budget
office:s@ by tele/hone in '<<& and '<<+. They found out that most states had ado/ted a formal
re2uirement for /erformance7based budgeting. Also3 they found out that there does not seem to
be a major difference between legislatively and administratively initiated reforms. 6inally3 they
found out that a number of states have created oversight bodies and given them res/onsibilities
that were once the /urview of the central budget office ?!elkers R Gilloughby '<<+@.
In another study3 1ee ?'<<+@ analyCed state budgeting /ractices for ,9 years and found thatK
e0ecutive and legislative budget /layers were increasingly alike in their consum/tion of
/erformance data and /rogram analysis for /ur/oses of budgetary decision making3 there was a
greater willingness on the /art of budget /layers to revise /erformance measures as funding
levels change and the introduction of oversight bodies with res/onsibility for develo/ing and
revising /erformance7based initiatives has im/lications for the role of central budget bureaus.
1ee and >urns ?,---@ using regression analysis analyCed data obtained from surveys of state
budget offices in '<<- and '<<9 with the aim of establishing the current status of /erformance
23
measurement /ractices and identify both the advancements and backsliding made by the states
between the two years. Their survey findings dramatically em/hasiCed the diversity among the
states in their use of /erformance measurements. The results also made it clear that in any given
time /eriod some states maybe advancing in the use of /erformance measurement while others
maybe backsliding3 and that any single state may be e0/anding its use of /erformance
measurement in one regard while backsliding in the other ?1ee and >urns ,---@.
Beddick ?,--*@ e0amined the im/act of three rival decision making theories on disaggregated
% state budgetary out/ut data. His study tested the im/act of the different theoretical
e0/lanations on e0/enditure levels. The three budget models tested are the garbage can theory3
incrementalism3 and Bational a//roaches. The garbage can theory of budgeting argues that
decisions are determined by the random mi0 of /roblems3 solutions3 /artici/ants3 and choice
o//ortunities in the decision7making /rocess. Incrementalism focuses on e0/enditure decisions
based on marginality and regularity from /revious s/ending out/uts. 6inally3 rational a//roaches
to budgeting advocate that decision7makers think /ros/ectively by systematically weighing
/olicy o/tions. The rational a//roaches he focused on here are /rogram budgeting3 Aero >ased
>udgeting3 and biennial budgeting ?re/resenting more strategic long7term decision7making in
com/arison to annual budgeting@. The results of the study demonstrated the uneven s/read of
rational techni2ues throughout the different areas of state finance. Incrementalism had relatively
low e0/lanatory /ower below the aggregates ?e0ce/t for education s/ending@. It seems that larger
categories such as total and education s/ending are more susce/tible to incrementalism than
smaller dissagregated categories. Therefore3 at the aggregate level the budget may a//ear
incremental3 but when one e0amines further3 there is more going on in the /rocess. Garbage can
budgeting is more /revalent at functional areas than for government as a whole. There was
su//ort for the garbage can theory of budgeting below the aggregates in five of the ten categories
of state finance. Interestingly3 there was no su//ort for this model on total e0/enditures. It seems
that the garbage can model is more /revalent at the disaggregated level3 /robably due to the
ability of decision7makers to mani/ulate functional areas of the budget rather than the entire
budget. This may be due to the difficulty of establishing government7wide agendas ?Beddick
,--*@.
24
"soro ?,--'@ studied the budgetary control /rocess in 8enya #on Governmental "rganiCations
with s/ecific reference to Gorld Eision 8enya. The study establishes how accurately budget
antici/ates the level and direction of actual results. The analysis found out that budgetary
/ractices in relief organiCations are clearly different from develo/ment organiCations due to
differences in donor funding and re/orting re2uirements. It established that more stringent
controls e0ists in relief /rograms than in develo/ment ones. It is established that more com/le0
control techni2ues are re2uired in develo/mental /rograms than in relief /rograms3 due to close
donor su/ervision and need for monthly accountability in the later as o//osed to the former
whose funding is not followed with strict re/orting re2uirements ?"soro ,--'@.
!uleri ?,--=@ set out to determine how budgeting /ractice is actually done3 to what e0tent the
budgets are used as management and control tools and the mechanism international #on
Governmental organiCations ado/t to control financial mismanagement. The study revealed that
budgets are normally /re/ared using such modern /ractices as Aero based budgeting or /riority
based budgeting. The budget forms an integral /art of the /lanning /rocess and have become a
standard /ractice. The study also revealed an over7em/hasis on conformity to budgets and
/arameters ?funds that can be mobiliCed@ which tends to relegate /ro/er financial management to
the /eri/hery. His findings reveal that many organiCations strive to s/end without due regard to
value for money and im/act3 and that once budgets are a//roved little effort is made to use the
budgets to control the budget holders. 6inancial mismanagement in the sector is never taken too
seriously. The /ush by funding organiCations to s/end ?which in fact is a measure of success@ has
just worsened the matter. The findings led to call for stringent budget management /ractices in
the sector ?!uleri ,--=@.
There is need to utiliCe different e0/ertise ?finance and monitoring e0/erts@ in /re/aration and
motoring of budgets. !baru ?,--9@ sought to com/are the budgets and the e0/ost results for
>amburi /ecial Products 1imited for a /eriod of four years from '<<) to ,--'. An analysis of
variances between ca/ital e0/enditure budgets and the four year /erformance budgets on one
hand and the e0/ost results on the other was done. The reason for deviations and remedial
actions were sought. The analysis of variances de/icts a huge variation from the set targets. The
/erformance in the four years shows that only a small /ro/ortion of the e0/ected /rofits were
attained. The highest level of achievement accounts for only +; of the budget. The ca/ital
25
e0/enditure was e2ually below the budget. Em/irical evidence suggests that most budgets are
set to be )-; to <-; achievable ?!erchant and !anCori3 '<)<@. This is in contrast to
management accounting literature which suggests that for o/timal motivation budget targets
should be achievable 9-; of the time ?!baru ,--9@.
According to !arks ?'<&&@ there is a /roblem of /lanning ahead for e0/enditure to be incurred
in two years time. The variances observed in this study add to the already com/le0 challenge of
dealing with the future which is uncertain. "bulemire ?,--&@ studied the budgeting /ractices in
/ublic secondary schools in 8enya. He collected /rimary data on budgeting /ractices and
analyCed it to determine the im/ortant budgeting /ractices mostly used in /ublic secondary
schools. His study revealed that budgets are mostly used to im/lement short7term o/erational
/lans with majority of the long7term /lans being im/lemented without /rior budgets. His study
results also revealed that a majority of schools in #airobi did not educate staff about budgeting
/rocess and budget targets were initiated mainly by the /rinci/al3 the bursar and Head of
$e/artments. The cash budget and long7term asset ac2uisition budgets were least /re/ared.
"bulemire suggests that a to/ to down budgeting a//roach be ado/ted in schools. #diritu ?,--+@
evaluated how Telkom ?8@ 1imited em/loyed a cash budget as a management tool3 the
effectiveness of cash budgeting in im/roving the management of cash and a//reciating the role
of li2uidity management in the firm by ensuring sustenance of enough cash for o/erations while
investing e0cess cash /rofitably. The study also assessed the weaknesses the firm faces in
management of cash and how this management tool can be im/lemented as a strategy to alleviate
the same. The results of this study revealed that the firm ends u/ losing huge cash amounts due
to lack of established and o/erational mechanisms and strategies to harmoniCe cash collection
and e0/enditure. There were many /itfalls with loose controls which ensured that cash budget
does not ca/ture the total cash movement in the organiCation. Another challenge was cash
/lanning mismatch due to /oor coordination between the various o/erational related de/artments
vested with management of cash ?#diritu ,--+@.
8aren . and tout $. E. ?,--)@ studied the budgetary /ractices in $utch7listed 5om/anies and
found out that they /re/are budgets that cover a fi0ed /eriod and will generally not be changed
during this /eriod. $uring this fi0ed /eriod3 regularly revised forecasts are /re/ared ne0t to the
