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«Journal of Finance & Economics Volume 1, Issue 3 (2013), 39-50 ISSN 2291-4951 E-ISSN 2291-496X Published by Science and Education Centre of North ...»

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preparation of a statement of basic assumptions underlying the individual budget in the organization and preparation of a forecast of general economic conditions and condition of the particular enterprise. Budget preparation is usually characterized by uncertainties. This means it is based on probabilities with the use of assumed data. Factor not anticipated could adversely affect the budget and even when the factors are anticipated, some are intractable.

2.4 Budget Target Setting and Performance Evaluation Modern corporate planning involves the setting of performance standards in advance for all departments and the entirety of the organization. These performance standards according to Drury (2004), embracing all the activities of an organization together, form a plan or a budget, which

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gives the direction and indication for future management. This at the same time provides the standard by which actual result can be measured (Hanson, 1966).

A budget can be an effective management tool if properly prepared with realistic statistical data (Holmes & Hurley, 2003). Various departments in an organization should be requested to maintain well-kept historical documents for their record. Statistical record should be properly maintained, realistic budgeting estimate and data should be utilized for budget planning and evaluation.

Furthermore, budget target setting consists of establishing specific, measurable time targeted objectives. Goals provide a sense of direction and purpose (Locke & Schweiger, 1979). In a study of behavioral effects of goal-setting, Locke and Schweiger (1979) conclude that 90% of laboratory and field studies involving specific and challenging goals led to higher performance than easy or no goals. However, when budget targets are established at a management level and thereafter solely laid down, employee motivation with regard to achieving these targets is rather suppressed (Lock & Latham, 2002). In addition, they are of the opinion that, in order to increase motivation the employees not only require to be allowed to participate in the target setting process but the goals have to be challenging as well; demanding targets extract better performance but unattainable targets tend to be counterproductive.

Hirst (1987) identifies two characteristics of budget targets which are the specificity and difficulty level of budget goals. According to him specific targets are those that are expressed in quantitative terms such as “sell x units of product ‘y’ whereas non-specific or general goals are expressed in non-quantitative terms (such as “sell as many units of product y as possible”). Hirst (1987) defines goal difficulty as the level of performance required to achieve a goal. In general, goals are moderately difficult where they are set at the average level of performance for a given task. In the works of Stedry (1960) and Rockness (1979), Hofstede (1967), Rockness (1977) and Chow et al.

(1988), the common conclusion reached is that targets established at level above (below) difficult budget goals leads to higher task performance than setting either specific moderate goals, specific easy goals or general goals (Hirst, 1987).

A budget gives benchmark by which to evaluate business units, departments and even individual manager. In other words a budget could be used as a basis for setting performance standards and rewards, in form of bonus, status or enhanced promotion prospects which are often tied to budget attainment. However, organizations are complex, tasks are interdependent and there are many dimensions of performance and these are not all easily quantified and certainly not in financial terms. At this juncture it is important to emphasis the increasing role of non-financial measures / information in budgetary planning, managerial and operational control. In order to achieve relevance and timeliness, it has been common to use performance measures to evaluate efficiency, material waste and many other operational aspects using quantitative but non-financial measures in addition to those of financial nature (Hopwood, 1972).

According to Burchell, Clubb, Hopwood, Hughes, and Nahapiet (1980), as cited in Abernethy and Brownell (1999) budgets can have “interactive” role when they are used as a “dialogue, learning and idea creation machine”. He adds that budget also has a “diagnostic” role, which refers to the traditional purposes of performance management and responsibility accounting. Responsibility accounting is defined as a system of accounting that segregates revenues and costs into areas of personal responsibility in order to assess the performance attained by persons to whom authority has been assigned.

Related studies in this regard have come up with interesting findings for examples Fisher et al.

(2002) reported that using budgets for both resource allocation and performance evaluation not only eliminates budget slack, but also increases subordinates effort and task performance. Callahan and Waymire (2007) in a study that examined whether budgetary control is associated with performance © Science and Education Centre of North America 43 Okpanachi Joshua & Nma Ahmed Mohammed Submitted on April 27, 2013 using a sample of large U.S. Cities found that the effective level of budgetary control is significantly and positively related to bond rating.

The use of budgets in performance evaluation and control is largely influenced by the manager’s evaluative style. Different styles have been identified based on their reliance on meeting budget





targets. Hopwood (1972) observed the following evaluative styles:

(i) Budget Constrained: This places considerable emphasis on meeting budget targets. In other words it represents a rigid application of the budget based performance evaluation.

(ii) Profit Conscious: This is also concerned with meeting the budget, but offers a more flexible approach. It takes a balanced view between budget targets, long-term goals and general effectiveness.

(iii) Non-Accounting: This style does not see accounting data as relatively important in the evaluation of subordinate. Therefore, it consists of a heterogeneous variety of other styles but none prioritizes meeting budget.

The style is suggested to influence, in some cases, the superior / subordinate relationship, the degree of stress and tension involved and the likelihood of budget attainment.

3. Method This paper employs a survey method of research. Data were collected from primary sources using questionnaire. The population of this study is made up of all the management and staff of the hotels located in Kaduna state. The sample size of the study is comprised of ten (10) hotels, namely Crystal Garden hotel Kaduna, Kongo conference hotel Zaria, New world hotel Kafanchan, Hamdala hotel Kaduna, Tee Jay hotel Zaria, Makosa empire hotel kafanchan,. Fina White hotel Kaduna, Kasham hotel Kafanchan, Zaria Palace hotel and Zaria Motel. The sample selection technique utilized was the convenient sampling whereby a total of ten (10) hotels whose managements were willing to participate in the study were selected across the three major cities in Kaduna stateKaduna, Zaria and Kafanchan. The respondents selected randomly from the sample included ten managers, ten accountants and thirty other hoteliers. A total of fifty (50) copies of questionnaire were distributed but only forty six (46) copies were completed and returned.

