WOLLO UNIVERSTY

COLLAGE OF BUSSINESS AND ECONOIMC

DEPARTEMENT OF ECONOMICS
TITILE: ECONOMIC EFFICENCY OF WHEAT PRODUCTION BY
SMALLHOLDER FARMAERS IN DESSIE SURIA WORDA

RESEARCHE PROPOSAL
PREPARD BY ID NO
1, Hiwot Desalegn......................................0932/12
2, zeritu................................0944/12
3, misa.....................................0969/12
4, hayat...............................0983/12
5, serkalem..................................0997/12

Submitted to Mr .YENEABAT.E
JUNE , 2014 E.C
WOLLO, ETHIOPIA

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ACRONYM
TVET : Techinical and vocational Training college
MoFED : Ministry of Finance and Economic Development
ZBB : Zero Based Budgeting

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 ABSTRACT
Ethiopia, increasing population pressure and low levels of agricultural productivity have
aggravated the food insecurity situation by widening the gap between demand for and
supply of food. Increasing productivity and efficiency in crop production could be taken
an important step towards attaining food security. The objective of this study will to
estimates the levels of technical, allocative and economic efficiencies of smallholder
wheat producers; and to identify factors affecting efficiency of smallholder farmers in
wheat production in Gindeberet district, Oromia National Regional State, Ethiopia. A
two stages sampling technique was used to select 152 sample farmers to collect primary
data pertaining of 2016/17 production year. Both primary and secondary data sources
were used for this study.

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 ACKNOWLEDGEMENT
First of all we will like to great thanks give to almighty our God he will helpe us in every
aspects of our life.

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CONTENT PAGE
ABSTRACT......................................................................................................................i

KEY WORDS..................................................................................................i

ACKNOWLEDGEMENT..............................................................................ii

CHAPTER ONE..............................................................................6
1. INTRODUCTION.......................................................................................6
1.1 Background of the study................................................................................................6

1.2 Statement of the Problem...............................................................................................7

. 1.3. Objective of the study...............................................................................................8

1.3.1. General objective.......................................................................................................8

1.3.2. The Specific Objectives.............................................................................................8

1.4. Significance of the Study..............................................................................................8

1.5 Scope of the Study.........................................................................................................9

1.6. Limitation of the study..................................................................................................9

1.7 organization of the paper...............................................................................................9

CHAPTER TWO............................................................................ 10
2. LITERATURE REVIEW.......................................................................... 10
2.1 Origin of the Budget....................................................................................................10

2.2. Definition of Budget and Budgeting...........................................................................10

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2.3 Characteristics of Budgeting........................................................................................11

2.4 The Objective and Role of Budgeting.........................................................................12

2.5 Budgeting Procedures..................................................................................................13

2.6 Budgeting Cycle...........................................................................................................13

2.7. Advantages of Budgets...............................................................................................14

Coordination and communication..................................................................................15

Frame work for Judging performance and Facilitating learning...................................15

Motivating Mangers’ and other Employees’.................................................................15

2.8. Relationship Between Planning and Budgeting..........................................................15

2.9. Performance Measurement.........................................................................................16

2.9.1. Performance Evolution Concepts............................................................................16

2.9.2. Performance Reports and Communication..............................................................17

2.9.3. Using Performance Measurement to Implement Corporate Strategy......................18

2.10. Budget Classification................................................................................................19

2.11. Types of Budget........................................................................................................19

2.11.1. Program Budgeting................................................................................................19

2.11.2. Zero Base Budgeting (ZBB...................................................................................20

2.11.3. Activity Based Budgeting......................................................................................20

2.11.4. Incremental Budgeting...........................................................................................21

2.11.5. Master Budget........................................................................................................21

2.11.6. Variable Budget.....................................................................................................21

2.11.7. Fixed Values flexible Budget.................................................................................22

2.11.8. Government Budget...............................................................................................22

2.12 Budgetary Accounts.................................................................................................22

2.12.1 Budget and Budgetary Control...............................................................................23

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2.12.2 Objectives of Budgetary Control............................................................................23

2.12.3 Organization Chart for Budgetary Control.............................................................24

2.12.4 The Need of Budgetary Control..............................................................................25

2.13. International Control Systems...................................................................................25

2.14 Empirical Literature...................................................................................................26

CHAPTER THREE........................................................................ 28
3. RESEARCH METHOD AND METHODOLOGY..................................28
3.1 The Research Design...................................................................................................28

3.2. Type of Data and Sources...........................................................................................28

3.3 Method of Data Collection...........................................................................................28

3.4 The Sampling Technique.............................................................................................29

3.5 Sample Size..................................................................................................................29

3.6 Method of Data Analysis and Presentation..................................................................29

CHAPTER FOUR...........................................................................30
4.1. Time Schedule............................................................................................................30

4.2 Budget Schedule.......................................................................................................31

REFERENCE..................................................................................32

VII
 CHAPTER ONE

1. INTRODUCTION
1.1 Background of the study
Agriculture in Ethiopia is the foundation of the country’s economy and it is agrarian
which accounts for about 35% of gross domestic product, over 80% of the country’s
exports, and 65% of the total employment (CSA, 2018). The agriculture production
system in Ethiopia is mainly rain-fed, subsistence and traditional, which is characterized
by low input of improved seeds, fertilizers, pesticides and technologies (Musa, 2013).
Most agricultural holders derive the food they consume and therefore the money they
demand to fulfil their daily expenses from agricultural activities (CSA, 2016).

