ADDIS ABABA UNIVERSITY- SCHOOL OF BUSINESS AND

ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
POST GRADUATE STUDIES
MSC IN ACCOUNTING AND FINANCE PROGRAM
Business Research Methods Assignment #2

Proposal on

Budgeting and Budgetary Control and Management Practice: The Case of

Ethiopian Public Budget Institutions

Prepared by ID
TAKELE WONDIMU TILAYE GSE/8977/16

Submitted TAKELE FUFA (Ph.D)

Submission date: January /2023
 I. DECLARATION
TAKELE WONDIMU, Registration ID Number GSE/8977/16 hereby declare that this
Proposal is my original work and that it has not been submitted partially; or in full previously, by
any other person for further developments.

Name: TAKELE WONDIMU

Signature:
Date: Jan 2024

II
APPROVAL

The undersigned certify that they have read and hereby recommend to the Addis Ababa
University , MSC Accounting and Finance Department to accept the Proposal submitted by
TAKELE WONDIMU and entitled “BUDGETING AND BUDGETERY CONTROL AND
MANAGEMENT PRACITC: THE CASE OF ETHIOPIA PUBLIC BUDGET
INSTITUTIONS (LIKE, KOTEBE METROPOLITAN UNIVERSITY), for assignment of
business research method.

Name of Instructor: Dr. Takele Fufa Signature:

Date: January 2024

III
 ACKNOWLEDGEMENT

All the way I favored because of the almighty God, reaching this destination has its own ups and
downs, which had its own past, but all happening with the help of our God. Therefore, first and
foremost, I would like to thank almighty God.
I would like to express my deepest gratitude to your kind communication, teaching, comment
and support to my Instructor Dr. Takele Fufa.

IV
ABSTRACT
This study assessed the effectiveness of budgeting and budgetary control and management
practice in case of Ethiopian Public Budget Institutions (like, Kotebe Metropolitan University).
Data were collected through questionnaire from seventy five budget holder. The data collected
from different unit were analyses using percentage analysis method, to see the effectiveness of
budgeting and budgetary control. Based on source analysis and findings, the researcher assessed
the effectiveness of budgeting and budgetary control and the researcher will give a possible
conclusion and recommendations, if the proposal further developed, which the University shall
take as measurements. This study serve as stepping stone for further study on similar topics and
it will fill the literature gap.

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LISTS OF ABRIVATIONS

MoF Ministry of Finance

EFY Ethiopian Fiscal Year
EFY Ethiopian Fiscal Year
MoFED Ministry of Finance and Economic Development
KMU Kotebe Metropolitan University
IMF International Monetary Fund
KPI Key Performance Indicators
PFM Public Finance Management
PPM Plan program Management
SPSS Statistical Packages for Social Science Students

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Contents
I. DECLARATION...................................................................................................................ii

APPROVAL.....................................................................................................................................iii

ACKNOWLEDGEMENT...............................................................................................................iv

ABSTRACT......................................................................................................................................v

LISTS OF ABRIVATIONS.............................................................................................................vi

CHAPTER ONE................................................................................................................................1

1. INTRODUCTION..................................................................................................................1

1.1 Background of the Study........................................................................................................1

1.2 Objectives of Research...........................................................................................................5
1.2.1 General Objective...........................................................................................................5
1.2.2 Specific Objectives.........................................................................................................5
1.3 Research Question..................................................................................................................6
1.4 Significance of the Study........................................................................................................6
1.5 Scope of the Study..................................................................................................................6
1.6 Limitations of the Study.........................................................................................................7
1.7 Organization (Structure) of the study.....................................................................................7
CHAPTER TWO...............................................................................................................................7

2. LITERATURE REVIEW.......................................................................................................7

2.1. Budget Definition...................................................................................................................7

2.2. Theoretical framework...........................................................................................................9

2.3. Walker’s Progressive Theory.................................................................................................9
2.4. The Principal-Agent Model and Budget Theory..................................................................10
2.5. Punctuated Equilibrium Theory of Budgeting......................................................................10
2.6. Empirical framework............................................................................................................10
2.6.1. Budget Management........................................................................................................10
2.6.2. The budgeting process features.......................................................................................11
2.6.3. The budget objectives......................................................................................................12
 2.6.4. Characteristics of Good Budget.......................................................................................12
2.6.5. Types of budgets.............................................................................................................13
2.6.6. Financial Budget..............................................................................................................14
2.6.7. Purpose of Budget...........................................................................................................14
2.6.8. Budget Control................................................................................................................15
2.6.9. Monitoring and Controlling.............................................................................................17
2.6.10. Ethiopian Budgetary Process...........................................................................................18
What course of actions in the Budget? (Budget process at central and local level)........................18
2.6.11. Budget transfer................................................................................................................20
2.7. Conceptual FRAMEWORK.................................................................................................21
2.8. Profit Planning Budgeting....................................................................................................23
CHAPTER THREE.........................................................................................................................24

3. RESEARCH METHODOLOGY.........................................................................................24

3.1. Description of the Study Area..............................................................................................24

3.2. Research Approach...............................................................................................................24
3.3. Research Methods.................................................................................................................25
3.4. Research Techniques............................................................................................................25
3.5. Sample Design......................................................................................................................25
3.6. Population or Universe.........................................................................................................26
3.6.1. Sampling frame and sample unit.....................................................................................26
3.6.2. Sampling Technique........................................................................................................26
3.6.3. Sample and sample size...................................................................................................27
3.6.4. Sources of Data...............................................................................................................27
3.6.5. Data Analysis, Interpretation and Presentation................................................................28
REFERENCES................................................................................................................................29

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CHAPTER ONE
1. INTRODUCTION

1.1 Background of the Study

Budgeting and budgetary control are Critical components of financial management in Ethiopian
Public budget institutions. These practices assist in the allocation And utilization of financial
resources, monitor expenditure and ensure effective management of public funds. The fiscal
policy as a part of economic policy deals with taxation, public expenditure, public borrowing and
debt management. The budgetary policy and the budget documents are important parts of fiscal
policy. That is why, the budgetary policy and the budget documents, to a significant extent,
influence the functioning of a financial system of a country (Routiya, 2013).
Now days, organizations have developed a variety of processes and techniques designed to
contribute to the planning and control functions. One of the most important and widely used of
these processes is budgeting.

