Assessing the Role of Budgeting in Internal Control Efficacy Within Manufacturing Firms: A Case Study of Pepukai Plastics Industries

The contemporary business environment, characterised by significant uncertainty, encompasses diverse elements such as economic fluctuations, political and regulatory landscapes, societal shifts, supply-demand dynamics, competitive forces, consumer attitudes, and technological advancements. (E​r​a​s​m​u​s​ ​e​t​ ​a​l​.​,​ ​2​0​1​9). This multifaceted setting poses challenges for manufacturing organizations, particularly in the realm of strategic planning and performance analysis. Business failures within this sector are frequently attributed to inadequate planning in the face of competitive pressures. D​r​u​r​y​ ​(​2​0​1​3​) posits that effective strategic planning mitigates uncertainty, providing clarity and direction to management through pre-emptive decision-making. In this context, S​t​e​v​e​n​ ​(​2​0​2​3​) highlights the critical role of budgeting as a commitment to a financial action plan. Budgets serve as tools for financial organization, guiding investments in profitable ventures while averting allocation to non-viable ones, with an overarching aim of revenue enhancement. However, budgetary decisions necessitate careful consideration of factors such as available capital and organizational objectives.

Contradictory viewpoints emerge regarding the impact of budgeting on corporate profitability, particularly in developing economies. O​t​l​e​y​ ​(​2​0​0​8​) argues that budgeting adversely affects profitability due to the tendency of management to underestimate expenses and overstate revenues. Conversely, L​u​c​e​y​ ​(​2​0​0​9​) contends that in such economic environments, budgets positively influence profitability by providing a strategic roadmap for achieving organizational goals. Echoing this sentiment, V​a​n​ ​d​e​r​ ​S​t​e​d​e​ ​(​2​0​1​7​) asserts the significance of budgets in enhancing overall corporate performance, emphasizing their role in delineating effective processes and procedures. This research endeavors to elucidate the impact of budgeting as an instrument of internal control, particularly concerning profitability. The utilization of budgeting in managing finite resources effectively is a pivotal aspect of organizational strategy, aiming to maximize resource use (F​o​s​t​e​r​,​ ​2​0​1​7; S​t​e​v​e​n​,​ ​2​0​2​3). Objectives encompassing profitability enhancement, performance satisfaction, continuous growth, organizational survival, investment risk mitigation, and the provision of desired social services are integral to this strategy.

Z​w​e​n​i​ ​(​2​0​1​7​) describes a budget as a network interlinking the disparate plans of various organizational divisions, whether in manufacturing or other sectors. It facilitates the coordination of marketing, production, and financial activities. The focal point of this study is the effective coordination of a manufacturing firm’s myriad activities by its management, exemplified through a case study of Pepukai Plastic Industries. Despite employing budgeting as an internal control tool, specific budgeting aspects were not adequately adhered to at Pepukai Plastic Industries, leading to unmet organizational objectives.

The business landscape, constantly evolving due to factors such as technological advancements, political instability, supply and demand fluctuations, and legal challenges, introduces numerous uncertainties impacting organizational management. Within this context, Pepukai Plastics Industries, a case in point, has struggled to achieve its organizational objectives and goals in recent years. This underperformance has underscored the need for a focused investigation into the organization's internal control mechanisms, particularly in managing limited resources. The crux of this issue lies in determining the efficacy of these controls in navigating the multifaceted and unpredictable business environment, which significantly influences the company's operational success.

The central inquiry of this study is to discern the impact of budgeting as a tool of internal control on the profitability and efficiency of a manufacturing firm. This question seeks to explore the extent to which budgeting practices influence the financial and operational performance of an organization within the manufacturing sector. The investigation aims to elucidate whether effective budgeting can serve as a catalyst for enhanced profitability and improved efficiency, thereby contributing to the overall success and sustainability of the firm in a competitive and dynamic business landscape.

As defined by O​t​l​e​y​ ​(​2​0​0​8​), a theoretical review encompasses the examination of relationships between the variables under study and the integration of existing theories with emergent hypotheses.

An agency relationship is characterized by the appointment of an agent by one or more principals to perform a specific task on their behalf, conferring considerable decision-making authority to the agent (A​s​s​e​y​,​ ​2​0​1​4). Agency theory is predicated on the divergence of interests between principals and agents. Nonetheless, principals can implement appropriate incentives and monitoring costs to deter opportunistic behaviors by agents, thereby aligning the agent's actions more closely with their interests. In corporate settings, boards of directors and management function as agents acting on behalf of stakeholders.

