JOSEPH SARWUAN TARKA UNIVERSITY, MAKURDI.

Center for Innovation in Procurement, Environmental and Social Standards

(CIPESS).

By:
ADAGBA DAMIAN IORHEN

Reg. Number:
APP/MSC/C/4573235605
MAT. NO: 24/1457/C/MSC

Course:
PRM 805
COST AND MANAGEMENT ACCOUNTING

Department:
PROCUREMENT MANAGEMENT

Assignment Question:
The Managing Director of Mega Ltd. recently attended a seminar on budgetary control systems where he gained the
impression that the introduction of such a system offered opportunities not only to improve control of the company’s
operations but also to improve staff motivation. Unfortunately, he did not fully understand some of the points made
at the seminar and has approached you, an expert in Procurement who is also knowledgeable in the company’s cost
and management accounting process, for a clearer explanation.
You are required to provide concise explanations to the following queries made by the Managing Director:
1. What is budgetary control and its objective in procurements? (3 marks)
2. Traditional budgetary systems are based on certain basic mechanisms for achieving control. What is the
traditional basis for achieving control? (3 marks)
3.It has been suggested that “zero based budgeting” can be particularly effective in improving control and staff
motivation.
a. What is meant by the term “zero based budgeting”? (2 marks)
b. What are the advantages of zero based budgeting over traditional budgeting systems and (4 marks)
c. how can it be used to help improve managers motivation (3 marks)

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 Abstract
This paper delves into the concept of budgetary control, its pivotal role in procurement, and the
evolution of budgeting practices. It elucidates the objective of budgetary control in procurement,
outlining key components for effective implementation. The study contrasts traditional budgeting
methods with the emerging zero-based budgeting (ZBB) approach, highlighting ZBB's
advantages in fostering cost-consciousness and managerial motivation. By examining the
intricacies of budgetary control and the transformative potential of ZBB, this research
contributes to a comprehensive understanding of financial management strategies for optimized
procurement and overall organizational performance.

Keywords: budgetary control, procurement, zero-based budgeting, managerial motivation, cost

management.

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 Question 1.
Budgetary Control and Its Objective in Procurement
What is Budgetary Control?

Budgetary control is a systematic process of monitoring and regulating expenditure to ensure it

aligns with the established budget. It involves comparing actual expenses against budgeted
amounts, identifying variances, and taking corrective actions to prevent overspending. In the
context of procurements, budgetary control becomes crucial for maintaining financial discipline
and achieving cost-effective outcomes.
Objective of Budgetary Control in Procurements
The primary objective of budgetary control in procurements is to optimize spending and ensure
that procurement activities are carried out within the allocated budget. This involves:
 Cost Reduction: Identifying cost-saving opportunities and implementing strategies to
reduce procurement expenses without compromising quality or service levels.
 Efficient Resource Allocation: Ensuring that funds are allocated effectively to procure
necessary goods and services while avoiding overspending.
 Risk Mitigation: Preventing financial losses due to unexpected cost overruns or
unauthorized expenditures.
 Performance Measurement: Evaluating the performance of procurement activities
against budgetary targets to identify areas for improvement.
 Compliance: Adhering to budgetary guidelines and regulations to avoid legal and
financial repercussions.
Key Components of Budgetary Control in Procurement
To effectively implement budgetary control in procurements, organizations typically employ the
following components:
 Budget Preparation: Developing a detailed procurement budget that outlines expected
expenditures for different categories of goods and services.

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  Cost Estimation: Accurately estimating the costs associated with potential procurement
activities.
 Purchase Order Approval: Establishing a clear approval process for purchase orders to
ensure they align with the budget.
 Regular Monitoring: Continuously tracking actual expenditures against budgeted
amounts.
 Variance Analysis: Identifying and analyzing deviations from the budget to determine
their causes.
 Corrective Action: Taking prompt measures to address unfavorable variances and
prevent further overspending.
By effectively implementing budgetary control in procurements, organizations can achieve
significant cost savings, enhance financial performance, and improve overall procurement
efficiency.

Question 2.
Traditional Basis for Achieving Control in Budgeting

Traditional budgetary systems primarily rely on a top-down, hierarchical approach to control.

This means that budgets are typically prepared by upper management and then imposed on lower
levels of the organization.
The core mechanisms for achieving control in this system are:
1. Centralized Planning and Control:
 Top-down budgeting: Budgets are prepared by senior management and allocated to
departments.
 Rigid structure: The budget is often a detailed, inflexible document.
 Limited participation: Lower-level managers have minimal input in the budgeting
process.
2. Emphasis on Financial Performance:
 Financial metrics: The primary focus is on financial targets, such as revenue, expenses,
and profits.