Budgeting involves the establishment of predetermined goals, the reporting of actual

performance results and evaluation of performance in terms of the predetermined goals
(Geletaw, 2017). CIMA official terminology has defined the terms „budget‟ as “Quantitative
expression of a plan for a defined period of time. It may include planned sales volumes and
revenues; resource quantities, costs and expenses; assets, liabilities and cash flows”. It is a means
of coordinating the combined intelligence of an entire organization into a plan of action based on
past performance and governed by rational judgment of factors that will influence the course of
business in the future. Budgeting involves the establishment of predetermined goals, the
reporting of actual performance results and evaluation of performance in terms of the
predetermined goals. Budgetary control systems are universal and have been considered an
essential tool for financial planning. The purpose of budgetary control is to provide a forecast of
revenues and expenditures this is achieved through constructing a model of how our business
might perform financially speaking if certain strategies, events and plans are carried out
(Nyambura, 2014). Traditionally, budgeting has always been viewed as a way of limiting
expenditure, hence a great part of management’s time is devoted to the allocation of fund.
However, empirical evidences in today’s globalized world, suggest that budgeting goes beyond
merely showing expected revenue and project expenditure. Rather, a budget protects and controls
the way management reacts to proposals brought before it, while also examining the present and
future cost as well as benefits associated with such a proposal. In achieving this though, it must
not lose sight of the environment in which it operates. This same principle goes with the
preparation of a budget, such that in preparing a budget, management of businesses must realize
that it is indeed a part of the economic system and as such, can influence as well as be influenced
by activities within the economic system (Lambe, 2014). Since many years, budgets are used
throughout private and public organizations to set objectives and to control and align managers‟
behavior. Depending on whether the organization is operating in the private or public sector, the
budget is established in order to fulfill certain requirements. Considering the performance
requirement for the budget, the private sector is profit orientated, whereas the public sectors
budget achievements are evaluated based on services provided by the organization (Fadi, 2013).
Budgeting is a key policy instrument for public management and management of the firm; it is a
familiar activity to many as it is practiced in our private lives as well as in businesses,
government and voluntary groups.
The Public Budget is a process by which government sets levels of expenditure, allocates the
spending of resources among all sectors to meet national objectives. It is the financial plan of
action for the year reflecting government priorities on expenditure, revenue, and overall
macroeconomic policy. Policies, programs, and projects would remain as wishful aspirations of
government unless they receive the required funding to translate them into practice. For these
reasons, the public budget is considered as an important process that attracts the attention and
consideration of the public at large. The government needs to prepare a budget since it has to
plan the extent of its expenditure and revenue (Esayas, 2014). Budgetary control is a technique
applied to the control of total expenditure on materials, wages and overhead by comparing actual
performance with planned performance. This technique is also believed to be another valuable
aid in cost control and coordination (Mkrue, 2013).

Public budget is a document that forecast a government expenditures and revenues for a given
fiscal year. It indicates how a public entity spends the financial resources in order to realize

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specific public goals. The document becomes a legal financial plan after it has been approved
through the legislative process of the country.

The Public Budget is a process by which government sets levels of expenditure, allocates the
spending of resources among all sectors to meet national objectives. It is the financial plan of
action for the year reflecting government priorities on expenditure, revenue, and overall
macroeconomic policy. Policies, programs, and projects would remain as wishful aspirations of
government unless they receive the required funding to translate them into practice. For these
reasons, the public budget is considered as an important process that attracts the attention and
consideration of the public at large. The government needs to prepare a budget since it has to
plan the extent of its expenditure and revenue (Esayas, 2014). Budgetary control is a technique
applied to the control of total expenditure on materials, wages and overhead by comparing actual
performance with planned performance. This technique is also believed to be another valuable
aid in cost control and coordination (Mkrue, 2013).

Ethiopia started the practice of government budget early at the regime of Hailesilase I. However,
at the beginning, it was not structured in such a way as to permit efficient financial
administration, but through time period continuous modification of the budget system was made
before it attained its present status (Miju and Girma, 2014). Ethiopia has a dual budgeting system
in which recurrent and capital expenditure are considered separately. Until recently these two
budgets were prepared separately by the Ministry of Finance (MoF) and the Ministry of
Economic Development and Cooperation (MoEDaC), respectively. In October 2001 these two
ministries were merged to form the Ministry of Finance and Economic Development (MoFED).
The new ministry determines budget ceilings for federal ministries and agencies and for the
regions. In doing so, it takes stock of the performance of the economy for the previous year and
makes economic projections for the following year in terms of growth, revenue, and so on. The
MoFED does this in consultation with other state agencies, such as the National Bank of Ethiopia
(NBE) and the Central Statistical Authority (CSA). It is this macroeconomic framework that,
when approved by the Council of Ministers and the Office of the Prime Minister, forms the
background to the budgetary process in Ethiopia (FDREP, 2001).