It is imperative for managers to address stakeholders' expectations, as stakeholders possess the capacity to both reward and sanction managerial actions (V​a​n​ ​d​e​r​ ​S​t​e​d​e​,​ ​2​0​1​7). Publicly traded companies convene annual general meetings where shareholders address agency issues by restricting the powers of management and the board of directors. D​r​u​r​y​ ​(​2​0​1​3​) notes that these meetings serve to scrutinize and approve financial statements, decide on dividend distributions, and review budgetary and capital expenditure decisions.

Agency theory is pertinent to this study as it elucidates how managers, acting as agents, utilize budgets as tools for internal control. This control aims to address variances and ensure the effective delivery of services as mandated by shareholders (principals). Negative variances indicate internal control inefficiencies, highlighting discrepancies between planned outcomes and actual results.

The priority-based theory formulated by E​r​a​s​m​u​s​ ​e​t​ ​a​l​.​ ​(​2​0​1​9​) focuses on resource allocation practices during the budgeting process, particularly in cooperative enterprises. This approach advocates for the allocation of resources to the most profitable segments of an organization, aligning with priority objectives. E​r​a​s​m​u​s​ ​e​t​ ​a​l​.​ ​(​2​0​1​9​) argue that small and medium-sized enterprises should adopt budgeting processes that pinpoint goals necessitating sufficient funding, thereby enhancing accountability, efficiency, and transparency.

This theory is relevant to the current study as it offers insights into the budgeting processes within Zimbabwe's manufacturing industry. It emphasizes the prioritization of planning and budgeting information systems to bolster transparency and accountability in budget management. This approach addresses various internal challenges faced by the industry. The theory's relevance extends to this study as it discusses resource distribution strategies aimed at maximizing profits, aligning with the organization's use of budgeting as a resource allocation tool.

According to B​r​o​w​n​ ​&​ ​H​o​w​a​r​d​ ​(​1​9​6​9​), the classical theory of budgeting initially advocated for surplus budgets, especially when government expenditures were minimal and confined to policing roles. Budgets consisted of a limited number of items, listing both revenues and expenditures, with surplus termed as "surplus budgeting." Post-World War II, developed nations shifted towards balanced budget theories, while developing nations, particularly in Asia and Africa, began advocating deficit budgets to support development initiatives.

Developing countries, constrained by limited savings, could not delay essential investments. Thus, they resorted to public borrowing, foreign aid, and deficit financing to mobilize funds for infrastructural and development projects through public enterprises. This review highlights how organizations in developing nations have adapted the classical theory to tackle challenges posed by budget deficits. The theory’s application is pertinent to the investigation of manufacturing companies in Zimbabwe, as addressed in this study.

C​r​e​s​w​e​l​l​ ​&​ ​C​r​e​s​w​e​l​l​ ​(​2​0​1​8​) define research design as the methodology encompassing the computation and analysis of variables identified in the research problem, which includes considerations of the population, sample size, and research methods. In this study, a descriptive research design was employed to gather insights into budgeting as a tool of internal control within manufacturing organizations, with a particular focus on Pepukai Plastics. This design was chosen for its ability to delineate the nature of policy decisions across a broad spectrum. The descriptive nature of this research design facilitates the definition of various aspects of the chosen domain, making it particularly suited for the exploration of budgeting practices in manufacturing settings.

Descriptive research is characterized by its non-intrusive approach to data collection, providing detailed information about relationships between different factors without altering the environment (C​r​e​s​w​e​l​l​ ​&​ ​C​r​e​s​w​e​l​l​,​ ​2​0​1​8). This approach was selected due to its effectiveness in outlining the characteristics of the target group under study. The methodology allows for a comprehensive understanding of the 'what', 'where', and 'how' aspects of the research subject. This study benefitted from the multifaceted perspective offered by descriptive research, enabling a thorough exploration of the topic beyond mere numerical data. The clarity in data presentation and the ability to capture the experiences of the population under study are inherent advantages of this method, contributing to the accuracy and depth of the gathered information.