original budget. The budget covers one year3 broken down by months3 and su//orts the firmFs
26
strategy. >usiness unit managers /artici/ate in setting targets of the business units. In most cases3
the standards are develo/ed by lower7level management and are reviewed and a//roved by
higher levels of management. The budget targets are attainable with some e0tra effort. Targets
are used in the budgeting /rocess. These targets are develo/ed through /artici/ation of
subordinate levels of management. These standards are tight but attainable. >udgets have several
uses. They are used most fre2uently to motivate and reward managers3 for /lanning /ur/oses3 to
evaluate activities3 and for communication /ur/oses. >udgets are related to long7term /lans. The
/rofit7conscious style is used to evaluate the /erformance of managers. Any overs/ending of
budgets is evaluated in relation to the long7term goals of the firm S8aren . and tout $. E.
,--)@.
2. E?8"("+%. S&'<")0 -$ +,%..)$#)0 -/ 3'<#)&"$#
In budgeting3 dealing with the future which is uncertain3 /osses a great challenge to managers. In
his study to com/are the budgets and the e0/ost results for >amburi /ecial Products 1imited for
a /eriod of four years from '<<) to ,--'3 !baru ?,--9@ found out that3 there is a huge variation
between the budgets and the actual results. The /erformance in the four years shows that only a
small /ro/ortion of the e0/ected /rofits were attained. The highest level of achievement accounts
for only +; of the budget. The ca/ital e0/enditure was e2ually below the budget. Em/irical
evidence suggests that most budgets are set to be )-; to <-; achievable ?!erchant and
!anCori3 '<)<@. This is in contrast to management accounting literature which suggests that for
o/timal motivation budget targets should be achievable 9-; of the time. According to !arks
?'<&&@ there is a /roblem of /lanning ahead for e0/enditure to be incurred in two years time. The
variances observed in this study add to the already com/le0 challenge of dealing with the future
which is uncertain ?!baru ,--9@. "nce budgets are a//roved3 little effort is made to use budgets
to control the budget holders ?!baru ,--9@ .
The challenge is that many organiCations strive to s/end without due regard to value for money
and im/act on their /erformance.These were the findings by !uleri ?,--=@ who set out to
determine how budgeting /ractice is actually done3 to what e0tent the budgets are used as
management and control tools and the mechanism International #on Governmental organiCations
ado/t to control financial mismanagement. Another challenge revealed in this study is that
27
financial mismanagement in the sector is never taken too seriously. The /ush by funding
organiCations to s/end ?which in fact is a measure of success@ has just worsened the matter. His
findings led to a call for stringent budget management /ractices in the sector ?!uleri ,--=@. 1ack
of budgeting knowledge or e0/ertise is a major budgeting challenge in Public secondary schools
in 8enya. A study by "bulemire ?,--&@ on the budgeting /ractices in /ublic secondary schools
in 8enya revealed that a majority of schools in #airobi did not educate staff about budgeting
/rocess and that budget targets were initiated mainly by the /rinci/al3 the bursar and Head of
$e/artments. Another challenge highlighted in this study is the inability of /ublic secondary
schools in #airobi to make budgets that cover both short term and long term activities. The cash
budget and long7term asset ac2uisition budgets were least /re/ared in /ublic secondary schools
in #airobi ?"bulemire ,--&@. E0istence of many /itfalls with loose controls which ensure that
cash budget does not ca/ture the total cash movement in Telkom ?8@ limited /osed a serious
budgeting challenge to the use of cash budget as a management tool for im/roving the
management of cash. Poor co7ordination between the various o/erational related de/artments
vested with management of cash is another challenge. This caused a cash /lanning mismatch in
Telkom ?8@ 1imited ?#diritu ,--+@.
C-$+.'0"-$ /(-? ."&)(%&'() ()1")A
#diritu ?,--+@ evaluated how Telkom 8enya 1imited has em/loyed a cash budget as a
management tool and the effectiveness of cash budgeting in im/roving the management of cash
while !baru ?,--9@ investigated the ga/ between budgets and e0/enditure in >amburi /ecial
Products 1imited. #diritu ?,--+@ and !baru ?,--9@ confirm e0istence of budgetary /rocesses in
the sector. However3 their studies revealed that there were many /itfalls with loose controls that
make it im/ossible to use budgetary /rocess to guide and control o/erations. The two studies
reveal /oor coordination between the various o/erational related de/artments vested with
management of cash. Their findings led to call for stringent budget management /ractices in the
organiCations studied.
8aren . and tout $. E. ?,--)@ studied the budgetary /ractices in $utch7listed 5om/anies while
"soro ?,--'@ and !uleri ?,--=@ studied budgetary control and budgetary /ractices res/ectively3
in #G"s in 8enya. "bulemire ?,--&@ established the budgetary /ractices in /ublic secondary
28
schools in #airobi. Their findings converge on the fact that budget forms an integral /art of the
/lanning /rocess and have become a standard /ractice in the sectors under study. However3 the
/ractices ado/ted are different. "soro ?,--'@ stressed that budgetary /ractices in relief
organiCations are clearly different from develo/ment organiCations due to differences in donor
funding and re/orting re2uirements. His study revealed that more stringent controls e0ists in
relief /rograms than in develo/ment ones. !uleri ?,--=@ concluded that financial
mismanagement in the develo/ment /rograms ?#on Governmental organiCations@ is never taken
too seriously which is contrary to 8aren . and tout $.E. ?,--)@which noted that variations
from the budget in $utch listed com/anies are taken so serious that regularly revised forecasts
are /re/ared ne0t to the original budget.
"bulemire ?,--&@ found out that3 /ublic schools in #airobi use budgets mostly to im/lement
short7term o/erational /lans with majority of the long7term /lans being im/lemented without
/rior budgets. This /osition is contrary to !baru P.. ?,--9@ findings that confirms e0istence of
ca/ital budgets in >amburi /ecial Products 1imited3 but /ointed out that the highest level of
achievement was about +; of 5a/ital budget. Ghile "bulemire ?,--&@ revealed that a majority
of schools in #airobi did not educate staff about budgeting /rocess and budget targets were
initiated mainly by the /rinci/al3 the bursar and Head of $e/artments and that the cash budget
and long7term asset ac2uisition budgets were least /re/ared3 #diritu ?,--+@confirmed that cash
budgeting was an integral /art of cash management /rocess in Telkom 8enya 1imited3 but noted
that there were many /itfalls with loose controls which ensured that cash budget does not ca/ture
the total cash movement in the organiCation.
The reviewed studies converge at a conclusion that budgeting is an integral /art of organiCations
management /rocess all over the world and that there are many challenges of budgeting that
limit effective use of budgeting as a management and control tool. However3 evidence e0ist that
show that there is no standard budgetary /ractice that is generally acce/ted or em/loyed by
organiCations and that different organiCations are faced with different challenges of budgeting.
There is no study ?that we know@ that has been carried out in the dairy sector of the economy.
This study aims at establishing the budgetary /ractices in the dairy co7o/erative societies in
8enya.
29
30
CHAPTER THREE
RESEARCH METHODOLOGY
9.0 I$&(-<'+&"-$
This cha/ter outlines the ste/s to be ado/ted in studying the research /roblem in order to satisfy
the research objectives. It contains the study area3 /o/ulation3 research design3 and data analysis.
It also outlines discusses the test for reliability and shows the results of the test by use of
5ronbach al/ha.
9.6 R)0)%(+, D)0"#$
6or the /ur/ose of this study3 the research design ado/ted was a survey of budgeting /ractices in
the dairy farmers: co7o/erative societies in 8enya. The design is a//ro/riate as a sam/le of thirty
five dairy co7o/eratives was randomly taken and studied. "ut of the thirty five dairy co7o/erative
societies included in the sam/le3 thirty one res/onded resulting in a res/onse rate of )).9;
9.2 P-8'.%&"-$ %$< S%?8.) 0"E)
This study was limited to $airy 6armers 5o7o/erative ocieties in 8enya. The choice of the
dairy sector was triggered by the im/ortant role the dairy sector /lays in ensuring food
sufficiency in the country and /articularly a very im/ortant food com/onent for young and
growing /o/ulation. The im/ortance of the dairy sector cannot be overem/hasiCed as the sector
is a major em/loyer both directly and indirectly. The sector therefore contributes immensely in
job creation and /overty eradication among other benefits. According to 1and ":1akes ?,--<@3 a
non governmental organiCation that works with farmers co7o/erative societies3 there are <)
registered dairy co7o/erative societies in 5entral 8enya. A random sam/le of *9 dairy farmers:
co7o/erative societies in 5entral /rovince was surveyed.
9.9 D%&% C-..)+&"-$
Primary $ata was collected to achieve the objectives of this study. $ata was collected from the
head of finance or the Accountant in the dairy co7o/eratives by way of researcher administered
31
2uestionnaire which was develo/ed in line with the objectives of the study ?a//endi0 '@. This
ensured consistency in the inter/retation of 2uestions and hence results to answers that are
consistent with the real situation on the ground. The Tuestionnaire consisted of /art I and /art II.
Part I contained 2uestions on the general information about the $airy 5o7o/erative society and
its /erformance. Part II contained 2uestions on the society:s budgetary /ractices. A five /oint
1ikert cale was used to determine the /ractices mostly used in budgeting among the societies.
The 1ikert cale was used to determine the im/ortant budgeting /ractices mostly used in dairy
co7o/erative societies. According to !ugenda et al ?'<<<@ the 1ikert scale can be used to rate or
rank the subjective and intangible com/onents in research. The numerical scale hel/s to
minimiCe the subjectivity and makes it /ossible to use 2uantitative analysis.
9.; R)."%3"."&2 -/ <%&%
Beliability of the measures was assessed with the use of 5ronbach:s al/ha. 5ronbach:s al/ha
allows us to measure the reliability of the different categories. It consists of estimates of how
much variation in scores of different variables is attributable to chance or random errors
?elltCm3 et al3 '<+&@. As a general rule3 a coefficient greater than or e2ual to -.9 is considered
acce/table and a good indication of construct reliability ?#unnally3 '<+)@.
Table =., shows the overall 5ronbachFs al/ha is -.&9) which is higher than -.9- and hence the
instruments used are termed as consistent and reliable.
T%3.) ;.2 O1)(%.. R)."%3"."&2 %$%.20)0
5ronbachFs Al/ha #umber of Items
-.&9) '9
32
CHAPTER FOUR
DATA FINDINGS, ANALYSIS AND INTERPRETATION
;.6 I$&(-<'+&"-$
This cha/ter outlines the findings of the survey and /resents them in tables. The cha/ter also
contains the analysis and inter/retations of the survey findings. This study used a random sam/le
of thirty five res/ondents mainly the head of finance or the Accountant in the dairy co7o/erative
society whereby thirty one of them res/onded to the 2uestioanaire constituting )).9; res/onse
rate. $ata analysis was done through tatistical Package for ocial cientists ?P@.
6re2uencies3 /ercentages and 1ikert cales were used to dis/lay the results which were
/resented in tables.
;.2 F"$<"$#0 /(-? &,) 0'(1)2
6rom the findings the study results shows that ?<*.*;@ of the dairy co7o/erative societies used
strategic /lan to guide their o/erations while &.+; do not use strategic /lans in their manageent.
This im/lies that majority of the res/ondent co7o/eratives had a long7term strategic /lan. The
findings are as /er table =.' and figure =.'. The res/ondents further indicated that the strategic
/lan runs for a /eriod of five years for the majority ?++;@ and for the minority ?,);@ for a
/eriod of * years. "nly 9; of the res/ondents did not indicate the time their /lan runs.
Table =.,D %se of strategic /lan in the management of the co7o/erative society
F()D')$+2 P)(+)$&%#)
use strategic /lan ,) <*.*
$o not use strategic /lan * &.+
T-&%. 96 600.0
The study sought to know the current membershi/ of the res/ondent:s co7o/erative. The findings
varied but they ranged from <-- members to '&3)&& members. This im/lied that the co7o/erative
that had the minimum members had <-- members and the one that had most members had
'&3)&& members. This indicated that there were res/ondent:s co7o/eratives which served very
33
many farmers in the area. This could be as a result of the many dairy farmers in the area. Table
=., shows the membershi/ of the dairy co7o/erative societies.
Table =.,D !embershi/ of dairy co7o/erative societies
M)?3)(0,"8 "$ $'?3)(0 F()D')$+2 P)(+)$&%#)
' 7 <<< , &.,
'--- 7 '<<< & '<.*
,--- 7 ,<<< + ,,.9
*--- 7 *<<< '' *9.<
=--- 7 =<<< ' *,
9-- and above = ',.<
Total *' '--
6urther it was im/ortant to get to know the total asset value of the co7o/erative. The study sought
to get information concerning land3 buildings3 cooling system and any other Asset as /art of total
assets owned. As shown in table =.* below &.<9 /er cent of the res/ondents have a total asset
base worth 8enya shillings five million and below. +,; of the res/ondent dairy co7o/erative
societies own assets valued between 8enya shillings five million and twenty five million while
'+9 own assets whose total worth is in e0cess of twenty five millions. "ut of all the res/ondents3
&.9; did not answer to this 2uestion.
T%3.) ;.9! T-&%. V%.') -/ %00)&0 -A$)< 32 +---8)(%&"1) 0-+")&")0
T-&%. 1%.') "$ M".."-$0 (K0,0) F()D')$+2 P)(+)$&%#)
' 7 =.<< , &.<9
9 7 <.<< = '*.)
'- 7 '=. << * '-.*
'9 7 '<.<< < *'.-
,- I ,=. << 9 '+.,
,9 I ,<.<< - -
*- I *=. << ' *.9
*9 I *<.<< * '-.*
34
=- and above , &.<9
T-&%. 2 600
"n another area the study sought to know the average delivery 2uantity /er member. The
findings a shown in table =.= below indicated that '<.*9 of the dairy co7o/erative societies
received below five liters of milk /er member every day. The table also shows that &'.*=; of
dairy co7o/erative societies received an average of between 9 and '* liters of milk /er member
every day. "nly *., /er cent of the res/ondent dairy co7o/erative society received an average of
between ,' and ,9 liters /er member /er day.
T%3.) ;.;! A1)(%#) ?".> <)."1)(")0 "$ ."&)(0 8)( ?)?3)( "$ +---8)(%&"1) 0-+")&")0
V-.'?) "$ L"&)(0 F()D')$+2 P)(+)$&%#)
- I =.<< & '<.*9
9 I ).<< < ,<.-+
< I ',.<< '- *,.,9
'* I '&. << * <.&)
'+ I ,-.<< , &.=9
,' I ,=.<< ' *.,-
T-&%. 96 600
In regard to the staff categories em/loyed by the co7o/eratives3 the findings showed that all the
co7o/eratives societies em/loyed su/ervisory staff and lower level staff while '<.*9; did not
em/loy managerial staff. "ut of those who em/loyed managerial staff =).*); em/loyed ' to *
members of managerial staff3 while only ',.<; em/loyed over ten em/loyees in management
level ?table =.9 a@. The su/ervisory staff em/loyed by dairy co7o/erative societies ranged
between ' and ,9 members of su/ervisory staff. &+.+=; of the societies em/loyed between '
and five su/ervisory members of staff while ',.9<; of the co7o/eratives em/loyed over ten
35
members of staff in su/ervisory level ?table =.9b@. &+.+*; of co7o/erative societies em/loyed
over thirty em/loyees in lower level while &.9 ; of them em/loyed less than ten em/loyees in
the lower level ?table =.9c@
T%3.) ;.:%! M%$%#)("%. S&%// )?8.-2)< 32 +---8)(%&"1) 0-+")&")0
N'?3)( -/ M%$%#)("%. 0&%// F()D')$+2 P)(+)$&%#)
- & '<.*9
'7* '9 =).*)
= I & = ',.<'
+ I < , &.=9
'- and above = ',.<'
T-&%. 96 600
T%3.) ;.:3! S'8)(1"0-(2 S&%// )?8.-2)< 32 +---8)(%&"1) 0-+")&")0
N'?3)( -/ 0'8)(1"0-(2 0&%// F()D')$+2 P)(+)$&%#)
' 7 9 ,' &+.+=
& 7 '- * <.&+
'' 7 '9 ' *.,,
'& 7 ,- = ,.<,
,'7 ,9 , &.=9
T-&%. 96 600
36
T%3.) ;.:+! L-A)( .)1). S&%// )?8.-2)< 32 +---8)(%&"1) 0-+")&")0
N'?3)( -/ .-A)( .)1). 0&%// F()D')$+2 P)(+)$&%#)
' 7 '- , &.=+
'' 7 ,- * <. &+
,' 7 *- 9 '&.',
*' 7 =- + ,,.9)
=' and above '= =9.'&
Total *' '--
;.7 F"$<"$#0 -$ C---8)(%&"1) B'<#)&"$# P(%+&"+)0 %$< C,%..)$#)0
To begin with in this section the study sought to establish the im/ortance of budgeting to the
success of the res/ondentFs dairy co7o/erative societies. The findings were as /er table =.&
whereby )*.<; of the res/ondents indicated budgeting was very im/ortant while '&.';
indicated it was im/ortant. Therefore all res/ondents indicated budgeting was im/ortant to the
success of their 5o7o/erative.
Table =.&D Im/ortance of budgeting to the success of the dairy co7o/erative society
F()D')$+2 P)(+)$&
Im/ortant 9 '&.'
Eery im/ortant ,& )*.<
T-&%. 96 600.0
6urther all re/ondents indicated they undertook some initial /re/arations and analysis before
undertaking the budget /rocess for their co7o/erative.
Table =.+a shows that +9; of the res/ondents /re/ared cash budgets while ,9; did not /re/are
cash budgets. >udget for ac2uisition of fi0ed assets was /re/ared by ,&; while +=; of the dairy
37
co7o/erative societies did not ?table =.+b@. "n the other hand =&; of dairy co7o/erative societies
/re/are Income and e0/enditure budget while 9=; did not /re/are any income and e0/enditure
budget ?table =.+c@.
T%3.) ;.=%! P()8%(%&"-$ -/ C%0, 3'<#)&
F()D')$+2 P)(+)$&
Pre/are 5ash >udget ,* +9
$o not Pre/are 5ash
>udget
) ,9
T-&%. 96 600.0
T%3.) ;.=3! P()8%(%&"-$ -/ 3'<#)& /-( %+D'"0"&"-$ -/ /"5)< %00)&0
F()D')$+2 P)(+)$&
Pre/are budget for ac2uisition of fi0ed assets ) ,&
$o not /re/are budget for ac2uisition of fi0ed
assets
,* +=
T-&%. 96 600.0
T%3.) ;.=+! P()8%(%&"-$ -/ "$+-?) %$< )58)$<"&'() 3'<#)&
F()D')$+2 P)(+)$&
Pre/are Income and e0/enditure budget
'= =&
$o not /re/are Income and e0/enditure
budget
'+ 9=
T-&%. 96 600.0
38
The study also sought to establish the level of /artici/ation by the General manager3 the 6inance
manager(Accountant3 the /roduction manager(2uality controller and the sales manager in budget
/re/aration. The findings are as /er table =.) below.
Table =.)D Partici/ation in budget /re/aration
L
)
%
0
&