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The MoFED can be seen to play a central role in the budgetary process of the country. It controls
the formulation and implementation of the budget of line ministries at various levels. During the
writing of the Budget Calls it is instrumental in the setting of budget ceilings. It can make 4
changes in the budget allocation of line ministries after review and analysis of the budget
estimate submitted by the ministries. It decides the level of the budget to be recommended to the
Council of Ministers. During implementation, it has the power to disburse funds. Through the
monthly accounting reports, it scrutinizes the performance of the ministries in budget
implementation, and it can decide on the level of funding to be authorized for disbursement. It
can also approve transfers and recommend supplementary allocations (MoEDaC, 2018).
.
I.2. Statements of the Problem

In developing countries, it has become increasingly complex to manage public expenditure

allocation because the roles of the government have been expanded and financial resources are in
scarce supply to meet this ever increasing social needs and population growth. Due to inadequate
financial resources as opposed to an increasing demand for public service, there is a need to
improve resource allocation through proper economic policy and expenditure planning
(Mohammed, 2015). Zayol (2017) carried out a study on Budgeting and Budgetary control in the
public sector using literature review and personal observations as the main source of data and
found out that budget and budgetary control has failed because of dependence on federation
account, untrained budget 5 staff, and non-adherence to budgetary control measures, corruption,
inflation and political environment. Similarly, Yesuf (2015) studied the practice of budgeting and
budget monitoring as a management tool for managing variances in NGOs operating in Ethiopia.
According to the result, the overall budgeting system in the sample organizations misses the
important participation of concerned staffs. Also, Tilahun (2010) in his study on budget
management and control in Ethiopia ministry of defense found that there were inefficiencies in
budget implementation due to problems of experienced man power, application of policy and
procedures, lack of monitoring budget timely. Despite the existence of a budget calendar and an
elaborate budgeting process, exercise carried out by Kotebe Metropolitan University every fiscal

4
year, with the aim of having minimal budget/actual variances of over or under expenditure,
budget performance variances (7%-15% of over expenditure) and (7%-15% of under
expenditure) consistently continue to exist during implementation of the university activities
(The Financial Report: 2012-2013). The above variance, if not checked would affect overall
long-term performance of the institution and therefore the motivation is that, what was missing
in the budgeting process that caused significant consistent budget performance variations during
budget implementation fiscal year. Contemporarily ministry of finance and economic
development declared the universities under federal government execute program budget for the
past three years starting 2004, whereas the budget utilization process to implement it in respect
of the perspectives plan of result oriented program faced challenges.

1.2 Objectives of Research

1.2.1 General Objective

The general objective of this study is to assess the effectiveness of budgeting and budgetary
control in case of Kotebe Metropolitan University.

1.2.2 Specific Objectives

(i) To assess annual budget implementation compliance conformity or against policy

and procedures;
(ii) To assess budget management and control implementation practices;
(iii) To assess the compliance with policy and procedures
(iv) To indicate whether there is performance audit practice as a means to control budget; and
(v) To review the cause of variance based on periodically report analysis and take
corrective action.

Therefore, in light of the describe Kotebe Metropolitan University Budget Policy and Procedures
the study would assess the problem of budget management and control of the University.

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1.3 Research Question

1. What is the process of budget planning looks like in Ethiopia?

2. Does budget monitoring and control contribute for effectiveness of Kotebe
Metropolitan University?
3. Is budget participation being practiced in Kotebe Metropolitan University?
4. What are the causes for mismatch between plan and budget in the units?
5. What deviations are observed in budgetary records compared to the country’s rules and
regulations?
6. Is there performance auditing practice to evaluate the effectiveness and efficiency of
the university’s budget utilization?

1.4 Significance of the Study

The study is important because it provides more understanding of the best practices in
Budgeting and Budgetary control for public Universities and Colleges. It also provides
insights to other firms in the finance sector on how to prepare and control Budget to
achieve the organizational objectives. The government also might use the findings of this
study to set policies that ensure the proper preparation and utilization of public finance.
This research work also contributes to the literature on assessment of the effectiveness of
budgeting and budgetary control in public universities and therefore forms the basis for
further research on this area.

1.5 Scope of the Study

This study was assessment of the effectiveness of budgeting and budgetary control in
case of Kotebe Metropolitan University. This study considered only the effectiveness of
budget and budgetary control in terms of budget planning, budget monitoring and control,
budget evaluation and participative budget on effectiveness of public University,
particularly Kotebe Metropolitan University.

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 1.6 Limitations of the Study

Since public budget institutions in Ethiopia are many in number the researcher unable to reach in
all public budget institutions. When the research was conducted the researcher faced some
challenge such as lack of time and lack of reference material especially the current literature on
the topic. However, the researcher is to find from different secondary source related to budget
and budgetary control and management.

1.7 Organization (Structure) of the study

This proposal is organized into three chapters. Chapter one comprises of introduction,
background, statement of the problems, objectives, hypothesis, limitations, scope, and
organization of the document. Chapter two comprises review of literature: Theories, empirical
evidences and conceptual framework. Chapter three comprises of research methods, descriptions
of the study areas, population, sampling and analysis and presentations.

CHAPTER TWO

2. LITERATURE REVIEW

2.1. Budget Definition

The major processes and techniques have been designed by organizations to facilitate planning
and control functions. One of the most important and widely used of these processes is
budgeting. Budgeting involves the establishment of predetermined goals, the reporting of actual
performance results and evaluation of performance in terms of the predetermined goals
(Geletaw, 2017).
According to CIMA Official Terminology (2005), a budget is defined as a quantitative statement
for a defined period of time, which may include planned revenues, assets, liabilities and cash
flows. A budget provides a focus for the organization aids the co-ordination of activities and
facilitates control. Budget refers to a comprehensive plan in writing, stated in monetary terms
that outline the expected financial consequences of management’s plans and strategies for
accomplishing the organization’s mission for the coming period. Budgeting refers to the process

7
of preparation, implementation and operation of budgets decisions into specific projected
financial plans.
Budgets are an important channel of communicating certain type of information that will enable
managers in different parts of the organization to be fully informed of the plan and policies, and
constraints, to which the organization is expected to conform. Through the budgeting process,
top management communicates its expectations to the lower level management, so that members
of the organization may understand these expectations and can coordinate their activities to attain
them (Drury, 2001).
The budgets put the plan in a concrete from and follow up action to see that plan is adhere to
complete the system of control. In other words, while budgeting is the art of planning, budgetary
control is the act of adhering to the plan. In fact, budgetary control involves continuous
comparison of actual results with the budgets and taking appropriate remedial action promptly. A
budget is (a) the quantitative expression of a proposed plan of action by management for a
specified period and (b) an aid to coordinate what needs to be done to implement that plan. A
budget generally includes both financial and nonfinancial aspects of the plan, and it serves as a
blueprint for the company to follow in an upcoming period
The English word “budget” derives from the Middle French bougette, which is the diminutive of
bouge, a leather bag. At its most basic, therefore, a budget is a small leather bag. During the
middle Ages in England, letters of particulars about taxes and spending were brought before
Parliament by putting them in a small leather bag (a bougette), which was placed on a table
before the assembly. As centuries passed, the word came to be applied to the contents as well as
to the bag itself, though originally only in the sense of a group of things (Quick et al., 2001).

