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MFM/ MMM/ MHRDM/ MIM

Batch 2019 - 2022
Project Submission

Cost and Management Accounting

Title of the project: ​Budgeting and Budgetary Control

​ ww.myaccountingcourse.com |
The source of information (books, journal, websites etc.) - w
www.accountingnotes.net ​| ​www.accountlearning.com | w ​ ww.yourarticlelibrary.com |
www.accountingtools.com

Details of the students –

Topic covered by each group

Roll No. Name of the student
member
Theories and Evaluation, Case
80 (Group Leader) Urvisha Patel
study
75 Aditya Mehta Review of Literature
95 Sonali Sinha Case study
104 Akshay Darji Significance
15 Akshay Valanju Introduction and Conclusion
84 Sagar Patil Problems and solutions

Remarks from CR / SR

Submitted to,
Prof. Pranita Waghmare

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INDEX

Chapter Number Chapter Name Page no.

1 Introduction 3-4

2 Significance of Budgeting 5-7

and Budgetary Control

3 Review of Literature 8-13

4 Theories and Evaluation 14-25

5 Problems and Solutions 26-32

6 Case Study 33-40

7 Conclusion 41-44

8 Bibliography 45

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Chapter – 1

Introduction

Meaning

Budget:​ A budget is a formal statement of estimated income and expenses based on future plans
and objectives. In other words, a budget is a document that management makes to estimate the
revenues and expenses for an upcoming period based on their goals for the business.

OR

Budgetary control​ is the process of preparation of budgets for various activities and comparing
the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus
budget is a means and budgetary control is the end result. Budgetary control is a continuous
process which helps in planning and coordination. It also provides a method of control.

OR

Budgetary control​ is the process by which budgets are prepared for the future period and are
compared with the actual performance for finding out variances, if any. The comparison of
budgeted figures with actual figures will help the management to find out variances and take
corrective actions without any delay.

Definition

Kenneth Boyd’s​ definition of Budget: In cost accounting, a budget is a financial plan that
includes both financial and non-financial information. Its most obvious features are a projection
of revenue (how much you anticipate selling) and expenses (how much you anticipate spending).
The budget can also contain non-financial information, such as how many employees you think
you need.

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OR

Koontz and O’ Donnell’s​ definition of ​Budget​: Budgets are statements of anticipated results, in
Financial terms as in revenue and expense and capital budgets or in non- financial terms as in
budgets of direct labour-hours, materials, physical sales volume, on units of production.

OR

Brown and Howard’s​ definition of ​Budgetary control:​ It is a system of controlling costs which
includes the preparation of budgets, coordinating the departments and establishing
responsibilities, comparing actual performance with the budgeted and acting upon results to
achieve maximum profitability.

J. Batty’s​ definition of ​Budgetary control:​ A system which uses budgets as a means of

planning and controlling all aspects of producing and/or selling commodities and services.

Wheldon​ characterizes ​budgetary control​ as planning in advance of the various functions of a

business so that the business as a whole is controlled.

Steven Bragg’s​ definition of ​Budgetary control:​ Budgetary control is a system of procedures

used to ensure that an organization's actual revenues and expenditures adhere closely to its
financial plan. The system typically involves setting personal goals for managers that are based
on the budget, along with a set of rewards that are triggered when the goals are attained. In
addition, budget versus actual reports are routinely issued to anyone having responsibility for a
line item in the financial statements; they are then expected to take action to correct any
unfavorable variances. Further, the results of the business are closely monitored by a budget
committee, which provides feedback to managers whenever actual results threaten to fall below
expectations.