"
$
1
-
.
1
)
<
L
)
0
0

"
$
1
-
.
1
)
<
M
-
<
)
(
%
&
)
.
2

"
$
1
-
.
1
)
<
M
-
(
)

"
$
1
-
.
1
)
<
M
-
0
&

"
$
1
-
.
1
)
<
M
)
%
$
S
&
<
.

D
)
1
.
General !anager , ' = ,= -
*.
& -.)
6inance !anager - - - - *'
9.
- 7
Production !anager ', ' '* - 9
,.
9 '.=
ales and !arketing !anager ') - < - =
,.
' '.=
A five /oint 1ikert scale was used to inter/ret the e0tent of involvement in budget making by the
General manager, the Finance manager/Accontant, the !ro"ction
manager/#alit$ controller an" the %ale% manager ranging from least involved to most
involved. According to the scale the manager who was least involved was awarded ' while the
manager who was most involved were awarded 9. Githin the continuum are , for less involved3
* for moderately involved and = for more involved. !ean and standard deviation was used to
analyCe the data. !anagers with a mean close to ' were considered least involved while those
with a mean close to 9 were considered most involved. "n the same note the higher the standard
deviation the higher the variations among the res/onses. According to the table all res/ondents
considered the finance manager to be most involved in budget /re/aration with a mean of 9. The
general manager was more involved with a mean of *.&K /roduction manager was moderately
involved with a mean of ,.9 while the ales and !arketing !anager was less involved with a
39
mean of ,.'. There occurred variations in res/onse in regard to the /roduction manager and the
ales and !arketing !anager among the res/ondents reason for a high standard variation of '.=.
"n the budgeting tools mostly used in the res/ondentFs co7o/erative ociety3 the findings are as
shown in table =.<. According to the table >udget committee was more used with a mean of =.'
followed by budget manual ?*.*@.and interde/artmental discussion grou/s ?*.'@. uggestion
system ?'.<@ and >rainstorming grou/s ?'.)@ were less used. There occurred high variations in
res/onse among the res/ondents reason for high standard deviationK interde/artmental discussion
grou/s ?'.<@3 budget manual ?'.)@ and >udget committee ?'.&@
Table =.<D >udgeting tools mostly used in dairy co7o/erative ocieties
B
'
<
#
)
&

T
-
-
.

L
)
%
0
&

'
0
)
<
L
)
0
0

'
0
)
<
M
-
<
)
(
%
&
)
.
2

'
0
)
<
M
-
(
)

'
0
)
<
M
-
0
&

'
0
)
<
M
)
%
$
S
&
<
.

D
)
1
.
>udget committee & - , - ,*
=.
' '.&
interde/artmental discussion grou/s '* - = - '=
*.
' '.<
uggestion system '< - '- - ,
'.
< '.,
budget manual '- ' 9 - '9
*.
* '.)
>rainstorming grou/s ,, - & - *
'.
) '.*
The study further sought to establish the /ro/ortion of /artici/ants in budget making that were
educated in the field of budgeting. 6rom the findings ++.=; of the dairy co7o/erative societies
had not educated their em/loyees in the budgeting /rocess3 while only ,,.&; indicated that their
em/loyees had been educated. Therefore majority of the res/ondent co7o/erative em/loyees had
not been educated about the budgeting /rocess. This information is given by table =.'- below.
Table =.'-D Partici/ants education in budgeting /rocess
40
E<'+%&"-$ 0&%&'0 F()D')$+2 P)(+)$&
Educated /artici/ants in budgeting /rocess + ,,.&
#on educated /artici/ants in budgeting
/rocess
,= ++.=
T-&%. 96 600.0
"n another note in regard to the budget a//roaches used in the res/ondent:s co7o/erative3 this
study found out that3 addition of some /ercentage on the /revious years budget with <*.9;
re/resentation was used together with 4ustification of all costs as if /rograms ?9'.&;@. However3
considering the cost of activities necessary to achieve desired level a//roach was not used in
majority of the co7o/eratives. This was re/resented by <-.*; of the res/ondents. All the
res/ondents did not give any other a//roach used in their co7o/erative. The findings are
demonstrated in table =.'' below.
Table =.''D >udget a//roaches used
B'<#)& %88(-%+, F()D')$+2 P)(+)$&%#)
'0)< N-&
'0)<
U0)< N-& '0)<
4ustification of all costs as if /rograms '& '9
9'.&
=).=
addition of some /ercentage on the /revious
years budget
,< ,
<*.9
&.9
5onsidering the cost of activities necessary to
achieve desired level
* ,)
<.+
<-.*
Any other - *'
7
'--.-
In regard to standards against which actual total cost /er litre of milk is com/ared in the
res/ondents co7o/erative3 the findings indicated that 9=.); of the res/ondent co7o/eratives
com/ared the actual total cost /er litre to standard total cost /er litre3 while =9.,; of the
res/ondent co7o/eratives did not com/are the actual total cost /er litre to the standard total cost
?table =.',@.
41
Table =.',D %se of standard total cost /er litre to measure actual costs /erformance
U0) -/ 0&%$<%(< &-&%. +-0& 8)( ."&)( F()D')$+2 P)(+)$&%#)
use standard total cost /er liter to measure actual cost /erformance '+ 9=.)
$o not use standard total cost /er liter to measure actual cost
/erformance
'= =9.,
T-&%. 96 600
Table =.'* below shows the res/onse to the 2uestion on whether or not budgets were negotiated
between to/ management and de/artmental heads. <&.); of the res/ondents indicated that their
co7o/erative budgets were negotiated between higher level managers and de/artmental heads
while only *.,; of the res/ondents indicated that their co7o/erative budgets were not negotiated.
T%3.) ;.69! B'<#)& $)#-&"%&"-$ 3)&A))$ ,"#,)( .)1). ?%$%#)(0 %$< <)8%(&?)$&%. ,)%<0
B'<#)& $)#-&"%&"-$ F()D')$+2 P)(+)$&%#)
#egotiated budgets between to/ management and de/artmental
heads
*- <&.)
did not #egotiate budgets between to/ management and
de/artmental heads
' *.,
T-&%. 96 600.0
The study also sought to establish what information the management of the co7o/eratives
communicated to their em/loyees during budgeting /rocess. According to the findings majority
of the res/ondents indicated that all the information en2uired were communicated to the
em/loyees. This is given as Targets to be achieved ?<&.+;@3 Environmental e0/ectations
?)+.';@3 strategic /lan details to be im/lemented ?)+.';@3 Eariance between actual R budgeted
?<*.9;@ and >udgeting guidelines ?)-.&;@. This indicated that majority of the information was
communicated to the em/loyees. These findings are given in table =.'=.
T%3.) ;.6; C-??'$"+%&)< -/ 3'<#)&"$# 8(-+)00 &- E?8.-2))0
42
Information ty/e 6re2uency Percent
5ommunicated #ot
5ommunicated
communicated #ot
communicated
Targets to be achieved *- ' <&.+ *.*
Environmental e0/ectations ,+ = )+.' ',.<
strategic /lan details to be
im/lemented
,+ = )+.' ',.<
Eariance between actual R
budgeted
,< , <*.9 &.9
>udgeting guidelines ,9 & )-.& '<.=
6inally the study sought to establish the 5hallenges faced by the res/ondents: dairy co7o/erative
society during budgeting. The findings are as /er table =.'9 below.
Table =.'9D 5hallenges faced by the res/ondents society during budgeting
L
)
%
0
&
L
)
0
0