The meaning of the term has, of course, changed since the days when a country’s resources were
deemed to be the personal property of the king, along with the political evolution from absolute
monarchies to constitutional governments. In most countries today, including a majority of
African countries, approval of the budget (the “power of the purse”) is the main form of
legislative control over the executive, with public money spent only under the law (Shah, 2007).

8
 2.2. Theoretical framework

There are numerous theories that can be used to explain budget and budgetary controls: Walker’s
progressive theory, the Principal-agent model and budget theory, Punctuated equilibrium theory
of budgeting among others (Patrick et al, 2017).
The major processes and techniques have been designed by organizations to facilitate planning
and control functions. One of the most important and widely used of these processes is
budgeting. Budgeting involves the establishment of predetermined goals, the reporting of actual
performance results and evaluation of performance in terms of the predetermined goals
(Geletaw, 2017).
According to CIMA Official Terminology (2005), a budget is defined as a quantitative statement
for a defined period of time, which may include planned revenues, assets, liabilities and cash
flows. A budget provides a focus for the organization aids the co-ordination of activities and
facilitates control. Budget refers to a comprehensive plan in writing, stated in monetary terms
that outline the expected financial consequences of management’s plans and strategies for
accomplishing the organization’s mission for the coming period. Budgeting refers to the process
of preparation, implementation and operation of budgets decisions into specific projected
financial plans.

2.3. Walker’s Progressive Theory

Walker’s concerned with the standard of living in cities and the ability to pay for it. Walker’s
progressive budget theory centered on the premise that the means to decide how to allocate
between options has through the “Utilitarian ideal” or indifference point in economic theory as
applied to government budgets. Walker advanced her belief that the ideal of marginal utility was
desirable, but it needed to be applied according to the progressive – values” or “human nature
values(Patrick et al, 2017) and (Endaya, 2018)

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 2.4. The Principal-Agent Model and Budget Theory

At the heart of public budgeting are relationships among those who provide agency services and
those who allocate resources to service providers. In order words, those who make claims on
governmental resources are agents and those who allocate and ration the resources are principals.
In this relationship, the principals contract with agents to provide services to the public, and the
main focus for all those involved is the contract (i.e. the budget) itself (Patrick et al, 2017).

2.5. Punctuated Equilibrium Theory of Budgeting

Baumgartner and Jones (1993) established their concept of “punctuated equilibrium” that
addresses both incremental and large budget changes. It asserts that there is a state of equilibrium
followed by a punctuated change followed again by equilibrium. The state of equilibrium is
during quiet periods of incremental change. Punctuations are breaks from the equilibrium norm.
Punctuated equilibrium theory involves environments of stability shifting into environments of
instability (Jordan, 2002). Thus, in order to establish equilibrium in terms of budget changes, the
budget and budgetary control measures put in place by an entity becomes pivotal to the overall
performance system of ensuring stability of environment (Patrick et al, 2017).

2.6. Empirical framework

2.6.1. Budget Management

The budgetary management is based on the following principles: (i) the integrity principle, which
entails that all the activities of a patrimonial unit should be characterized by a perfect
coordination between the various functional and operational services(ii)the principle of
superposition of the budgetary system over the authority system from the patrimonial unit, which
means that the budget must be identified with a responsible individual and its accounting
authority description (iii) the principle of maintaining the solidarity among departments and the
congruence with the strategic objectives of the patrimonial unit (iv) the versatility principle,
which means adjusting the budgets to the changes in the economic variables (v)the principle of

10
personnel policy coupling to determine the motivation and adhesion of the personnel to the
targeted strategic objectives (vi) the principle of updating the budgetary predictions(Todea
Nicolae and Calin Anca, 1918).

Budget administration and management is the process of regulating expenditures during the
fiscal year to ensure that they do not exceed authorized amounts and that they are used for
intended, proper and legal purposes. The management of the budget is accomplished in a variety
of ways: monitoring program implementation; controlling expenditures; tracking revenue
receipts; making corrections in expenditure allocations to reflect changes in costs, service levels
or plans; and reporting to the Board of Trustees and the public on fiscal operations (Accessed on
December 2, 2019).According to Ben, budget management reforms were the major areas of the
Nigerian public service reforms undertaken from the inception of civilian administration in 1999.
The major objective is to enhance budget discipline among others. This is predicate on the
theoretical considerations that improving the process and management of budgeting through
reforms would be ultimately translated into improved budgetary outcome (Ben-Caleb Egbide,
2014).