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Chapter – 2

Significance of Budgeting and Budgetary Control

Significance of Budgeting and Budgetary Control

A budgetary control is a mechanism that helps senior managers ensure that spending limits are
adequate. This control is important because spending excesses have an unfavorable impact on
corporate profits.
a. Needs of budgeting and budgetary control
1. It is a plan expressed in monetary terms but it can also contain physical units.
2. It is prepared prior to a defined period of time (budget period) during which it will
operate.
3. It is related to a definite future period.
4. It is approved by the management for implementation.
5. It usually shows the planned income to be generated and expenditure to be incurred.
6. It also shows capital to be employed during the period and
7. It is prepared for the purpose of implementing the policy formulated by the management
and the objective to be achieved during the period.
b. Importance of budgeting and budgetary control
1. Definite planning​:​Budgets are based on the well-defined plans. Budgets enable the
different heads to know what is expected of them.They know the amount that they are
entitled to spend and the income they are expected to earn. Thus, budgeting introduces an
element of definiteness in planning.
2. Enhanced efficiency:​Budgeting is an effective way of controlling costs and eliminating
wastage. It promotes economy and efficiency.
3. Proper communication:​Budgets are constructed taking into consideration feedback
information supplied by lower levels of management. Every department frames its own

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budget in consultation with the departmental staff. Thus, it makes two-way

communication in the organisation.
4. Control:​Budgets make management by exception possible. The comparison of actual
and budgeted performance will show up weak spots where management attention is
needed the most. Thus, budgeting is an important technique of control.
5. Co-ordination:​It promotes co-ordination between different departments or divisions of
the enterprise. It facilitates centralised regulation of diversified operations. The budget
committee acts as a coordinator of production, sales and other departments.
6. Delegation of authority:​Budgeting encourages delegation of authority. It fixes the limits
within which delegated authority can be used. Subordinates and executives can exercise
initiative and judgment within the budgetary limits.
7. Motivation:​Budgets act as a strong incentive to employees by fixing targets of
performance.
8. Maximisation of profit:​It aims at the maximisation of profit of the enterprise. To
achieve this aim planning and co- ordination of different functions is undertaken. There is
control over costs, revenue and capital expenditures. The resources are put to optimum
use.
9. Forecasting credit needs:​The budgets of cash expenditure and cash receipts make it
possible for the financial manager to forecast their need for credit and arrange for it in
advance.
10. Uniform policy:​The centralisation of budgetary control over all divisions and
departments help in carrying out a uniform policy without the disadvantages of an
authoritarian type of business organisation.
​c. ​Factors
1. Sales volume​: This key factor may limit the volume of sales and makes further expansion
of sales because of the restricted demand in the market or limited efforts for sales
promotion.
2. Management policy​: This might be a key factor because of deficiency of capable
managers or limited funds at the disposal of executives.

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3. Materials​: This may be the limiting factor on account of inadequate availability of

supply.
4. Labor​: This may be the key factor because there might be a dearth of workers in general
or in certain grades. It is, therefore, necessary to consider what possible key factors may
influence the business operation before preparing the budgets.

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Chapter – 3

Review of Literature

Research Title 1: ​Budgeting and Budgeting Control

Abstract:

Operational management needs to know the causes of off-standard performance in order to

improve operations. The knowledge of variances (real result versus budget) will aid control, at
least if and when these variances are understood well enough. The only criterion for the
calculation of a variance is its usefulness. Of course variances must be calculated immediately
after the event and one should act upon them adequately.

Budget processes in many cases actually exemplify what is harming companies instead of
helping them. Jensen, 2001, describes what is happening in practice
(http://ssrn.com/abstract=267651). Measuring performance, by whether or not achieving set
targets for the period or missing them, is ridiculous. Budgets and targets mean nothing without
thorough detailed budgetary control; how should it be conducted?

Variance analysis, the way it is taught at many schools and universities, in accordance with a
wide variety of textbooks, is put to the test. This paper presents a few examples, with quotes
from various textbooks and examinations. Problem definitions are quoted literally. Working-outs
as explained by famous writers/lecturers/consultants are given where necessary and otherwise
they are available at the quoted places in literature. The author's opinion is that these
working-outs cannot stand the test. Anyway my opinion is not important, the reader decides. I
give my elaboration in full detail, in reaction to the corresponding working-out published in
well-known textbooks/examination papers, and may the best one prevail. Of course the
elaborations of others and myself have a lot in common, but the discrepancies are at stake.