M
-
<
)
(
%
&
)
M
-
(
)

M
-
0
&

M
)
%
$
S
&
<
.

D
)
1
.
1ack of to/ management su//ort and
involvement
,) - - * -
'.*

-.<
1ack of education for all involved '* - - ' '+
*.*

,.-
Partici/ation of all individuals ', - = = ''
*.'

'.)
1ack of understanding of the business
environment
,, - = * ,
'.)

'.*
etting of unrealistic targets by
managers for /ersonal gains
,9 - * ' ,
'.9

'.,
43
>udget com/le0ity ', - = & < *.- '.+
5onflicts among managers ,+ ' ' ' '
'.*

-.<
#on Icommunication to em/loyees
during budgeting
,) - ' - ,
'.*

'.-
escalating costs beyond antici/ation & - - , ,*
=.,

'.&
>udget im/lementation '& - = = +
,.9

'.+
6rom the findings majority of the res/ondents indicated escalation of costs beyond antici/ation
as the most common challenge they faced during the budgetary /rocess. Table =.'= above shows
that this challenge /ortrays a mean of =.,. The other challenges which were moderately faced
were 1ack of education for all involved ?*.*@3 Partici/ation of all individuals ?*.'@ and >udget
com/le0ity ?*.-@. >udget im/lementation was a moderate challenge faced by the res/ondent:s
co7o/eratives. "n the other hand 1ack of understanding of the business environment ?'.)@ was a
less challenge together with etting of unrealistic targets by managers for /ersonal gains ?'.9@.
The least faced challenges were given as #on Icommunication to em/loyees during budgeting
?'.*@3 5onflicts among managers ?'.*@ and 1ack of to/ management su//ort and involvement
?'.*@. There occurred high variations among individuals in regard to Partici/ation of all
individuals ?'.)@3 >udget com/le0ity ?'.+@3 escalating costs beyond antici/ation ?'.&@ and >udget
im/lementation ?'.+@. This indicates the reason why the standard deviation was high.
;.= S'??%(2 -/ &,) /"$<"$#0
6rom the survey results3 the study found out that <*.*; of dairy co7o/erative societies use long
term strategic /lans as a guide to management actions while &.+; of the dairy co7o/erative
societies did not use long term strategic /lans. These strategic /lan runs for a /eriod of five years
and three years for ++; and ,); of the dairy co7o/erative societies res/ectively. 9; of the
res/ondent dairy co7o/erative societies did not indicate the time their strategic /lan runs. The
study established that the co7o/eratives membershi/ at the time of the survey ranged from <--
members to '&3)&& members. 6urther in regard to the co7o/eratives total asset value3 the study
44
established that the total value of assets owned by dairy co7o/erative societies ranged from a low
of half a million for smaller societies to a high of &+' millions for giant co7o/erative societies.
"ut of all the res/ondents3 9; did not reveal the details of their assets and their values. 6urther
the study revealed that the average milk deliveries /er member for individual dairy co7o/erative
societies was between * liters /er member and ,9 liters /er member. In regard to the staff
categories em/loyed by the co7o/eratives3 the findings showed that all the co7o/eratives societies
em/loyed su/ervisory staff and lower level staff while '<.*9; did not em/loy managerial staff.
"ut of those who em/loyed managerial staff =).*); em/loyed ' to * members of managerial
staff3 while only ',.<; em/loyed over ten em/loyees in management level. The su/ervisory
staff em/loyed by dairy co7o/erative societies ranged between ' and ,9 members of su/ervisory
staff. &+.+=; of the societies em/loyed between ' and five su/ervisory members of staff while
',.9<; of the co7o/eratives em/loyed over ten members of staff in su/ervisory level. &+.+*; of
co7o/erative societies em/loyed over thirty em/loyees in lower level while &.9 ; of them
em/loyed less than ten em/loyees in the lower level.
The study found out that )*.<; of the dairy co7o/erative societies consider budgeting as very
im/ortant to success of their society while '&.'; consider budgeting as im/ortant. 6urther3 the
study established that all dairy co7o/erative societies undertook some initial /re/arations and
analysis before undertaking the budget /rocess. Also established by the study is the fact that +9;
of the res/ondents /re/ared cash budgets while ,9; did not /re/are cash budgets3 budget for
ac2uisition of fi0ed assets was /re/ared by ,&; while +=; of the dairy co7o/erative societies
did not and the other hand =&; of dairy co7o/erative societies /re/ared income and e0/enditure
budget while 9=; did not /re/are any income and e0/enditure budget. "n the findings with
regard to the e0tent of /artici/ation by the General !anager3 the 6inance manager3 the
/roduction manager and the sales managers: in the budget making /rocess3 the study established
that the finance manager was most involved in budget /re/aration with a mean of 9. The general
manager was more involved with a mean of *.&K /roduction manager was moderately involved
with a mean of ,.9 while the ales and !arketing !anager was less involved with a mean of ,.'.
The study also established that the budgeting tools mostly used in the res/ondentFs co7o/erative
society was the budget committee with a mean of =.' followed by budget manual with a mean of
*.* and interde/artmental discussion grou/s with a mean of *.'. uggestion system and
brainstorming grou/s were least used with a mean of '.< and '.) res/ectively.
45
6urther the study established that ++.=; of the dairy co7o/erative societies did not educate their
budget officers in the area of budgeting. This is in com/arison to ,,.&; of the co7o/erative
societies who had educated the em/loyees involved in the budgeting /rocess. The study also
found out that3 addition of some /ercentage on the /revious years budget was the budgeting
a//roach used by <*.9; of the dairy co7o/erative societies while justification of all costs as if
/rograms was in use in 9'.&; of the societies. However3 considering the cost of activities
necessary to achieve desired level a//roach was not used in <-.*; of the co7o/erative societies.
res/ondents. #o other a//roach other than the listed a//roaches was found to be in use in any of
the res/ondent:s co7o/erative societies. In regard to standards against which actual total cost /er
litre of milk is com/ared in the res/ondents co7o/erative3 the findings indicated that 9=.); of the
res/ondent co7o/eratives com/ared the actual total cost /er litre to standard total cost /er litre3
while =9.,; of the res/ondent co7o/eratives did not com/are the actual total cost /er litre to the
standard total cost. "n a similar note <&.); of the res/ondents indicated that their co7o/erative
budgets were negotiated between higher level managers and de/artmental heads while only *.,;
of the res/ondents indicated that their co7o/erative budgets were not negotiated between higher
level managers and de/artmental heads. The study also established that targets to be achieved
was communicated to em/loyees by <&.+; of the societies3 environmental e0/ectations was
communicated to em/loyees by )+.'; of the societies3 strategic /lan details to be im/lemented
was communicated down to em/loyees by )+.'; of the societies3 variance between actual and
budgeted results was communicated down to em/loyees by <*.9; of the societies and budgeting
guidelines were communicated down to em/loyees by )-.&; of the societies.
6inally3 the study established that3 escalation of costs beyond antici/ation was the greatest
challenge faced by the dairy co7o/eratives societies with a mean of =.,. The other challenges
which were faced by dairy co7o/erative societies were 1ack of education for all involved with a
mean of *.*3 lack of /artici/ation of all individuals with a mean of *.' and budget com/le0ity
with a mean of *.-. >udget im/lementation was a moderate challenge faced by the res/ondent:s
co7o/eratives with a mean of ,.9. "n the other hand lack of understanding of the business
environment with a mean of '.) was a less challenge together with etting of unrealistic targets