2.6.2. The budgeting process features

The budgeting process is characterized by the following features: a) Planning and coordination.
The budgeting process is based on some more general long-term objectives with the purpose of
elaborating thorough operational plans for different sectors or executive links of the enterprise.
Planning is the key to success in any business and it is encouraged by the allotment of budgetary
resources. Planning is reflected in the master budget that includes all the secondary budgets, a
fact that determines the managers to consider the relation among the function of the budgets and
the various departments of the enterprise and to analyze the way in which they contribute to
achieving the objectives (Todea Nicolae and Calin Anca, 1918). b) Authority and responsibility:
The budgeting process assumes that the entity is organized in responsibility or budgetary centers
and follows clear instructions regarding the responsibilities of each manager that has a budget as
well. Adopting a budget includes the authorization of all its activity plans, allowing the
exceptional management which means that a subordinate is given a specified role and also the

11
authority and necessary resources to carry out the assigned part of the plan but if the activities do
not follow the plan, the variations are reported to the superior authority (Todea Nicolae and Calin
Anca, 1918). c) Communication: The budgeting process involves all the managerial levels and
constitutes an important means of communication between the superior and middle management
regarding the targeted objectives and their achievement. When the budgeting process ends, the
approved plans are communicated to the entire involved personnel (Todea Nicolae and Calin
Anca, 1918). d) Control: This element of budgeting is the least expected by employees. The
process of comparing the current results with the planned or budgeted results and reporting the
comparison’s results, which is in fact the budgetary control, establishes a guideline for carrying
out the plans within these limits for the expenses (Todea Nicolae and Calin Anca, 1918). e)
Performance evaluation: The performance of the managers is partially evaluated according to
their ability to implement the budgets. The data regarding the manager’s budget and his ability to
achieve the budget objectives is an important factor whenever a manager is evaluated to be
promoted, to be give a raise or in any other kind of assessment. The budgets used as objectives
may assist a manager in monitoring his own performance (Todea Nicolae and Calin Anca, 1918).

2.6.3. The budget objectives

The budget objectives are: (i) provide the basic information, the cost for elaborating the
development plans (ii) indicate the conditions under which the patrimonial unit must work to
achieve the targeted objectives (e.g. the amount of sales that ensure the predicted profit until the
end of the trimester) (iii) represents an instrument for coordinating the activity within the
patrimonial unit encouraging the information circuit regarding the costs and increases the
awareness among the individuals responsible for the expenses centers (iv) increases the capacity
to anticipate the consequences of the decision made or that are about to be made, since the
budgets are a referential image directed by the decision makers(Todea Nicolae and Calin Anca,
1918).

2.6.4. Characteristics of Good Budget

A good budget may be characterized with the following attributes: Participation– It involves as
many people as possible in drawing up a budget; Comprehensiveness– It embraces the whole

12
organization; Standards– It is based on established standards of performance; Flexibility– It
gives room for changing circumstances; Feedback– It constantly monitor performance; and
Analysis of Cost and Revenue– Allows cost and revenue analysis on the basis of product lines,
departments or cost centers (Patrick et al, 2017).
Gregory (2005) gives characteristics of a good budget. According to him, a good budget is
characterizes by the following:

a. participation – involves many people as possible in drawing up a budget;

b. comprehensiveness- embrace the whole organization;

c. standards – based it on established standards of performance;

d. flexibility – allows for changing circumstances;

e. feedback – constantly monitor performance;

f. Analysis of costs and revenues – this can be done on the basis of product line,
departments or cost centers.

2.6.5. Types of budgets

A budget is not a unitary concept but varies from organization to organization. The basic concept
of budgeting involves estimating future performance, comparing actual results with the estimate,
and analyzing the differences between them.

Factors that are relevant in determining the type or style of an organizations budget and its
effects include: the type of organization, the leadership style, personalities of people affected by
the budget, the method of preparation, and the desired results of the budgeting process
(Cherrington, Cherrington , 1973 as cited inDusan, 2005).

Types of budget Larry M. (2010) described the types of budgets as follows: Operating budgets
are plans that provide definition of the anticipated revenues and expenses of an organization and
more. These operating budgets can become fairly detailed, to the level of mapping specific
inventory purchases, staffing plans, and so forth. The budgets oftentimes delineate allowable

13
levels of expenditures for various departments. Capital budgets are budgets that reveal the need
for capital expenditure relating to new facilities and equipment. These longer term expenditure
decisions must be evaluated logically to determine whether an investment can be justified and
what rate and duration of payback is likely to occur.

2.6.6. Financial Budget

Financial budgets identify sources and uses of funds for the budgeted operations, including
strategic projects and initiatives. Financial budgets include the cash budget, budgeted statement
of cash flows, the budgeted balance sheet, and the capital expenditures (including strategic
expenditures) budget (Blocher et. al. 2010).

The financial budget is prior components of the master budget, including the budgeted income
statement and the capital expenditures budget, along with plans for raising cash and paying
debts, provide information for the first element of the financial budget: the cash budget. The cash
budget details how the business expects to go from the beginning cash balance to the desired
ending cash balance and feeds into the budgeted balance sheet, which, in turn, feeds into the
budgeted statement of cash flows. These budgeted financial statements look exactly like ordinary
statements. The only difference is that they list budgeted (projected) amounts rather than actual
amounts. The financial budget consists of: Cash budget and Pro forma balance sheet (Shim
&Siegel, 2005).
Financial budgets are a company must assess financing needs, including an evaluation of
potential cash shortages these tools enable companies to meet with lenders and demonstrate why
and when additional support may be needed

2.6.7. Purpose of Budget

Kaplan (1992) stated that budget brings about improvement and efficiency in the working
conditions of the organization by setting out target of the organization and providing resources to
work towards achieving these targets thus everybody knows what they are working for and given
the necessary resources which will ensure efficiency. A budget, if created and used properly, can
provide valuable information about the direction, resources and expectations of the organization.
Budget is described as an integral part of management control systems that aims at promoting

14
coordination and communication among 11 subunits within the company, provides a framework
for judging performance and finally motivating managers and other employees (Horngren,
2006).