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  Short-term orientation: Often, budgets are focused on the upcoming year, with less
emphasis on long-term planning.
3. Performance Evaluation:
 Budget variance analysis: Performance is measured by comparing actual results to
budgeted figures.
 Responsibility accounting: Managers are held accountable for the performance of their
departments.
While this approach has been widely used, it has limitations in today's dynamic business
environment. Many organizations are adopting more flexible and participative budgeting
methods to enhance performance and adaptability.
Question 3A:
What is Zero-Based Budgeting (ZBB)

Zero-based budgeting is a budgeting method where every expense must be justified for each new
period. Unlike traditional budgeting where the previous year’s budget is used as a starting point,
ZBB starts from a “zero base.”
This means that every function, program, and activity within an organization is analyzed for its
needs and costs. Budgets are then built from scratch based on current requirements, rather than
relying on historical spending. In essence, with ZBB, every expense is questioned and justified
before it’s included in the budget. Zero-based budgeting (ZBB) is a budgeting method that
requires every expense to be justified from scratch for each new budget period. Unlike traditional
budgeting, where the previous budget is used as a starting point and adjustments are made, ZBB
starts with a “blank slate” or “zero base.”
Key characteristics of ZBB:
Justification: Every expense must be justified based on its current necessity and value to the
organization.
Prioritization: Expenses are ranked based on their importance and impact.
Efficiency: It encourages a focus on cost-effectiveness and identifying areas for potential
savings.
By starting from zero and scrutinizing every expense, ZBB can lead to improved control over
spending and increased efficiency within an organization.

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 Question 3B:
Advantages of Zero-Based Budgeting Over Traditional Budgeting

Zero-based budgeting (ZBB) is a budgeting method that starts from a “zero base” and requires
each expense to be justified for each new period. This contrasts with traditional budgeting, which
typically uses the previous year’s budget as a baseline and adjusts it for inflation and other
factors.

Here are the key advantages of ZBB over traditional budgeting:

1. Enhanced Cost-Efficiency
Elimination of Waste: By justifying every expense, ZBB helps identify and eliminate
unnecessary costs.
Prioritization of Spending: It forces managers to prioritize spending based on current needs and
goals, rather than relying on historical spending patterns.
2. Improved Decision Making
Focus on Value: ZBB encourages managers to focus on the value of each expenditure, leading to
better-informed decisions.
Alignment with Goals: It helps align spending with organizational goals and objectives.
3. Increased Accountability
Justification of Expenses: Managers are held accountable for every dollar spent.
Transparency: The process promotes transparency and open communication about resource
allocation.
4. Flexibility and Adaptability
Responsiveness to Change: ZBB allows for quicker adjustments to changing circumstances.
Opportunity-Focused: It encourages a focus on new opportunities and initiatives.
5. Improved Performance Management
Performance-Based Budgeting: ZBB can be linked to performance metrics, creating a stronger
incentive for efficiency and effectiveness.
Empowerment: It empowers managers to make decisions about resource allocation based on
their understanding of their units' needs.

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While ZBB offers significant advantages, it is important to note that it can be time-consuming
and resource-intensive to implement. However, the potential benefits often outweigh the costs
for organizations seeking to optimize their financial performance.

Question 3C:
How Zero Based Budgeting Can Improve Managers Motivation

ZBB can significantly impact manager motivation in several ways:

Empowerment: ZBB gives managers more control over their budgets, allowing them to make
decisions that directly impact their department's performance.
Recognition: Managers who successfully reduce costs and improve efficiency through ZBB are
likely to receive recognition for their achievements.
Challenge: ZBB presents a challenging and stimulating task, which can be motivating for many
managers.
Alignment with Organizational Goals: By linking budgets to strategic objectives, ZBB gives
managers a clear sense of purpose and how their work contributes to the overall success of the
organization.
Growth Opportunities: ZBB can foster a culture of innovation and creativity as managers seek
new and better ways to deliver services and products.
Implementation Tips:
Clear Communication: Ensure that managers understand the benefits of ZBB and the process
involved.
Training: Provide training on budgeting techniques and financial analysis.
Support: Offer support and resources to managers throughout the budgeting process.
Incentives: Consider implementing performance-based incentives to reward successful budget
management.

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Regular Reviews: Conduct regular reviews of the budgeting process to identify areas for
improvement and maintain momentum.
By effectively implementing ZBB, organizations can achieve significant cost savings, improve
efficiency, and boost manager motivation.

References:

Agarwal, J. D. 1976. 1988. Capital Budgeting Decisions under Risk and Uncertainty. Ph.D. diss.,
Delhi School of Economics, University of Delhi; IIF Publication, Delhi.
Agarwal, J. D., and Chandra Prakash Gupta. 1991. “A Fuzzy Goal Programming Model with
Additivity Structure to Capital Budgeting Decisions.” Finance India 5 (June): 161–172.
Archer, S.H., et al. 1972. Business Finance—Theory and Management. New York: Macmillan.
AS–6. November, 1982. Depreciation Accounting. New Delhi: The Institute of Chartered
Accountants of India, para 3.1.
Anthony, R.N., et al. 1975. Principles of Management Accounting. Illinois: Richard Irwin.
Batty, J. 1966. Management Accountancy. London: MacDonald and Evans.
Bierman H., Jr., et al. 1986. Financial Management for Decision Making. New York: Macmillan.
Brigham, E.F., et al. 1997. Financial Management: Theory and Practice. 8th ed. Florida: Dryden
Press.
Chenhall, R.H., and Morris, D. 1993. “The Role of Post Completion Audits, Managerial
Learning, Environmental Uncertainty and Performance.” Behavioral Research in Accounting 5,
pp. ...