Data generated were presented in frequency tables using simple percentages. Analysis of the data was done by means simple percentages while the research hypotheses were tested using chi-square

statistic with the formula is given as:

2 ∑ (O − E ) 2 X= (1) E Where O = Observed frequency E = Expected or theoretical frequency For the decision rule using the chi- square statistic, the null hypothesis should be rejected and the alternative hypothesis accepted if the computed value of X2 is greater than the critical (table) value.

If otherwise, accept the null hypothesis and reject the alternative hypothesis and conclude accordingly The Degree of freedom (DF) = (r-1) (c-1), where r refers to the number of rows and c, number of columns. A significance level of 5% was applied.

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4. Results The discussion of research results was based on the responses gathered from the administration of personal questionnaire as presented in the table below.

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In relation to question one (1), 29 respondents which are about 64% indicate that they use budget in planning their activities while 17 representing 36% of the respondents believe that they do not use

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formal budgets in their hotels. For question two (2) it was gathered that 70% (20) of those that use budget adopt the incremental system while 30% (9) adopt zero-based budgeting system this means that mainly two budget improvement techniques are applied by these hotels.

Even though respondents agree that they use budgets for planning, none of them neither have a budget committee nor budget manual. This is shown by table 1 in response question three (3) that 100% of the respondents indicate that they do not have such things in existence. This implies that two of the basic requirements for budget preparation and administration are lacking in the hotels under study. It could therefore, be said that thorough budgeting procedure do not exist and formal guidelines in a documented form are lacking giving room for high incidence of intended and unintended mistakes and losses.

For question four (4) which is about proper coordination and communication of budget policies and guidelines. It shows that 22 respondents representing 69% are of the opinion that budget policies and guidelines are properly coordinated and communicated. This proportion of respondents identifies the specific procedures for budgetary control and coordination to include: formal report to management on the areas of differences; finding out the cause(s); and remedial action. Others are cautioning the hoteliers involved when the variances are adverse. However, 10 (31%) of the respondents hold a contrary view that they do not believe there is proper procedures for coordinating and controlling budgets. Some are of the opinion that since they do not use budgets, the existence of specific control procedures is not necessary.

Table1 above shows that on question five (5), 40% (18) of respondents strongly agree that the procedures for budget control adopted by them are effective while 35% (16) only agrees that these procedures are effective. However, 15% (7) and 10% (5) of the respondents strongly disagree and disagree respectively that these control procedures are effective. The respondents who strongly agree and agree respectively indicate that the outcomes of the existing procedures are: reduction of waste, more effective coordination of activities mostly in the areas of food beverages and labour usage which translate into lower cost and higher profits. Those respondents that strongly disagree and disagree respectively predicate their opinion upon the fact that the identified specific control procedures are not effective because they are not adequately applied.

The responses generated on question six (6). From table 1 shows that 29 respondents which are 64% indicate that targets are set for individuals and units while 17 (36%) of the respondents hold contrary opinion. This means that majority of the sampled hotels in the sample set performance standards for their employees. On the achievability of the targets as contained in question seven (7), 28 (60%) states that the targets are challenging but achievable, 18(40%) state that the targets are not tough and not achievable.

Based on question eight (8) in table 1 shows that 30 respondents which are 65% indicate that they conduct performance evaluation exercise while 16 (35%) of the respondents hold contrary opinion.

This means that majority of the selected hotels evaluate their hoteliers in respect of the extent to which they carryout assigned role and responsibilities either in their individual capacity or collectively as units.

On the benchmarks or criteria adopted in measuring performance was captured by question (9) of which 18 (40%) state that the overall profitability of the hotel for the period is used to appraise the hotels generally while 12(25%) state that the comments, observation and complaints made formally by guests determine managements’ measurement approach. 16(35%) are silent on this issue. Even though, not properly designed, the use of profitability to measure performance by most of the hotels is rooted in the achievement of the predetermined financial goals set at the planning stages to be achieved in the course of business operation.

The response to question ten (10) indicates that 16 (35%) and 17(37%) of the respondents opine that the existing performance evaluation methods are very effective and effective respectively while 46 © Science and Education Centre of North America Journal of Finance & Economics www.todayscience.org/jfe Vol. 1, Issue 3, 2013 7(15%) and 6(13%) of the respondent believe that the current methods are very ineffective and ineffective respectively. The response to question eleven (11) shows that 23(50%) are of the opinion that the extent of their targets attainment has effect on their performance rating while 23(50%) do not think so. The above analysis shows that the current performance appraisal methods in use in the Kaduna State hotel industry are not very effective. This is because the methods adopted are not properly articulated and applied.

In response to question twelve (12), 18 respondents constituting 40% indicate that they are satisfied with the current performance appraisal procedure while 28 respondents which are about 60% said that they are not satisfied with the current procedures, consequently 12(65%) of those satisfied with their level of financial performance also agree that the satisfactory level of performance is a result of effective planning and control while 6 (35%) hold contrary view meaning that their financial performance cannot be attributed to effective budgetary target setting in budgeting process. The above analysis implies that most of the hotel in Kaduna state are performing below their best due to lack of proper, well-articulated and jealously applied short- term planning and control mechanism.



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