Increasing agricultural production is vital for enhancing the development of agriculture,

ensuring food security, providing inputs for industrial sector, stimulating export earnings,
GDP and getting better income and living condition of the people (Tolosa, 2018).
However, the farmers with identical resources produce different per hectare yield, due to
the presence of inefficiency (FAO and WFP, 2012). Hence, being an agriculturally
dependent country with a food deficit gap, increasing crop production and productivity is
not a matter of choice rather a must to attain food self-sufficiency.

Cereals are the major food crops both in terms of the area coverage and volume of
production and accounts for 95 percent of agricultural production in Ethiopia and
contributed 87.48 percent of the grain production (CSA, 2018). Of them, Teff (Eragrostis
tef), is a warm-season annual cereal, is one of the underutilized crops that can contribute
to food security and crop diversification. Teff contains high and unique nutritional
values, which will meet the need of health-conscious consumers (Mekuriaw, 2020). It is
endemic to Ethiopia and has been widelycultivated for centuries and the most important
economic crop cultivated by 43 percent of small holder farmers in Ethiopia (Assefa et al.,
2020). The cultivation of Teff in Ethiopia has partly been motivated by its relative merits
over other cereals in the use of both the grain and straw(Yimer, 2017).

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1.2 Statement of the Problem
The production of wheat in the country is very insufficient to meet the increasing demand
for food for the ever-increasing population, forcing the country to import 30 to 50% of
the annual wheat grain required (Jemal et al., 2016). This is may be due to that ninety-
eight percent of this crop is produced by resource-poor farmers. So, to meet the domestic
needs of the country, increasing production and productivity of the wheat crop is needed
and it may be achieved through improved crop management, particularly use of high
yielding and disease resistant varieties coupled with improving the existing level of
farmers efficiency.

Efficient production is the basis for achieving overall food security and poverty reduction
objectives particularly in major food crops producing potential areas of the country
(Tolesa et al.,2014). However, farmers are discouraged to produce more because of
inefficient agricultural systems and differences in efficiency of production (Kifle et al.,
2017). When there is inefficiency; attempts to introduce new technology may not result in
the expected impact since the existing knowledge is not efficiently utilized.
The presence of inefficiency not only limits the gains from the existing resources, it also
hinders the benefits that could arise from the use of improved inputs. Hence,
improvement in the level of efficiency will increase productivity by enabling farmers to
produce the maximum possible output from a given level of inputs with the existing level
of technology (Geta et al., 2013; Mesay et al., 2013; Sisay et al., 2015).

Most of the empirical studies in Ethiopia show that there was a variation in the level of
efficiency of smallholder farmers in wheat production (Fikadu and Bezabih, 2008; Mesay
et al.,2013; Solomon, 2012; Awol, 2014; Tolesa et al., 2014; Kaleb and Negatu, 2016;
Hassen, 2016; Getahun and Geta, 2016). According to the results of these studies the
main sources of variation was; farm size, livestock holding, land fragmentation,
education, participation in off/non-farm activities, access to credit, family size, extension

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contacts and poor infrastructures, among the others. However, those factors are not
equally important and similar in all places at all times. A critical factor in one place at a
certain time may not necessarily be a significant factor in other places even in the same
place after some time.

Many researchers, in different sectors, have done many performance evaluation studies in
Ethiopia. However, the majority of farm efficiency studies are limited to technical
efficiency (Fekadu and Bezabih, 2008; Mesay et al., 2013; Hassen, 2016; Kaleb and
Negatu, 2016;Assefa,2016; Getahun and Geta, 2016). But, focusing only on technical
efficiency (TE) understates the benefits that could be derived by producers from
improvements in overall performance. Unlike technical efficiency, studies conducted on
economic efficiency (EE) of wheat are limited (Solomon,2012; Awol, 2014). Moreover,
there is no study done on economic efficiency of smallholder wheat producers in the
study area. Therefore, this study was attempted to fill the existing knowledge gap.

1.3. Research Questions

The study has attempted to answer the following key research questions.
1. What are the levels of technical, allocative and economic efficiencies of smallholder
wheat producers in the study area?
2. What are the factors that affect technical, allocative and economic efficiencies of
smallholder wheat producers in the study area?