by managers for /ersonal gains which had a mean of '.9. #onIcommunication to em/loyees
during budgeting /rocess3 conflicts among managers and lack of to/ management su//ort and
involvement were found to be least faced challenges with a mean of '.* each.
46
;.= I?8."+%&"-$0 -/ &,) /"$<"$#0
1ong term strategic /lan was not used as a guide to management actions by &.+; of the co7
o/eratives. The im/lication is that these dairy societies have no clear direction that guides
management decisions and actions. This is a risky /osition as lack of a clear direction can lead to
failure of the society in the long run. The study findings that the co7o/eratives societies
membershi/ at the time of the survey ranged from <-- members to '&3)&& members im/lies that
some dairy co7o/erative societies are very small and hence weak as evidenced by low
membershi/ and low assets base while others are very big and strong. The revelation by the
study that average milk deliveries /er member for individual dairy co7o/erative societies was
between * liters /er member and ,9 liters /er member im/lies that dairy farming was very low in
some areas and high in others. This clearly im/lies that some society members were able to kee/
their /roduction high des/ite the drought that faced the country at the time of the survey while
members of other societies were unable to co/e with the hush weather conditions. The study
findings also showed that '<.*9; of the dairy co7o/eratives did not em/loy managerial staff.
This im/lies that those societies do not benefit from the services of 2ualified and e0/erienced
managers.
The study established that )*.<; of the dairy co7o/erative societies consider budgeting as very
im/ortant to success of their society while '&.'; consider budgeting as im/ortant. 6urther3 the
study established that all dairy co7o/erative societies undertook some initial /re/arations and
analysis before undertaking the budget /rocess. The im/lication here is that budgeting is
considered as an essential tool for the success of the dairy co7o/erative societies. However3 the
study also established that ,9; of the societies did not /re/are cash budgets3 +=; did not
/re/are budget for ac2uisition of fi0ed assets and 9=; did not /re/are any income and
e0/enditure budget. "n the same note3 the study revealed that /roduction manager was
moderately involved in budget making while the ales and !arketing !anager was less
involved. The im/lications are that not all high level managers are involved in the budgetary
/rocess and hence the com/leteness and usefulness of the budgets com/romised. The study also
established that the budgeting tools mostly used in the res/ondentFs co7o/erative society was the
budget committee with a mean of =.' followed by budget manual with a mean of *.* and
interde/artmental discussion grou/s with a mean of *.'. uggestion system and brainstorming
47
grou/s were least used with a mean of '.< and '.) res/ectively. This shows that some a//roaches
to budgeting such as suggestion system and brainstorming grou/s were least used. This
translated into lesser em/loyees getting a chance to /artici/ate in the budget making /rocess.
1ack of any initiative to educate budget makers by ++.=; of the dairy co7o/erative societies in
the area of budgeting im/lies that a lot of em/loyees charged with the res/onsibility of making
budgets are not s/ecialists in the area of budgeting. This im/lies low 2uality of the /roduct of the
budgeting /rocess.
The budgeting a//roach that was mostly used by <*.9; of the dairy co7o/erative societies was
addition of some /ercentage on the /revious years budget3 while justification of all costs as if
/rograms was in use in 9'.&; of the societies. However3 considering the cost of activities
necessary to achieve desired level a//roach was not used in <-.*; of the co7o/erative societies.
This im/lies that more modern a//roaches to budgeting like considering the cost of activities
necessary to achieve desired level of activity was not /o/ular with the societies. The im/lication
of use of addition of some /ercentage on the /revious year:s budget as an a//roach to budgeting
is that some activities are included in current year:s budget just because they were /art of the
/revious year:s budget. tandards to com/are with actual total cost /er litre of milk sold were in
use in 9=.); of the res/ondent co7o/eratives. The im/lications are that close to a half of all dairy
co7o/erative societies did not measure their actual total cost /er liter of milk sold against any
standard. It therefore means that about 9-; of the dairy co7o/erative societies are not able to
measure their /erformance in terms of total cost of liter of milk sold. #egotiation of budgets
between higher level managers and de/artmental heads was not done by *.,; of the
res/ondents. The im/lication is that some of the em/loyees could take budgets as im/osed on
them and hence reduce the level of acce/tance of the budgets. The study also established that
targets to be achieved was communicated to em/loyees by <&.+; of the societies3 environmental
e0/ectations was communicated to em/loyees by )+.'; of the societies3 strategic /lan details to
be im/lemented was communicated down to em/loyees by )+.'; of the societies3 variance
between actual and budgeted results was communicated down to em/loyees by <*.9; of the
societies and budgeting guidelines were communicated down to em/loyees by )-.&; of the
societies. The im/lication is that not all em/loyees were aware of what they were working
towards and the environment in which they o/erate.
48
Escalation of costs beyond antici/ation was the greatest challenge faced by the dairy co7
o/erative societies. The im/lication is that the budgeted e0/enditures /re/ared at the beginning
of the financial year were significantly different from the actual e0/enditures. This diminishes
the usefulness of budgeted e0/enditure as a guide to s/ending. The other challenge which was
faced by dairy co7o/erative societies was lack of education for all involved. This im/lies that
those involved in budget making did not have a good command of the /rocess of budgeting.
1ack of /artici/ation of all individuals and budget com/le0ity were also noted as challenges
facing the dairy co7o/eratives societies. This im/lies that some budget officers were
overburdened with budgeting tasks whiles other officers were not actively involved. This also
reduces the acce/tance and ownershi/ of the results of the budgeting /rocess by all members of
staff. >udget im/lementation was a moderate challenge faced by the res/ondent:s co7o/eratives
societies. This could mainly be as a result of lack of education about the budgeting /rocess and
failure by some members of staff to /artici/ate in the budget /rocess.
49
CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS
:.2 C-$+.'0"-$
Poor business /lanning3 unrealistic and conflicting goals and targets3 absence of stringent
monitoring and evaluation of activities is considered as the cause of business failures. However3
through effective budgeting and stringent budgetary control /rocess3 these activities can be
efficiently and effectively managed. The situation amongst the dairy co7o/erative societies in
8enya is not different and more often we have had various co7o/eratives close due to /oor
financial management.
The study objectives were to establish the budgeting /ractices among dairy co7o/erative societies
in 8enya and the budgeting challenges facing dairy co7o/erative societies in 8enya. The
significance of this study is that recommendations made to government /olicy makers and
management of co7o/erative societies3 if im/lemented would enhance financial management and
general /erformance of the dairy sector through sound financial management /ractice. The study
would also form a basis for academics and further research and knowledge on the subject of