2.6.8. Budget Control

For budgetary control to be effective, the following essentials/features must be in place: A sound
and clearly defined organization with a clearly defined manager’s responsibility; An effective
accounting record keeping and procedures; Support and commitment of top management for the
budgetary control system in place; Training of managers in the development, interpretation and
use of budgets; and Flexibility of budgets to ensure revision of budgets where amendments are
needed to make them appropriate and useful (Patrick et al, 2017).
Budgetary control is defined by CIMA, (2005) as the establishment of budgets relating the
responsibilities of executives to the requirements of a policy, and the continuous comparison of
actual with budgeted results, either to secure by individual action the objective of that policy, or
to provide a basis for its revision. Budgetary control is a system of controlling costs and
resources which includes comparing actual performance with the budgeted performance and
subsequently acting upon the actual results to minimize variance and achieve maximum returns.
In essence, budgetary control is purported to ensure that the activities carried out are providing
the desired results.
Budgetary control: refers to any management approach that involves setting some kind of targets,
regularly measuring variances between the original targets and actual outcomes, and motivating
people to reduce those variances.
According to Rufus, (2008) Managers and business operators (not only in the manufacturing
industry) to pay more attention to their budgetary control systems, while those without any
should endeavor to ensure the set-up of a result-oriented system as it goes a long way in
repositioning businesses and organizations from their creeping performance level to an improved
and high capacity utilization point. Budget and Budgetary control, both at management and
operational level looks at the future and lays down what has to be achieved.

15
13Ngozika, U. (2009) stated that Budgeting and budgetary control contribute in the improvement
of management efficiency and high productivity, the budget committee should be educated in the
implementation of budget. This would enable them to understand the importance of adhering to
budget and the minimization of loses. Thus a budget education should be conducted at least once
a year by the financial or an independent accounting or management consulting firm. Its
usefulness cannot be questioned or over emphasized. The process of budgetary control should
not only consider sector needs in the planning stage but also parameters within implementing
organizations in order to facilitate sound financial standing. It is important not to over subject the
process of budgetary control to political scrutiny as this may divert the core purposes of a
budget.

Budgets should not only be used as tool for management and indicators of management, they
should also be viewed as practical tools within which organizations should use to enhance their
financial goals (Odour and Jagongo, 2013).

According to Frimpong, (2013) Budgeting and budgeting control measures are an integral part of
any organization including timber firms.It serves as a basis of planning, controlling cost of
operations and evaluating performance of workers of the organization. For a budget to be an
effective one, sound organizational structure, research and analysis as well as management
acceptance should be considered. Budgeting thus, serves as a blueprint for any organization to
follow in an up-coming period usually for one year period at most.

Yilmaz (2011) as a result, effectiveness of budgetary control, ethical work climate and
perception of procedural justice are important factors affecting the creation of budgetary slack in
public organizations. For this reason, it will be beneficial to make new regulations to increase
perception of procedural justice and effectiveness of budgetary control

These included adequate availability of financial resources, competent human resource, proper
planning, evaluation, monitoring and control of the budget process, staff motivation and
participation of both staff and other stakeholders in the budgeting processIt will also be

16
beneficial to make necessary things to establish ethical work climate that is accepted by
employee and guided to them, open to the innovation. Because it is not provided adequate
efficiency in public organizations; today, there is an increasing interest in new public
management and privatization. For this reason, these kinds of researches‟ results should be taken
more into account.

Ahmed (2015) in the study recommends that in order to enhance the effectiveness of Budgetary
control techniques in the Organizations, the management should put in place measures to solve
the budgetary control system problems such as enhancing better understanding of budgetary
control techniques, their behavior and institutional dynamics among the staff, developing strong
financial integration with performance management, quarterly revision of financial plan to
redirect resources at frequent intervals, better engagement between organizational leaders,
managers, finance staff with timing of the financial plan. Moreover, Governments should set
yearly objectives for each performance indicator of their budgetary control system so that Civil
workers, the business owners and other employees should bear in mind the yearly objectives to
be achieved, business owners and employees should work hard to achieve the yearly set
objectives for each indicator. According to Srinivasan, (2005) cited by Nyambura, (2014) there
are several determinants to effective budget implementation of budgets among organizations.

2.6.9. Monitoring and Controlling

Monitoring and control of budget process is a determinant of effectiveness, once the budgets
have been implemented they need to be monitored and controlled to ensure effectiveness in
aligning budgets over a defined period of time (Horngren et al., 1997).

Despite the laudable benefits of budgeting, its preparation, implementation and execution need to
be controlled and monitored to avoid deviations from the plan and serve as a basis for revising
the budget put in place. Challenge of preparation implementation and human factors that tend to
affect budgeting need to be given serious thought. In the preparation of the budgets, management
should give serious thought to the external environment, emerging technologies, organizational

17
structure and size as well as culture of the organization and the setting where the timber firms
operate (Frimpong, 2013).

A professional and transparent approach to budget planning will help convince investors,
development banks and national or international donors to make financial resources available if
the organization implements proper monitoring and control of budget process. This is achieved
through ensuring that the estimated budget does not deviate from the actual outcome in order to
take appropriate actions where necessary (Otley and Van der Stede, 2003).

2.6.10. Ethiopian Budgetary Process

Ethiopia has a dual budgeting system in which recurrent and capital expenditure are considered
separately.

What course of actions in the Budget? (Budget process at central and local level)

The Ethiopian government budget process has four stages at all level of jurisdiction (Federal,
Regional, and Woreda government) which is guided by Financial Calendar directive issued by
the Ministry of Finance (MOF) to all public budgetary bodies (institutions).
The four stages of government budget are:-
1. Budget Formulation (draft/design process),
2. Budget approval and appropriation (legislative process),
3. Budget execution (implementation process), and
4. Budget control (performance monitoring – audit and oversight).

The budget calendar directive has a time table to ensure that planning and budgeting are
prepared, approved, appropriated and executed accordingly.