1.4. Objective of the study

1.4.1. General objective

The general objective of this study was to assess economic efficiency of smallholder
wheat producers in Abuna Gindebarat District of West Shewa zone.
1.4.2. Specific objectives

The specific objectives of the study were:

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1. To measure the levels of technical, allocative and economic efficiencies of smallholder
wheat producers in the study area; and

2. To identify factors that affect technical, allocative and economic efficiencies of

smallholder wheat producers in the study area.

1.4. Significance of the Study

The significance of the study will helps to make the reliable decisions by managers of the
TVET, to create aware of active participation of all workers.
- The study will also contribute to create awareness among the budget users, and any
other concerned body on the role of management and success of vision of college.
They will be used the findings of the study on the budget allocation and utilization
as feedback. The study will be employed by TVET College in addressing some of
the problems related to budget allocation and utilization. The Study will be laid
down a starting point for other researchers in order to incentive study on the
budget allocation and utilization
1.5 Scope of the Study
The scope of the study will to assess budget allocation and utilization performance on
chiro TVET College. Here the focus area of this research will how TVET College plans,
establish and evaluate the budget. Even though, many problems will be found in this area,
but the study focus area will related to budget allocation and utilization. It will be better
to touch all previous year’s budget reports. But the study will assesses three years budget
report to analyze the budget allocation and utilization.

1.6. Limitation of the study

The study will face some challenges. There are various studies being conducted on
budget allocation and utilization performance in different area and there are several
literatures on the topic but the researcher will not cover the entire due its wide nature and
many numbers. The researcher also will not getting sufficient information from
employees and different secondary sources related to budget allocation and utilization. In

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addition to this, the study uses only 3 year budget report due to financial and time
constraint, experience on the study of the research.

1.7 organization of the paper

The study is organized by five chapters. The first chapter is the introduction section
which contains back ground of the organization, background of the study, statement of
the problems, and objective of the study, significance of the study, scope and limitation.
The second chapter is literature review it contains the theoretical aspect of economic
efficiency and chapter three contains the methodology part. The data presentation and
analysis part is included in the fourth chapter and finally the fifth chapter contains
recommendation and conclusion part on budget implementation and control system.

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 CHAPTER TWO
2. LITERATURE REVIEW
2.1 Origin of the Budget
The word budget is originated from “The old French baguette, meaning a small bag or
pouch” This term was first used in England to describe the summons leather bag in which
the chancellor carried to the parliament, the statement which was contained in the bag.
The practice of budgets was also originated in 1217 in England as means of asserting
parliamentary control over the crown. During this time parliament was aware of the fact
that the financial control should be under its own hands or control but not under the
crown. Hence forth parliament secured the power of controlling the financial matters of
the country. Pizzey, A. (1973).

2.2. Definition of Budget and Budgeting

There is no consensus on the definition the term Budget. Pizzey, A. (1973) defines it as ‘a
plan quantified in monetary terms, prepared and approved prior to a defined period of
time showing the planned income to be generated and expenditure to be incurred during
the period and the capital to be employed to attain a given objective’. It is detailed plan
expressed in quantities terms that specifies how resources will be acquired and used
during a specified period of time. Hilton, R. (1979).
Pizzey, A. (1973) Writes:
‘Budgeting is a coordinating process since all the disparate department and cost centers
which make up the business are filled in to one plan’. It is also an imperative process.
Since by a series of small steps comprising a process of a continual review and revision,
the original estimates become firm plans’.

Budget is an expression of a firms plan conversing all phases of operations in financial

form for a definite period of time in future. Budget spells out the policies, plans, goals
and objectives laid down in advance by top management for the organization and for each
sub- division of the same. It predicts income for a given period as well as estimates costs
and expenses, with the objective of earning a desired profit (Mohan). It forces
management to give early consideration to what they plan to do in the future period.

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Budgeting involves as a great range of interests and concerns. It is difficult to conceive
any public policy that can be carried out without money, and hence without becoming
subject to budgetary process. All countries, whether developed or developing would be
engaged budgeting and operate on a budget recognizes its invaluable aid in planning and
form waiting economic policy as well as check on its execution. Budget is used not only
by government but also used by private firms, business and various organizations,
because it enables them to achieve their goals. Nevertheless, budget had not been
developed uniformity among countries and the approaches to budgetary procedures are
not the same in all countries.

2.3 Characteristics of Budgeting

As per the definition shown above a budget has the following characteristic; ❖
It is a quantitative statement expressed in terms of money.
❖ It is prepared in advance and approved prior to a definite period of time during
which it is to operate.
❖ It relates to future. In other words budgets are prepared for future implementation.
❖ A budget is prepared for the implementation of the policy formulated by the
management for the purpose of attaining a given objective.