C​r​e​s​w​e​l​l​ ​&​ ​C​r​e​s​w​e​l​l​ ​(​2​0​1​8​) describe the research approach as a series of strategies and procedures spanning from broad hypotheses to detailed methods of data collection, analysis, and interpretation. A mixed-methods approach, integrating qualitative and quantitative elements, was utilized in this study. The qualitative component focused on exploring and understanding respondents' perspectives, particularly regarding challenges in cost control and necessary steps for improvement. This approach is instrumental in qualitatively elucidating the complexities of these issues. Conversely, the quantitative aspect concentrated on the collection, analysis, and interpretation of data through numerical evidence. The integration of these methods was deemed essential due to the reliance of the study's focal areas—challenges faced, cost control, and organizational performance—on both qualitative and quantitative data.

B​u​r​n​s​ ​&​ ​G​r​o​v​e​ ​(​2​0​0​5​) define the population as all entities that meet the criteria for inclusion in a study, comprising both target and accessible groups. For this research, employees from various cost centers at Pepukai Plastics Industries constituted the study population.

According to Table 1 above, the study population consisted of 28 participants.

As defined by D​r​u​r​y​ ​(​2​0​1​3​), a census is "a comprehensive enumeration of the units in a population." In this study, all 28 individuals within the target population were included to ensure the capture of every individual’s opinion within the entity. Owing to its manageable size, the census approach was chosen. This method enhances confidence in the trustworthiness of the data acquired, as opposed to a sample that might exclude certain members of the respondent group.

For a comprehensive understanding and to yield high-quality results, both primary and secondary sources of data were utilized in this research.

Primary data, derived directly from the source, were collected specifically to address the research objectives. Quantitative and qualitative data were gathered using questionnaires and interviews. These data, utilized in two distinct accounting systems, were instrumental in addressing the organizational problems under study. The selection of primary data was due to its focus on specific topics and direct acquisition from participants. The information was original, as it was collected firsthand by the researcher, and was unbiased. However, the collection process was time-consuming and demanding, requiring direct, one-on-one interaction.

Various techniques can be employed for data collection, including surveys, focus groups, interviews, telephone interviews, field notes, and recordings of social interactions.

Questionnaires are used by organizations to gather data on current conditions and practices and to explore attitudes and opinions. A questionnaire comprises a series of questions presented to respondents. Various strategies were employed to design the questionnaire to ensure accurate and meaningful data. The questionnaire included both open-ended and closed-ended questions, facilitating analysis and comparison. All 21 individuals in the population were surveyed. The standardized response collection contributed to the objectivity of the questionnaires. Data was typically collected swiftly, with a significant portion of the group participating. However, questionnaires limited respondents' expression, particularly in open-ended questions, and response rates for electronically distributed surveys were often low. Open-ended questions can generate extensive data that may be challenging to manage and analyze.

Interviews with the finance managers and ICT administrator of City Plastics were conducted to obtain current, accurate, and relevant information. This method proved highly efficient and effective, allowing for immediate reactions from interviewees and resulting in the collection of pertinent and trustworthy data. The opportunity to clarify research questions during interviews was valuable for gathering relevant data.

In this study, data were presented utilizing questionnaires disseminated within Pepukai Plastics Industries, which served as the case study organization. A total of 28 questionnaires were distributed across all staff categories, forming the foundation for data presentation.

The response rate, as defined by S​a​u​n​d​e​r​s​ ​e​t​ ​a​l​.​ ​(​2​0​0​7​), is calculated by dividing the total number of responses by the sample size, after excluding eliminated and unreached respondents, and is expressed as a percentage. The response rates for the questionnaires are listed in Table 2.

As indicated in Table 2, the overall response rate was 79%. According to O​t​l​e​y​ ​(​2​0​0​8​), a response rate above 70% is considered acceptable for mail questionnaires, thus the 79% response rate achieved in this study was deemed satisfactory. The use of Google Forms facilitated the distribution of questionnaires, enhancing respondent convenience and maximizing response rates.

Table 3 shows that a 100% response rate was achieved for the scheduled interviews.

Various methods, including graphs, tables, and pie charts, were employed for data display and interpretation to ensure clarity and ease of understanding.