18
TABLE 2.1
Budget
Process Main Activities
at each Stage Responsible Body Time
Budget  Macro-Economic and Fiscal By 10th
Framework (MEFF) preparation. MOF November
preparation
 Based on MEFF, annual fiscal By January
plan will prepared MOF 24th
 public investment program;
annual subsidy estimates to By 8th
regions; budget call to public MOF February
bodies
 Public bodies submitting budget By 22nd
request Public Bodies March
 Conducting budget hearing Public bodies with
MOF. By 23rd May
 Approval of Recommended
budget Executives By 30th June

Budget  approval of the budget and annual

appropriation of the approved Legislators/the By 7th July
approval
budget parliament

Budget All public bodies From July

Budget implementation 8th to July
Execution
7th

Budget  performance review and

MOF/public From July
Control control
bodies/Auditor 8th to July
 auditing public bodies General/legislators 7th
 oversight

2.6.11. Budget transfer

19
The budget transfer moving budgeted funds between public bodies, budget institutions, projects
or items of expenditure, without changing the total approved budget. Budget transfers between
public bodies, budget institutions, projects or items of expenditure are authorized by the
Financial Administration Proclamation No. 648/2009 and the Financial Regulations No.
17/1997, subject to certain restrictions and the required level of approval or authorization. These
include: No transfers are permitted from other recurrent expenditure to salaries, wages or
allowances; No transfers are permitted from the capital budget to the recurrent budget; all other
transfers must be approved by the authority specified in Part Four of the, Financial
Administration Proclamation No. 648/2009 and the Financial Regulations No. 17/1997(Tilahun
Bogale, 2010).
Program budgeting in Federal government of Ethiopia is primarily designed to act as a basis for
supporting Public Finance Management (PFM) reforms by enhancing performance management
and accountability, enabling a stronger linkage between the annual budget and policy objectives,
and improving transparency and accessibility of information. Shifting to program budgeting aims
to facilitate the flow and quality of information so as to provide a robust basis for resource
allocation decision-making and to create the right environment and mechanisms that will
strengthen the improved PFM.
Administrative budget management at the Bank has been guided by an ambitious reform agenda
approved by the Board of Directors on 15 June 2007. The reform package aimed at addressing
some of the key challenges to the Bank’s efficiency and effectiveness, and thus focused on: i)
strengthening the link between institutional priorities and resource allocation; ii) enhancing
institutional budget flexibility through increased fungibility and devolved authority; iii)
establishing a new accountability and performance framework, notably by linking deliverables to
key performance indicators (KPIs); and iv) building budget capacity throughout the institution.
Budget reform thus occupied a central position in this evaluation (African Development Bank,
2015).
It is Possible to move budgeted funds between public bodies, budget institutions, projects
or items of expenditure, without changing the total approved budget. Budget transfers
between public bodies, budget institutions, projects or items of expenditure are authorized
by the Financial Administration Proclamation No. 648/2009 and the Financial

20
Regulations No. 17/1997, subject to certain restrictions and the required level of approval
or authorization. These include:
• No transfers are permitted from other recurrent expenditure to salaries, wages or
allowances;

• No transfers are permitted from the capital budget to the recurrent budget;

• All other transfers must be approved by the authority specified in Part Four of the

Financial Administration Proclamation No. 648/2009 and the Financial

Regulations No. 17/1997.
On the other hand, MOFED is empowered to transfer funds within items of expenditure
of the recurrent budget; and budget from one capital project to another within a public
body FDRE (2009).

2.7. Conceptual FRAMEWORK

Dependent Independent variables
variables
Budget control Budgeting and budgetary control integrates budgeting, planning and
statements implementations with control monitoring
Budgeting and budgetary control helps country government to estimate its
revenue and expenditure in the coming financial year
Budget Country government incorporates both development plans and recurrent
planning plans in the budget
Budgeting link country government budget, programmers and budget
activities to set goals and targets
Country government budget at planning level considers stakeholders
priorities in the coming years
Budget Budget implementation review is done by the office of controller of
implementation budgets every three months to examine budget performance
statement
Budget implementation report considers revenue and expenditure

21
 performance against set targets
Country government encounter challenges while implementing their
budgets such as non-compliance with budgetary timelines as per public
financial management act year ----
Budget Citizens and civil society organization monitors country government
Monitoring implementation budget by analyzing published reports as an oversight
and Evaluation role as per public financial statement act year ---
Statements Country government require regular checks regular checks and
assessment function for efficient project implementations
Strict budget monitoring by country government ensures revenue and
expenditure are constantly kept at check so that appropriate actions is
taken in case of significant variance projection occur
Budget control Country assembly policies assists in monitoring budget spending
statements Country appropriation bills based in financial year determinants country
government performance in that year
Budget legislation and budget plans are well executed to avoid financial
performance challenges
Investment Performance of country government is felt by citizens through the
Stakeholders perceived impact on country services
Statements Country government performance influences stakeholders voting
behavior
National Public service delivery is used by the country governments to measure
Treasure public satisfactions as a performance indicator
Release of Schedule prepared by national treasury
Fund Consultation with the intergovernmental budget and economic councils
Approved published gazette and not later than ----30 month every year
Managerial Country agencies comply with budget levels with implementing and
Performance controlling budget
Customers and stakeholders meet expectations account to the managerial
performance in the country government which in turn contribute to

22
 country performance
Country government service missions give country managerial team
directions on quality delivery
The dependent and independent variables

Source: (Zipporah Wayua Mutungi, 2017)

2.8. Profit Planning Budgeting

This is about planning the future financial cash flows of profit centers (profit wheel), it gives the
possibility to assess whether an organization or unit generates sufficient cash flows, creates
economic value and attracts sufficient financial resources for investment. It also ensures
consideration of an organization’s short-and and long term prospects when preparing its financial
plans. Anohene, Julia 2011

23
CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. Description of the Study Area

The Kotebe Metropolitan University (KMU) the former Kotebe College of Teacher Education,
was set up within the Haile Selassie I University (HSIU) in 1959 under the name College. In
1969, the College left HSIU and went to the present Addis Ababa technical and Vocational
College where it came to be known as Teacher Training College. Later, the name was changed to
Addis Ababa College of Teacher Education. It was in 1976 that the College transferred to the
present site and got its name, Kotebe College of Teacher Education.