The institute defines budgetary control as the establishment of budgets relating to the
responsibilities of executives of the requirements of a policy and the continuous
comparison of actual with budgeted results, either to secure by individual action the
objectives of the policy to provide firm basis for its revision. Mold, Arifpasha. (2007).

2.4 The Objective and Role of Budgeting

Given that limited availability of resources as compared with competing demand, the
process of budget making assumes a critical role in decision making process of
government in order to optimize the use of existing resources. The paper of monetary of
finance in Amharic vision of Ministry of Finance and Economic Development (MoFED)

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states that the objective of the budget in three aspects. These are allocation of resource,
distribution of resources and stabilization of economy

The first objective consists of allocating resources between the various function
consumption and investment that between the public and private sector. The distributional
sector (objective) necessitates the consideration of public expenditure and the income
groups that are anticipated to be served. It is the policy maker or government that decides
who will be benefited how much from the available resources among the society. This
may be achieved by expenditure policies such as, subsidies, pension or social welfare
schemes as much as taxation on income and capital

Concerning the stabilizing role of budget, Bhatia (1980) states that "budget plays very
important role in the flow of funds in the economy. It also has important affection in the
economy not only through the flow of funds but also through various fiscal policies and
measures. "As a result, budget can be used to control the danger of inflation by adjusting
the amount of governmental taxation and expenditure. Finally, budget plays an important
role as a tool of accountability, a means of management and instrument of plan of
implementation

2.5 Budgeting Procedures

There are several approaches of budgeting of which the following three are among the
common ones to be mentioned. The first one is incremental budgeting approach. Here,
the existing budget is taken as starting point (or base) for developing the next budget.
This may be the easier but not necessarily the best. The second approach is Zero based
approach (budgeting). This approach puts much less emphasis on the past budget and
focuses on what must be done to achieve specific objectives. ZBB starts as new each year
and therefore it is a more time consuming process. Fressant J. Iydon and Ensert Miller
(1978) strengthen this notion by saying 'I ZBB usually involves more managers and takes
more management time than the traditional budgeting procedures". However, this
approach has been appreciated for it gets rid of unnecessary activities that budgeting
often perpetuates.

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The third one is program budgeting / master budgeting program! It is plan oriented and
consists of three stages that include developing alternative for the future, analyzing what
the outcome of the alternative program might be, and relating the programs and policies
on the future costs and benefits, and lastly the actual performance of the chosen program
must evaluated.
Therefore, master budgeting is a means that government expenditures are managed
through the comparative attempt of the program proposals of all government agencies.
Hyman (1969) clarifies the benefit of master budgeting as it possesses potential to permit
budget managers to compromise issues that are not immediately unaware when the
agency budgets are viewed in isolation.

2.6 Budgeting Cycle

Well managed companies usually cycle through the followings budgeting steps during the
course of the fiscal year.
1. Working together, managers and management accountants plan the performance
of the company as a whole and the performance of its sub units (such as
departments or divisions.) Taking in to account part performance and anticipated
changed in the future, manages at all levels reach a common understanding on
what is expected.
2. Senior manager give subordinate managed a frame of reference asset of specific
financial or non-financial expectations against which actual results will be
compared.
3. Management accountants help mangers investigate variations form plans such as
unexpected decline in sales. If necessary, corrective action follows, Such as
reduction in price to boast sales or cutting of costs to maintain profitability.
4. Managers and management accountants take in to account market feedback,
change conditions and their own experiences as they begin to make plans for the
next period. For examples a decline in sales may case managers to make changes
in product features for the next period.

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 The preceding four steps describe the ongoing budget process the working
document of the core of this process is called the master budget. The master
budget expresses management operating and financial plans for a specified period
/usually a fiscal years and it includes a set of budgeted financial statements the
master budget is the initial plan of what the company intends to accomplish in the
budget period. The master budget involves both operating and financing decisions
made by manager.
• Operating decisions deal with how to best use the limited resources of an
organization.
• Financing decisions deal with how to obtain the funds to acquire those resources.

2.7. Advantages of Budgets

Budgets are an integral part of management control systems when administrated thought
fully by mangers budgets.
Promote coordination and communication among sub units within the company.
Provide a frame work for judging performance and facilitating learning.
Motivate managers and other employee.

Coordination and communication

Coordination is meshing (to fit) and balancing all aspects of production or service and all
departments in a company in the best way for the company to meet its goals.
Communication is making sure those goals are under stood by all employees.
Coordination forces executives to think of relationships among individual departments
and the company as a whole and across the companies.

Frame work for Judging performance and Facilitating learning

Budgets able a company’s manager to measure actual performance against predicted
performance. Budgets can overcome two limitations of using past performance as a basis
for judging actual results. One limitation is that past results often incorporate past misuse
and substandard performance. The other limitation of using past performance is the future
conditions than be expected to differ from the past.