budgeting. 6uture studies in budgeting and /articularly in the dairy sector can use the results of
this study as reference material.
6rom the findings of this study3 long term strategic /lan was not used as a guide to management
actions by &.+; of the co7o/eratives. The study also found out that membershi/ of the societies
at the time of the survey ranged from <-- members to '&3)&& members. It was also established
that the average milk deliveries /er member for individual dairy co7o/erative societies was
between * liters /er member and ,9 liters /er member. The study findings also showed that
'<.*9; of the dairy co7o/eratives did not em/loy managerial staff. The study also established
that )*.<; of the dairy co7o/erative societies consider budgeting as very im/ortant to success of
their society while '&.'; consider budgeting as im/ortant. 6urther3 the study established that all
dairy co7o/erative societies undertook some initial /re/arations and analysis before undertaking
the budget /rocess. However3 the study also established that ,9; of the societies did not /re/are
50
cash budgets3 +=; did not /re/are budget for ac2uisition of fi0ed assets and 9=; did not /re/are
any income and e0/enditure budget. "n the same note3 the study established that /roduction
manager was moderately involved in budget making while the ales and !arketing !anager
was less involved. The study also established that the budgeting tools mostly used in the
res/ondentFs co7o/erative society was the budget committee3 followed by budget manual and
interde/artmental discussion grou/s in that order. uggestion system and brainstorming grou/s
were least used. The study also established that ++.=; of the dairy co7o/erative societies did not
educate their budget officers in the area of budgeting.
The study also established that <*.9; of the dairy co7o/erative societies used addition of some
/ercentage on the /revious years budget as an a//roach to budgeting3 while justification of all
costs as if /rograms was in use in 9'.&; of the societies. However3 considering the cost of
activities necessary to achieve desired level a//roach was not used in <-.*; of the co7o/erative
societies. tandards to com/are with actual total cost /er litre of milk sold were not in use in
=9.,; of the res/ondent co7o/eratives.. #egotiation of budgets between higher level managers
and de/artmental heads was not done in *.,; of the societies. The study also established that
targets to be achieved was communicated to em/loyees by <&.+; of the societies3 environmental
e0/ectations was communicated to em/loyees by )+.'; of the societies3 strategic /lan details to
be im/lemented was communicated down to em/loyees by )+.'; of the societies3 variance
between actual and budgeted results was communicated down to em/loyees by <*.9; of the
societies and budgeting guidelines were communicated down to em/loyees by )-.&; of the
societies.
Escalation of costs beyond antici/ation was the greatest challenge faced by the dairy co7
o/erative societies. The other challenge which was faced by dairy co7o/erative societies was lack
of education for all involved. 1ack of /artici/ation of all individuals and budget com/le0ity were
also noted as challenges facing the dairy co7o/eratives societies. >udget im/lementation was a
moderate challenge faced by the res/ondent:s co7o/eratives societies.
:.9 R)+-??)$<%&"-$0
This study recommends that Government /olicy makers should formulate a /olicy that make it
mandatory for all dairy co7o/erative societies to /re/are and have in /lace a strategic /lan that
51
guides the direction of all management actions. The study also recommend that the ministry of
co7o/eratives should launch a cam/aign aimed at recruiting more members for the societies with
low membershi/ in order to make them strong and at the same time intensify su/ervision of the
management of the giant societies to ensure /ro/er financial management and hence enhanced
benefits to members to encourage current members to stay on and new members to join. The
study also recommends that a research be undertaken to establish how some societies were able
to maintain high /roductivity levels des/ite the hush weather conditions. The skills and
knowledge should be im/arted to those dairy farmers whose /roductivity was low in order to
boast /roductivity in future dry s/ells. Becommendation that Government /olicy makers make a
/olicy that make it mandatory for all dairy co7o/erative societies to em/loy 2ualified and
e0/erienced management staff to enhance chances of success is also made. The study also
recommends that Government /olicy makers formulate a /olicy that make it mandatory for all
dairy co7o/erative societies to /re/are all ty/es of budgets and that the ministry of co7o/eratives
should go further and enforce im/lementation of the /olicy and conduct regular system audits to
ensure adherence to /olicy guide lines.
It is also recommended that government /olicy makers should make it a matter of /olicy for all
high level managers to be fully involved in budget making /rocess and that the officers in charge
of budgeting /rocess o/en u/ the budgeting /rocess to accommodate suggestions from all
members of staff and also com/ose brainstorming grou/s to enrich the budget making /rocess
with ideas. The study also recommends that to/ management of the co7o/erative societies should
make a training /rogram and ensure budget makers are well trained in the budgeting /rocess.
Government /olicy makers should also come u/ with a re2uirement that the ministry of co7
o/eratives /lan and e0ecute training /rograms for the dairy co7o/erative societies in all areas
including budgeting. The management of co7o/erative societies should also be educated on the
im/ortance of using more modern a//roaches to budgeting to enhance accuracy and avoid
inclusion of unnecessary activities in the budget just because they were /art of the /revious years
budget. The study also recommends that all dairy co7o/erative societies develo/ standard total
cost /er liter of milk sold against which they measure actual total cost /er liter. This will enable
them to be able to ascertain when costs are going overboard and be able to take corrective
actions well in time. It is also highly recommended that all budgets should be negotiated between
52
lower level em/loyees and high level managers to enhance acce/tability and ownershi/ of the
budgets by all em/loyees. All information regarding the budgeting /rocess should also be
communicated to enhance awareness. The study also recommends that he budget makers in dairy
co7o/erative societies be trained in budgetary /rocess and /articularly on how to use /rice level
indices to accurately /redict the future /rices of goods and services. 6urther research should be
undertaken to establish the e0tent of variance between budgeted e0/enses and actual e0/enses
and further establish that /art of the variance that is as a result of une0/ected /rice changes.
:.; L"?"&%&"-$0 -/ &,) 0&'<2
The study was carried out at time when the country was facing a severe drought that killed some
of the livestock and adversely affected the /roduction of the ones that survived. $airy activities
were therefore at low levels and hence non availability of key managers in their offices was
limiting. The time within which the research was to be com/leted and the resources available
were also limited.
:.7 S'##)0&"-$0 /-( /'(&,)( 0&'<")0
This study suggests that further research be undertaken in dairy co7o/erative societies to
establish the relationshi/ between sound budgeting /ractices and /erformance. It would also be
interesting to establish the relationshi/ between budgeted income and e0/enditure and actual
income and e0/enditure in the dairy co7o/erative societies in 8enya. This study also suggests
that a further research be carried out to establish how members of some dairy co7o/erative