Upon the approval of the Commission of Higher Education, the college launched degree
programme in six areas of study: English Language and Literature, Ethiopian Languages and
Literature, Geography, History, Health and Physical Education and Mathematics in 1989. In
1997, the Addis Ababa City Administration took over the responsibility of running the college
from the Ministry of Education. Following the transfer of the college to Addis Ababa City
Administration, degree programs except the Department of Health & Physical Education were
discontinued. After 9 years of relentless effort made by the college management, the college
community, former graduates of the college and other stakeholders, the degree program was re-
launched in 2007 in affiliation with Bahr Dar University. Degree program students were assigned
in 10 departments namely Biology, Chemistry, Civics and Ethical Education, English Language
and Literature, Ethiopian Languages and Literature, Sport Science, History, Geography,
Mathematics and Physics. It also ran a diploma program in linear and cluster modalities.

3.2. Research Approach

Quantitative and qualitative data will be collected from KMU finance office and audit
employees. The accounting and finance head is provide with an interview. The data outcome was
measured by likert scale and categorical response. Research approach is based on bringing

24
together a worldview or assumptions about research, a specific design, and research methods.
Decisions about choice of an approach are further influenced by the research problem or issue
being studied, the personal experiences of the researcher, and the audience for whom the
researcher writes (Creswell, 2014).

3.3. Research Methods

Survey method using descriptive approaches is used to measure the budget management and
control. The research used descriptive cross sectional survey of KMU finance employees on
performance of compliance against budget policy and procedures. The thesis employed a
descriptive survey study research design which is aimed at assessing the budget management
and. A descriptive survey is usually concern with describing a population with respect to
important variables with the major emphasis being establishing the relationship between the
variables. The advantage of this type of research design is that it is easy to understand as
recommended by (Kothari, 2005). This design attempts to collect data from members of the
population and describes existing phenomenon with reference to pre-established objectives.

3.4. Research Techniques

Survey of opinions on existing practices of budget policy and procedures among finance officers
will be made. Key informant interview of finance head will be conducted. The observations of
respondents’ attitude towards answering the survey questioner will be made. The study used
structured questionnaires for the purpose of collecting data. The questionnaires consisted of
closed ended questions as closed questions give a further controlled answer. A five point likert
scale ranging from strongly disagrees to strongly agree were used in measuring the degree of the
responses provided.

3.5. Sample Design

Even though there were different projects in kind and size the budget policy and procedures and
practices are nearly similar. KMU was selected to conduct the research purposefully because the
researcher is relatively compared with others will have some access and assume data is easier to
access. The researcher understands the practical malfunctions and wants to assert the issues with

25
researchable evidences that fill the knowledge gap. The study used a descriptive survey study
research design which was aimed at examining the impact of budgeting and budgetary controls
and management on effectiveness of public enterprises. A descriptive survey was usually
concerned with describing a population with respect to important variables with the major
emphasis being establishing the relationship between the variables. The advantage of this type of
research design is that it is easy to understand as recommended by (Kothari, 2005). This design
attempts to collect data from members of the population and describes existing phenomenon with
reference to pre-established objectives.

3.6. Population or Universe

Kotebe Metropolitan University (KMU), on December 15, 2016 when Kotebe University
College is upgraded to a full-fledged Metropolitan University by the Addis Ababa City
Government .Following this, KMU is restructured into 8 divisions. These are: College of
Education and Behavioral Studies, College of Natural and Computational Sciences, Faculty of
Languages and Humanities, Faculty of Urban Development Studies, Faculty of Social Sciences,
Faculty of Business and Economics, Sport Academy and Science and Technology innovation
Center. At present, the University is running certificate, diploma, undergraduate and graduate
studies in its regular, evening extension and summer programs. The number of KMU staff
accounts about 1200 of which 450 represents the academic staff.. Therefore, the study will assess
in light the problem of budgeting and budgetary control and management of the University

3.6.1. Sampling frame and sample unit

The sampling frame is lists of employees in KMU finance unit. KMU finance unit staff is the
sampling unit.

3.6.2. Sampling Technique

A random sampling technique is used select finance offices staffs based on availability in the
office and willingness to respond to questionnaire. Each staff were administered a questionnaire.

26
3.6.3. Sample and sample size

A finance staff, accountants, auditors, managers were sampled in KMU finance office. The study
has been planned to approach from 140 staffs 75% will be request.

TABLE 2: Sample Size to be Determined

Sn Education level Finance and Audit Planning Total

Male Female Male Female
1 Second degree 13 5 13 9 40
2 First degree 24 15 14 17 70
3 Diploma 1 17 1 11 30
Total 38 37 28 37 140
Source KMU 2023 Finance employee data

Using the Formula (Yamane, 1967)

N
n= 2
1+ N ( e )
Where, n=Desired sample size,

N=Total population/population size

Z=confidence level (70% standard value is 1.58)

e = level of statistical significance set or margin of error (standard value is 0.05)

3.6.4. Sources of Data

The study data to be collect from KMU finance staffs PPM using survey questionnaire. In depth
interview of key informants was made for senior personalities in each finance subunit. The
primary data will be select by questionnaire, personal interview, observation etc. Data from
secondary sources was KMU budget policy and procedures. Project reports, actual utilizations of
budget and planned budget and frequencies of budget revisions.

27
3.6.5. Data Analysis, Interpretation and Presentation

The data will be characterized in different categories. The likert scale, continuous and categorical
and, etc. The interpretation is based on the types of data obtained from the questionnaire. SPSS
version 20 or more updated version was utilized. The data will be present through graphs, tables,
frequencies, etc. The study used structured questionnaires for the purpose of collecting data. The
questionnaires consisted of closed ended questions because closed questions provide a more
structured response. A five point likert scale ranging from strongly disagrees to strongly agree
were used in measuring the extent of the responses provided.

28
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