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Motivating Mangers’ and other Employees’
Research shows that challenging budgets improve employee performance that because
employees view falling short of budgeted numbers as a failure. Most employees are
motivated to work more intensely failure than to achieve success. As employed set
classer to a goal, they work harder to achieve it. Therefore, many executives like to set
determining but achievable goals for their subordinate manager and employees.
(Charles T. Horn green 2006.)

2.8. Relationship Between Planning and Budgeting

Planning signifies the strategies elements for selecting flows of action by a logical
consideration of resources to achieve policy objectives. It establishes program, set goals,
objectives and makes fundamental policy decisions for the economy. Frederick (1954:
489) puts plans as conceiving of goals and the development of alternative courses of
future action to achieve the goals. For him planning also involves the reduction of these
alternatives from a very number to a smaller one and finally to an approval course of
action.

(Hamid, 1998) writes:

Budgeting analysis in detail, the many functions of activities that the economy must
perform the implementation of each program, analysis the alternative with in each
activity to achieve the end product and identifies the achievements of the established
goals and the associated costs’

Since budgeting is a crucial instrument for plan accomplishment, they should be

harmonized for proper plan implementation.

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‘To harmonize the budget with the plan, there must be a plan in existence, there should be
on annual plan with which budget could be harmonized, ….and there must exist at least a
set of short term targets and goals towards the attainment of which the budgetary
decisions could be oriented.
According to Hand, P. (1989) budgeting without planning could to be a plan of action
and plans without realistic detection of budgetary restraints have little chance of
implementation. Thus any appropriate plan can be meaningless and the result my become
paradox unless it is reelected in the budget.

Therefore, budget and plans are concerned with policy analysis and allocation of
resources. The difference is that, in planning the economic aspects dominate, whereas, in
budgeting more attention is paid for financial aspects.

2.9. Performance Measurement

2.9.1. Performance Evolution Concepts
Performance reporting for internal management us an important part of a comprehensive
profit planning and control system. To indicate the extensive reporting requirements a
business requires and to focus on performance reporting. The following are an overview
of financial reports.

The first one is special external reports. Here, reports are submitted to government
agencies such as regulatory commissions, creditors, investigative agencies and other
external groups. These reports are extensive and comprise a considerable portion of the
overall reporting. The next one is reports to owners. It refers to the traditional annual
report to the owners (to stock holders in the case of a business) and other special reports
got ready for the owners. These reports based on generally accepted economic principles.

The last category, the internal reports are those secret reports are prepared in the
corporation for internal use only. They do not have to meet the needs of external groups,
nor the test of “Generally accepted economics principle”. This category of reports is

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subdivided in to three different sub qualifications. These are statistical report, special
report and performance reports.

All companies regardless of their size; have reporting requirements for all the categories
listed above. In small companies, most the basic reporting needs may be accomplished by
using a single general propose report; we are concerned specifically with performance
reports. This particular phase or reporting is an internal part of a comprehensive budget
program. Walsh and etal (1997)

2.9.2. Performance Reports and Communication

Performance reporting is a crucial phase of the regulatory process. The control process
can be recapped as:
1. Approved plan (Tactical and strategic)
2. Feed forward (Planned objective and goals communicated)
3. Current controls (supervision, inspection, performance reports)
4. Feedback (Communication of different between actual performance causes
identified)
5. Correction action (designed to reduce any unfavorable differences in routine
results (Hyman).
In most business, management depends to a great extent upon information contained in
reports that serve as an important means of economics information.

Communication involves that a person receiving the information understands the nature
and meaning of material in the report accordingly, clear communication leads to effective
management action and decisions that are likely to base on the facts. Reports help to
communicate effectively to all levels of management stimulate action and influence
decisions Welsch (1976). However, some times reports were not understood, recipients
lacked time required to grasp the meaning, or the content of reports was not relevant to
problems facing the persons who received them (Bulletin), Accounting practice report.

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2.9.3. Using Performance Measurement to Implement Corporate Strategy
Well-developed, coherent strategies merit well developed, coherent performance
measurement system. There are integrated sets of performance indicators that links
strategic objective to functional tasks by focusing attention on the critical out puts
required by the strategy.

Traditionally, firms have oriented themselves around either a low cost or differentiation
strategy. Firms that focus on cost usually focus on mass production technologies,
attempting to stamp out variance and to attain efficiency through constancy. Conversely,
Firms following differentiation strategies, tend to concentrate on developing flexibility,
promoting rapid adaptation to changing customer’s needs. Nationally, they will
experience tension when cost and differentiation priorities conflict
All companies ought to be aware of the performance levels of their rivals both in
absolute and incremental terms. Bench marketing systems that compare internal
performance with industry best practice can provide not only important
information for strategic planning but also a valid insight for change. (Michael
vitale and Salah C. Mavernae)

2.10. Budget Classification

Budget categorization refers to the systematic ways of organizing budgetary data of both
revenues and expenditures. It offers the form and structure of the budgetary information
that help analysis and inference. Budget classification is one of the essential points to be
beard in mind for the budget to attain its goals more efficiently and effectively. Three
general importance’s’ can be gained if proper budget classification is intended. These
include:
1. Budget classification play’s a significant role to maintain accountability and fix
responsibility to specific organization and even persons in a unit it the account
define responsibility accurately and precisely.
2. It offers a means of evaluating performance by alleviating comparison between
actual result and the level of funding found in the budget.