Table 4 showcases the duration of employment of respondents within the company. It reveals that 54.55% of respondents had been employed for 0-2 years, indicating a majority were relatively new to their positions. A higher tenure, between 3-5 years, was observed in 77.28% of respondents, suggesting a decline in the proportion of experienced employees over time. Only 13.64% had 6-8 years of experience, while a mere 9.09% (equating to 2 respondents) possessed more than 8 years of experience. The demanding nature of the business, characterized by long working shifts, standing, and overtime, likely contributes to the decreasing trend of experienced workers within the organization.

Figure 1 shows the aacademic qualification of respondents. It shows that most of the respondents have obtained a degree.

The data presented in the Table 5 above and Figure 2 address the respondents' views on the effectiveness of budgeting as an instrument of internal control within Pepukai Plastics Industries. The responses were categorized into three main aspects: optimum utilization of resources, cost control, and performance evaluation.

(1) Optimum Utilization of Resources: The responses indicate varied perceptions regarding budgeting's role in optimal resource allocation. A significant portion of the respondents, 36% (8 out of 22), strongly agreed that budgeting leads to the optimum utilization of resources. Additionally, 27% (6 out of 22) agreed with this statement. However, a noticeable proportion, 14%, remained neutral, while another 14% disagreed. Notably, 9% of the respondents strongly disagreed with the notion that budgeting results in optimal resource allocation.

(2) Cost Control: The results suggest a general consensus that budgeting effectively aids in cost control within the organization. This is an important finding, as effective cost control is a critical factor in the financial health and sustainability of any company.

(3) Performance Evaluation: The use of budgeting as a tool for evaluating organizational performance received considerable support from the respondents. Approximately 50% of them agreed that budgeting is an effective means for assessing performance. This highlights the role of budgeting not just as a financial tool, but also as a mechanism for gauging and guiding overall organizational performance.

Figure 2 above shows the views of respondents to the impact of budgeting as an instrument of internal controls. It shows that the majority agreed that budgeting as an instrument of internal controls has a big effect.

This segment of the study was dedicated to understanding how manufacturing firms regulate their profit levels and the specific techniques employed for this purpose. The questions posed to respondents were meticulously structured to glean insights into the strategies and methodologies adopted by manufacturing firms in managing and optimizing their profit levels.

Table 6 provides a detailed breakdown of the responses concerning whether manufacturing firms actively control their profit levels and the techniques they utilize to achieve this. The data gathered from these responses is crucial in identifying the various approaches and practices employed within the manufacturing sector for profit optimization.

The analysis of Figure 3 reveals a significant insight into the organization's practices regarding profit level control. It appears that Pepukai Plastics Industries is not effectively utilizing key techniques such as variance analysis, forecasting, and coordination or planning. This conclusion is drawn from the responses indicating a high level of disagreement, with over 27% of respondents dissenting on the effectiveness of each queried technique. This trend in the data suggests a lack of implementation or under-utilization of these critical methods in the organization's approach to managing profit levels. Furthermore, this observation is corroborated by the findings from the interviews conducted, which confirm that the company has not been actively employing these techniques.

The objective of this section was to delve into the perceived weaknesses of budgeting when utilized as a tool of internal control. Table 7 below presents the responses regarding the perceived weaknesses of budgeting as an instrument of internal control, and Figure 4 further illustrates these views on the weaknesses of budgeting as an instrument of internal control, providing a visual representation of the responses.

Regarding the perception that budgeting is based on estimates, a significant majority of respondents, constituting 73%, concurred with this view, as indicated in the graphical data. This reflects a common belief that budgets, while essential, often rely on estimated figures that may not accurately mirror actual financial conditions. In contrast, 19% of respondents disagreed with this perspective, highlighting a division in opinions on the reliability of budget-based estimations. Additionally, 14% of the participants chose to remain neutral on this matter, suggesting some ambivalence or uncertainty regarding the impact of estimations in budgeting.

Time consuming and costly

The aspect of budgeting being time-consuming and costly was another point of contention. The data showed that 59% of respondents agreed that the budgeting process could be resource-intensive, underscoring concerns about efficiency and cost-effectiveness. On the other hand, a notable 27% did not view budgeting as overly burdensome in terms of time and resources, while 14% remained neutral. This spread of responses highlights varied experiences and perceptions regarding the operational demands of budgeting within the organization.