societies managed to maintain high milk /roduction levels des/ite the devastating drought
/revailing in the country at the time of the study.
53
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5arter 3 !acdonald #.43 5heng $.5.> ?'<<+@D >asic 6inance for !arketersK 6A" Begional
office for Africa. www.fao.org.
5hristo/her G. Beddick ,--*K 1ong7run and short7run budgetingD Theories and Em/irical
evidence for 5anadian Provinces3 International 4ournal of Public Eol. ,&3 #o. =3 //. =,+I=9*3
,--*
5hristo/her G. Beddick ,--*K Testing rival theories of budgetary decision7making in the %
tates36inancial AccountabilityR !anagement3 '<?=@3 #ovember ,--*.
5o/eland I ?,---@D Jcutting costs without drawing blood.: Harvard >usiness Beview3 e/tember7
"ctober ,--- Page '=-7'&,.
$rury 5.?,--=@D !anagement and 5ost Accounting3 si0th edition3 Thom/son 1earning.
$uane Gindsor ?'<),-K Two theories of Aero7>ase >udgetingD The Institute of !anagement
ciences
Eol. ',3 #o. =3 August '<), --<,7,'-,(),(',-=(-',)U-'.,9
Ekstrom 5.$ ?'<)+@D>udgetary Practices in maller units of GovernmentK Public budgeting and
finance(summer '<)<.
Garrison H.B. ?'<)9@D !anagerial AccountingD conce/t for /lanningK control and decision
making3 >usiness /ublication Inc.
Hansen3 !owen3 Elias and enkow ?'<<)@D >ehavioral $imension of >udgeting. Available on
www.atkinson.yorku.ca
Horngren 5.T3 $atar .! and 6oster G. ?,--9@D 5ost accounting3 A managerial em/hasis3
twelveth edition3 /rentice Hall.
Horngren 5.T.3 undem G.1. and tratton G.". ?,--,@D Introduction to !anagement
Accounting3 Twelveth edition3 Pearson education.
htt/D((www.treasury.gov.Ca(commVmedia(s/eeches(,--=(,--=-<,--'./df
8aranja A. ?,--<@D $airy Industry in 8enyaK the /ost liberaliCation Agenda3 Tegemeo
Agricultural !onitoring and Policy Analysis Project
8aren . and tout $.E ?,--)@K >udgetary Practices in $utch listed com/anies3 !anagement
Accounting Tuartely3 6all.
8enya $airy >oard website htt/D((www.kdb.co.ke3 !ay *-
th
,--<.
54
1ee B.$. and >urns B.5.?,---@D Performance measurement in state budgetingD advancement and
backsliding from '<<- to '<<93 Public budgeting and 6inance ( s/ring ,---.
1ucey T.?,--,@ 5osting 3 si0th edition3 >ook Power formerly E1 T.
!arron $. >.?,--&@ The A>5s of 1ong7Term >udget 5hallenges3 $irector:s 5onference on
>udgeting and Accounting for 1ong7Term "bligations $ec )3,--&.
!baru P.. ?,--9@D An investigation into the ga/ between budgets and e0/erience. The case of
>amburi /ecial Products limited.
!eagan !. 4. and Hackbart ?'<<<@D Performance >udgeting and Performance 6unding in the
tatesD A tatus Assessment 3 Public >udgeting R 6inance ( /ring '<<<
!elkers 4. R Gilloughby 8 ?'<<+@K The tate of the tatesD
Performance7>ased >udgeting Be2uirements in =+ out of 9-K Georgia tate %niversity
%niversity
!uleri A.!. ?,--=@D A survey of budgeting /ractices among the major >ritish Government
agencies in 8enya.
#diritu !.G. ?,--+@D Effectiveness of cash budgeting in /ublic institutions3 a case study of
Telkom 8enya 1imited.
"bulemire T.A.?,--&@ A survey of budgeting /ractices in secondary schools ?A case study of
Public econdary chools in #airobi@.
"soro P.!. ?,--'@D >udgetary control in #G"s in 8enyaD a case study for Gorld Eision.
Porter 4. T. ?,--)@K !anaging the >ottom 1ine3 available on website
htt/D((archive.techlearning.com(techlearning(/df(events(techforum(ny-*(vault(>ottom1ineVHand
out,./df
Bedick 5.G. ?,--*@D Testing rival theories of budgetary decision7making in the % states3
6inancial accountability and management3 #ovember ,--*.
antos 4.B.A ?'<<<@D 5ronbach:s Al/haD a tool for assessing the reliability of cales3 4ournal of
E0tension on www.joe.org.
Geston 4.6.3 >righam E.6.?'<)+@D Essentials of !anagerial finance3 eigth edition. The $ryden
/ress.
Ghitehead G. and %/son A. ?'<),@D Accounting and 5osting3 4ohn !urray /ublishers.
GlodarcCak P. ,--)3 5hallenge of budgeting for a s/ray deck3 Published in the
www.wlodarcCakWstrathcona.ab.ca -n e/tember ,&3 ,--)
55
Hoingco A.T and Guevara !.!. ?'<)=@D >udgetary /ractices and develo/ments in the
Phili//ines.
56
APPENDIF 6! QUESTIONAIRE FOR DAIRY FARMERS CO-OPERATIVES
High level of confidentially will be accorded the information in this 2uestionnaire and will be
used for academic /ur/oses only. Any difficulties e0/erienced will be discussed with you during
the interviews.
$ate .......... Tuestionnaire number ...........
PABT I
General information about the 5o7o/erative society
1. $o you use long term ?strategic@ /lan as a guide to management actions for the 5o7
o/erativeP
Hes ? @ #o ? @
2. Ghat is the current membershi/ ?in numbers@ of your co7o/erative societyP..............
3. .Ghat is the total Asset Ealue of the 5o7o/erative
?a@ 1and 7 #umber of acres ....... Ealue 8shs. .....
?b@ >uildingsD Total value of building ........
?c@ 5ooling ystemD Total Ealue...............
?d@ any other Asset D 7 Total Ealue ...............
=. Ghat is the average delivery 2uantity ?litres@ /er member .............P
9. How many of the following staff categories are em/loyed by the 5o7o/erativeP
!anagerial taff ........
u/ervisory staff........
1ower level staff ........
P%(& II
C---8)(%&"1) B'<#)&"$# P(%+&"+)0 %$< B'<#)&"$# +,%..)$#)0
&. Is budgeting im/ortant to the success of your 5o7o/erativeP
57
#ot im/ortant 1imited im/ortant im/ortant Eery im/ortant
Essential ? @ ? @ ? @ ? @
7. $o you undertake some initial /re/arations before undertaking the budget /rocessP
Hes ? @ #o ? @
). Ghat kind of >udgets does your 5o7o/erative /re/areP ?Tick as a//ro/riate@
5ash >udget for ac2uisition of Income and
>udget fi0ed assets e0/enditure budget
? @ ? @ ? @
<. To what e0tent are the following involved in /re/aration of the budget in your societyP
1east involved !ost involved
' , * = 9
7General !anager ? @ ? @ ? @ ? @ ? @
7 6inance !anager ? @ ? @ ? @ ? @ ? @
7 Production !anager ? @ ? @ ? @ ? @ ? @
7ales R !arketing !anager ? @ ? @ ? @ ? @ ? @
10.Ghich tool is used most in your co7o/erative societyP
1east used !ost used
' , * = 9
7>udget committee ? @ ? @ ? @ ? @ ? @
7interde/artmental discussion grou/s ? @ ? @ ? @ ? @ ? @
7uggestion system ? @ ? @ ? @ ? @ ? @
7budget manual ? @ ? @ ? @ ? @ ? @
7>rainstorming grou/s ? @ ? @ ? @ ? @ ? @
7 Any other ?s/ecify@ ? @ ? @ ? @ ? @ ? @
Have em/loyees been educated about your budgeting /rocessP Hes ? @ #o ?
@
''. Are the following budget a//roaches used in your co7o/erative societyP
74ustification of all costs as if /rograms Hes ? @ #o ? @
7addition of some /ercentage on the /revious years budget Hes ? @ #o ? @
7 5onsidering the cost of activities necessary to achieve
desired level of o/eration Hes ? @ #o ? @
7 Any other ?s/ecify@ Hes ? @ #o ? @
58
12.$o you use standard total cost /er liter as a measure of actual total cost /er literP
Hes ? @ #o ? @
'*. Are your budgets negotiated between higher level managers R de/artmental headsP
Hes ? @ #o ? @
'=. Ghat information do you communicate to em/loyees during budgeting /rocessP
7Targets to be achieved Hes? @ #o ? @
7 Environmental e0/ectations Hes? @ #o ? @
7 strategic /lan details to be im/lemented Hes? @ #o ? @
7 Eariance between actual R budgeted Hes? @ #o ? @
7 >udgeting guidelines Hes? @ #o ? @
'9. Ghat 5hallenges do you face during budgeting /rocess for your ocietyP
1east !ost
' , * = 9
71ack of to/ management su//ort and involvement ? @ ? @ ? @ ? @ ? @
71ack of education for all involved ? @ ? @ ? @ ? @ ? @
7Partici/ation of all individuals ? @ ? @ ? @ ? @ ? @
71ack of understanding of the business environment ? @ ? @
? @ ? @ ? @ 7etting of unrealistic targets by managers for
/ersonal gains
? @ ? @ ? @ ? @ ? @ 7>udget com/le0ity
? @ ? @ ? @ ? @ ? @
75onflicts among managers ? @ ? @ ? @ ? @ ? @
7 #on Icommunication to em/loyees during
budgeting /rocess ? @ ? @ ? @
? @ ? @ 7escalating cots beyond antici/ation ? @ ? @
? @ ? @ ? @ 7>udget im/lementation ? @ ? @ ?
@ ? @ ? @
59