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 3. It provides means of controlling resources because authorized spending limits are
established in the budget. Axelred, (1989).
2.11. Types of Budget
Budget as a process and a system has different features and applications. Even though
many of them have common feature, they also manifest significant differences. Since
budget express plan and an organization may have a large verity of plans: there are many
type of budget. The classification of budget based on their nature, coverage of function,
characteristics of activity, period and flexibility.

2.11.1. Program Budgeting

Program budgeting does not have a standardized definition because of its encompassing
nature. Its many aspects include concepts, systems and process, technique and format,
and in some case almost a management philosophy. Essentially, it is a management
decision making system that tries together strategic and long range planning with
conventional budgeting and supporting analysis so that an organization can most
effectively assign resources to achieve both its short and long range objectives. It utilizes
a planning and budgeting process in an output oriented program format, which is oriented
to its objective to facilitate developing and evaluating alternative. This process ultimately
leads to an allocation of resources over a planning period. This is then a basic for
constructing a resources (man power), materials, facilities (including equipment), and
capital, which operate together to achieve a set of common objectives with in a planning
period. Robert (2004)

2.11.2. Zero Base Budgeting (ZBB)

This type of budgeting is similar to planning programming and budgeting. The most basic
concept behind ZBB is that all programs and expenditure are evaluated every year.
Another zero base budgeting is that the responsibility, to present and defend program.
The principals’ advantage of zero base budgeting is that each type of cost incurred in
every budget period will be justified.

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Its advantage falls in to the hands of mangers of respective institutions. More over
according to the method of zero base budgeting “decision packages; have to be
developed. The key to be zero base budgeting lies in the identification and evaluation of
alternative. This is favorable by ranking of decision package, the most crucial stage in the
application of this method. Despite the obvious advantage of ZBB, it has disadvantages.
- Given enough time and man power, there would not be controversy on the
application of zero base budgeting.
- However, if such problems exist, reviewing all programs every year would be
bulky and sometimes important.
- Another more serious problem is the ranking of problems.
- If there is in no way to continue with that inefficiency
- Activity in the future. Robert (2004)

2.11.3. Activity Based Budgeting

It focuses on the cost of activities necessary to produce and sell product and services. It
separate indirect cost in to separate homogeneous activity cost pool. Management uses
the cause and effect criterion, to identify the cost driver for each of these indirect cost
pools comes up with the following merits of activity based budgeting.
1. Ability to set more realistic budgets,
2. better identification of research needs,
3. Clear or linking of costs with staff responsibility and
4. Linking of cost to output.

Conversely, it is tiresome and time consuming to determine the demand for each
individual activity based on output budgeted, production, new product development
Robert (2004)
2.11.4. Incremental Budgeting
In this case the previous budget is considered as a base. The former budget figures can be
increased or reduced based on situations, particularly on the volume of activity of the
organization planned to be performed. These types of budgeting simplify the preparation
of the budget because it needs adjustment of data from the budget that had already been

23
prepared. However, incremental budgeting is not without drawbacks, particularly because
the past period budget may include in efficiency. Robert (2004)

2.11.5. Master Budget

It is a budget that summarizes the financial estimates of the entire organization’s
individual’s budget. It helps achievement of long range plans year by year steps)

The guidance is more specific for coming year than it is for more distant year. The plan
for the coming years is called master budget. The master budget is also known as the
static budget, the budget plan or the planning budget. The master budget indicates the
sales level, production and cost level. Here, income and cash flows that are anticipated
for coming year. However, it has its own limitations that arise from its
comprehensiveness which may result in wrong formulation of the budget. Maritaland,
(1997)

2.11.6. Variable Budget

The primary purpose of this type of budgeting is to accelerate control.Weish (1978)
identifies three specific benefits of variable budgeting.
- To help development of departmental expense budget for insertion in the profit
plans.
- To give examples, goals for the managers of responsibility center during the
period covered by profit pan and
- To offer adjusted budget allowances for comparison intention in the monthly
report.
2.11.7. Fixed Values flexible Budget
Fixed budget is a budget for a specific or fixed total amount that many not be exceeded
due to changes in the demand for goods and services. Being prepared for a particular
planned action, it is suitable for activities whose resources utilization does not materially
vary in due course. It is most appropriate when changes in the amount of goods and
services obtainable directly affect availability of resources and expenditure needs.