Budgeting only considers finance outcomes

Finally, the focus of budgeting predominantly on financial outcomes was acknowledged by 77% of respondents, who agreed that this was a characteristic of their budgeting processes. This viewpoint suggests a tendency for budgets to primarily concentrate on financial metrics, potentially overlooking other vital organizational aspects. Conversely, 14% of respondents did not align with this view, suggesting a belief in a more holistic approach to budgeting. The remaining 9% of respondents were neutral, indicating either a balance in their perspective or an uncertainty about the extent to which budgeting in their organization is financially focused.

Table 8 and Figure 5 present the responses regarding various budgeting methods and types that could be adopted by the organization. The data collected reflects opinions on fixed budgets, incremental budgets, and flexed budgets.

(1) Fixed Budgets: The analysis of the graph indicates that a majority, comprising 55% of respondents, support the implementation of fixed budgets in the organization. This approach is seen as a viable option for managing financial resources. However, there's a significant counter-view, with 27% of respondents expressing disagreement with the adoption of fixed budgets, and 18% remaining neutral. This diversity in responses suggests varying levels of confidence in the rigidity that fixed budgets entail.

(2) Incremental Budgets: Incremental budgets received considerable endorsement, with 77% of respondents agreeing on their effectiveness. This suggests a strong preference for this budgeting approach, likely due to its adaptability and gradual progression in financial planning. However, 19% of the respondents did not find incremental budgets to be an effective method, and 5% remained neutral, indicating some reservations about this type of budgeting despite its popularity.

(3) Flexible Budgets: The flexible budget approach garnered agreement from 43% of the participants, reflecting a moderate level of support for its use. The flexibility offered by this method seems to appeal to a portion of the respondents. Nevertheless, 23% disagreed with the implementation of flexible budgets, and a substantial 32% remained neutral. This neutrality might indicate either a lack of familiarity with the concept or uncertainty about its application in the organization’s context.

The investigation into Pepukai Plastics Industries revealed that the firm implements flexible budgeting. This approach is primarily aimed at enhancing cost control and facilitating performance evaluation assessments. A significant finding of the research is the positive impact of budgeting on internal controls within the firm. It was determined that an effective budgeting system significantly contributes to the overall effectiveness of internal controls, indicating its crucial role in organizational management and strategy.

The research at Pepukai Plastics Industries indicated that the firm does not utilize key techniques such as variance analysis, forecasting, and coordination and planning in its production processes for controlling profit levels. This absence of strategic financial management practices suggests potential areas for improvement in the company's approach to profit maximization and financial health.

The study identified several weaknesses affecting the effectiveness of budgeting as a tool of internal control. These include the tendency to prepare budgets based on estimates, the time-consuming and costly nature of budgeting processes, and the limitation of budgets to primarily consider financial outcomes. These findings highlight critical areas where budgeting practices may need refinement to enhance their utility as a tool of internal control.

A key recommendation emerging from the study is the shift from a fixed budget approach to an incremental budgeting ideology. This suggestion is based on the understanding that incremental budgeting may offer more flexibility and adaptability in the dynamic environment of manufacturing firms, potentially leading to improved financial management and control.

This research provided a comprehensive analysis of the budgeting practices employed at Pepukai Plastics Industries as a mechanism of internal control. The study aimed to evaluate the efficacy of budgeting as an instrument of internal control within the context of Pepukai Plastics Industries. The findings suggest that there is a pressing need for Pepukai Plastics Industries to undertake a revision of its budgeting processes. It is recommended that the firm integrates its budgeting with other methods to prevent obsolescence and enhance its dynamism and adaptability. Such a transformation is essential for the company to effectively navigate and respond to the rapidly evolving business environment, thereby improving its overall performance.

The research underscores the necessity for budgeting practices to be not only robust and comprehensive but also sufficiently flexible to adapt to changing market conditions and internal organizational dynamics. The adoption of more dynamic budgeting approaches, such as incremental budgeting, could potentially aid in making the budgeting process more reflective of current realities and responsive to future challenges. Additionally, this study highlights the importance of addressing the identified weaknesses in budgeting, including the reliance on estimates, time-consuming procedures, and a narrow focus on financial outcomes.

In conclusion, the research indicates that the current budgeting system at Pepukai Plastics Industries, while serving its basic purpose, requires significant enhancements to align with best practices and contemporary needs. By embracing more flexible and comprehensive budgeting methods, the firm can strengthen its internal controls and foster an environment conducive to sustained growth and improved efficiency.