24
Maritaland, (1997).

2.11.8. Government Budget

In governmental entities, budget services as a tools of managing resources to attain
programmed objectives. It serves as instrument for the legislative body to ensure whether
actual expenditures are corresponding to budgeted amounts and that the objective and
levels of activity envisaged in the budget are attained or not. As well, to obtain a share in
government resources allocation, preparing and submitting budget proposal is expected
from each government entity. Moreover, governmental budgets are legally binding upon
the executive body and once fixed by law, they are usually unalterable without much
effort.

2.12 Budgetary Accounts

Budgetary accounts generally should not be needed for permanent funds because
transactions of the result in changes in the fund principal only incidentally by definition,
the principal be appropriated or expended. However, public purpose expendable trust
funds may be required by law to use the appropriation procedure to ensure adequate
budgetary control over the expenditure of fund assets since they are accounted in special
review funds. If the appropriation procedure is required, the use of the other budgetary
accounts discussed earlier in this recommended. Early R, (2010)

2.12.1 Budget and Budgetary Control

A budget is a financial or quantitative statement, prepared priors a defined of time, of the
policy to be pursued during that period for assigning a given objective. Examples of
financial budget are sale budget, administration cost budget and cash budget. Plan
utilization budget, sales budget /in physical units/ and raw materials purchase budget /in
units are examples of quantitative budgets. . A budget control is a system of planning and
controlling costs. It has been defined 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

25
objective of that policy or to provide a basis for its revision. Budgetary controls have the
following steps those are:-
1. Establishment of Budgets: - Targets or budgets are fixed for each
function relating to the responsibilities of individual executives.
2. Measurement of actual performance
3. Comparison of actual performance with budgeted performance to
ascertain deviations variances’. Actual defaced compared with fixed
budgets or adjusted budgets.
4. Analysis of the causes of variations and reporting: - this is done for
motivating the right people to take the right action at the right time. For
detailed analysis, budgetary control with standard costing is the ideal
combination.
2.12.2 Objectives of Budgetary Control
From the functional stand point a system of budgetary control will serve the following
purposes: -
Planning
Co-ordination and
Control
The objective of budgetary control are normally to plan and control the
i. Income and expenditure of manufacturing and trading operations.

ii. Capital expenditure

Iii, expenditure on research and development and
iv. Financing of a business to ensure adequate working capital
2.12.3 Organization Chart for Budgetary Control
For effective budgetary control a sound and efficient organization is essential. The
following proximities to be considered in a sound system of budgetary control:-
1. Budget center’s:- a budget center is a section of the organization for which
separate budgets can be prepared and control exercised.
2. Organization chart: There should be a well-defined organization chart for
budgetary control. This will show the lines of responsibility of each executive

26
 and his position in relation to others. The designs of an organization chart will
vary depending up on the nature and size of individual business.
3. Budget committee: - in small companies, the preparation of budget in the
responsibility of the cost of management accounts Budget committee is composed
of executives in charge of major functions. The Chief Executives generally act as
chairman and the accountant as the budget officer. The main functions of budget
committee are:-
1. To help departmental managers by submitting post information to prepare
budgets.
2. To receive and review the budgets relating to different functions
3. To decide general policies of management in relation to the budgets.
4. To recommend action to be taken on the variance analysis

4. Budget Manual: - it is a document which sets out the responsibilities of the

persons engaged in the routine of and the forms and records required for budgetary
control.
5. Budget period: it is the period for which budgets is prepared and used which may
then the sub divided in to control periods. One of the following types of budget periods is
generally uses.
1. Long period say up to 10 or 20 years
2. Fiscal period which is ordinarily a year or
3. Short period say a week or a month
The selection process is influenced by the following two factors.
a. The nature and type of business , and
b. The control aspect.
6 Level of activity: it is essential to establish a normal level of activity since it
forms the basis of the budget. (Bhabatosh Banerjee 2006).

27
2.12.4 The Need of Budgetary Control
Planning and control of operation and related resources and their costs are the keys of
good management. Planning is important to all success full profit oriented company. The
objective of budgetary controls is
✓ To forecast future financial and non-financial transaction and events.
✓ To develop information that is accurate and as meaning full to the receipted
possible.
✓ To avoid in establishing procedures for preparing accompanies planned reviews
and to formulate basis for effective revenue and cost control
(Ltt://www,Wikipedia org’)

2.13. International Control Systems

The council of minister’s finical regulation No. 17/1997 defines internal control systems
as:
“The plan of organizational and all the coordinated methods and measures adopted
by management to safeguarded assets ensure the lines, accuracy and reliability of
economic data, promote operational efficiency and maintain adherence to regulation
and directives.”

The two main constituents of internal control system are the administrative and the
financial (Accounting control)

The administrative control comprises the procedures and records that are concerned with
decision making process leading to management’s authorization of events. on the other
hand, the financial control consists of the plan of an entity, producers; and records that
deal with protection of assets and the consistency of financial records ascertains logical
plan of an entity, new designed and accounting configuration, an internal audit function,

28
and quality and training of personnel’s as among the indispensable factor to reinforce
internal control arrangement.

Strong system of internal control is very essential in achieving certain goals of an

organization. Internal control includes all the procedures and actions taken by an
organization in order to manage the expiating assets, ensure conformity with
organizations policy and governmental rules, evaluate operating efficiency and ensure
precise and reliable operating data and accounting records.

2.14 Empirical Literature

According to Hongren, Sundem, Stratton, Burgstahler and Schwartzberg, (2008) states
that, recent survey show just how valuable budget can be. They assert that, a study of
more than 150 organizations in North America listed budget allocation and utilization as
the most frequently used as most important part of budget process. One of the usefulness
of the budgeting forces manager to become a better administrator and puts planning in the
fore front of manager’s mind. In the same book, Horngren etal, (2008) also point out that
the result of a survey carried out in the same place (North America) shows that most
managers still agree that good budget allocation and utilization, correctly used as
significant value to management. They reported that over 92% of the 150 companies in
North America allocated and utilized budget and remarked budget process as the top
among the top activity expected from management. In same view, in roundtable
discussion organized by CIMA and ICAEW in 2004 on “The traditional role of budgeting
process in organization”, it is stated that budgeting and the accompanying process are
indispensable and that , research in organizations seems to suggest that this is a
commonly held view. It was further stated that, traditional budget process remains
widespread. Some claim that as many as 99% of European companies have budget in
place and no intention to abandon it .Kennedy and Dugdate (1999), cited in CIMA-
ICAEW, 2004)
However, empirical evidence from Nigeria showed that from country other than the
developed ones on the value of budget allocation and utilization. The study conclude that

29
most companies in Nigeria operate annually, there confirming its widespread use. We can
also conclude that budget allocation and utilization is avertable part of budget process. It
is recommended that effort through research should be directed towards improving the
Budget allocation and utilization rather than calling for its total abandonment.

30
 CHAPTER THREE
3. RESEARCH METHOD AND METHODOLOGY
3.1 The Research Design
This study will a descriptive design. According to (Ngechu, 2004) it is appropriate where
the study seeks to describe the characteristics of certain groups, estimate the proportion of
people who have certain characteristics and make predictions. Accordingly, to achieve of
objective of the study the researcher will use descriptive design type of research will be
conducted. Because, descriptive studies are non- experimental researches that describe
the characteristics of particular individual or group. In other words, the research is
designed in order to describe the system of budget allocation and utilization on chiro
TVET College.

3.2. Type of Data and Sources

Primary data are those data that are gathered for a specific purpose or for a specific
research project by effort of researchers. Primary data are more accurate and reliable
compared to secondary data (Ngechu, 2004).
The main source of the study will both primary and secondary data source. Primary data
will collecte through questionnaires, while secondary data will collecte from financial
reports and budget document.

3.3 Method of Data Collection

In the data collection process different data collection method will be used in the study,
according to the source of data that will collected to conduct the research. The primary
data will collected through questionnaires of mix type/ closed and open ended questions
are provided to employees and the secondary data will also collect from financial reports
and budget document.

3.4 The Sampling Technique

The sampling techniques used for the study will be non-probability sampling techniques
particular judgmental sampling techniques. This technique of sampling will selected,
because it enables to select individuals who are believed to have sufficient knowledge

31
and familiar with that task, as well as to get accurate and sufficient information, and it is
less costly, less time consuming, more representative and simple to draw samples.

3.5 Sample Size

ChiroTVET College has 73 total populations. From 73 employees of TVET College 10
employees will select as sample size by using judgmental sampling technique. Researcher
will selecte this 10 samples because they are currently working in the TVET budget
related activities.

Total population=73 in TVET College

Then, sample size =10 in TVET finance office
Sampling method= judgmental sampling

3.6 Method of Data Analysis and Presentation

After the relevant data will gather through primary and secondary sources analyzed by
using both qualitative and quantitative data procedure and the data are represented by
using simple d

32
CHAPTER FOUR

4.1. Time Schedule

NO Activities May June July August

1 Selection of title
2 Surveying available
literature
3 Writing of proposal
4 Collection of data
5 Analysis and
interpretation
6 Writing of research
7 Submission and
presentation of final
essay

33
 4.2 Budget Schedule

No Material requirements Unit Unit cost Total cost

1 Pen 10 10birr 100birr
2 Paper 1packs 200birr 200birr
3 Pencil 1 10birr 10birr
4 USB memory[16gb] 1 300birr 300birr
5 Transportation 5times 40birr 200birr
6 Internet usage 5times 20birr 100birr
7 Telephone call 10times 10birr 100birr
8 Printing and bending cost 100birr
8 Miscellaneous expenses 400birr
Total 1510birr

34
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