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Wrong, incomplete, unclear analyses will lead to mismanagement. In literature a so-called Dutch
method is advocated versus what is supposed to be the American way to handle variance analysis
i.e. solving the problem of budgeting and budgetary control. The author's opinion is that only one
calculating method can be the right one. Only the best integral working-out is the essential base
to better (operational) management.

Of course variance analysis is but a means to an end. A deeper understanding of the state of the
company is the ultimate goal of all representations in budgeting and budgetary control.
Management's task is to find the reasons for the variances and to take proper action to bring
operations into line with the budget. Maybe the variances and trends indicate that the standards
need amendment.

A strategic investment proposal is also a budget. The realised results ex post (not just future cash
flows resulting out of an investment today), should be analysed in full detail
(http://ssrn.com/abstract=366561).

Keywords: Budgeting, Budgets, Control Systems, Performance Measurement, Monitoring,

Evaluating, Motivation, Productivity, Accounting Irregularities, Cooking the Books, Managing
the Numbers, Strategic Investments, Accounting Systems, the New IASB Rules

Citation:

Jacobs, Jan F., Budgeting and Budgetary Control (April 29, 2003). Available at SSRN:
https://ssrn.com/abstract=400120​ or ​http://dx.doi.org/10.2139/ssrn.400120

Research Paper 2: ​A Systematic Review of Budgeting and Budgetary Control

in Government Owned Organizations
Abstract:

Budgeting and budgetary control entails the establishment of goals by the management of an
organization and designing a process which serves as a framework within which an organization
effectively articulates overall planned activities. The quantification of these planned activities in

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financial terms is known as budgeting, while the establishment of an effective mechanism to

guarantee desired result is known as budgetary control. This study therefore seeks to undertake a
systematic review of budgeting and budgetary control in Government owned organizations and
given the importance of the foregoing, attention was focused on the Nigerian National petroleum
Cooperation (NNPC). To achieve the objective of the study, primary data were obtained through
the use of a well structured questionnaire administered to the respondents, while the secondary
data were obtained from the annual financial statements, files, memos, tax laws and gazette of
the NNPC. The findings revealed that a necessary and sufficient condition for achieving effective
budgeting and budgetary control is the involvement of all relevant stakeholders in the
preparation of the budget, given the established processes in government circles, while
emphasizing a deliberate and faithful implementation, by all responsible officers. This rests on
the existence of a mental picture of the present state of affairs, vis-a-vis the future expected state
of affairs, within the organization. It therefore recommended that since budgeting and budgetary
control contributes to management efficiency and high productivity of an organization, all
relevant stakeholders must be involved in the budget process, from preparation to
implementation, in other to guarantee overall goal attainment. Keywords: Budgeting, Budgetary
Control, Effective, Efficient, Management, Performance.

Citation:

Lambe Isaac, Mary Lawal and Theresa Okoli

Isaac, L., Lawal, M., & Okoli, T. (2015). A Systematic Review of Budgeting and Budgetary
Control in Government Owned Organizations. Published 2015. Economics

Research Title 3: ​BUDGETARY CONTROL AND ORGANIZATIONAL

PERFORMANCE

Abstract:

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The purpose of the study was to carry out a preliminary investigation on budgetary control and
organizational performance. It also set out the measure of performance on the organizational and
determined the inhibiting factors that affect the use of budgetary controls. In this project,
International Breweries was chosen as a case study. The objective was to evaluate the impact of
budgeting control in organizations performance, evaluate factors inhibiting effective budgetary
control in an organization among others. Data used for the research was collected through well
structured questionnaire using simple random sampling for selecting respondents. Analysis of
data was done using frequency percentage and chi-square. Findings from this study revealed that
budgets and budgetary controls are factors that can influence the performance of an organization,
as they have a very mutual relationship. Concerning how budgets are linked to performance,
budgets and budgetary controls mainly form and give every organization the structural support to
achieve its goals and objectives, and maximizing performance, through resource allocation and
control. Recommendations were then made that all organization must prepare budget and put in
place budget control since it has a great impact on organization performance. Also budget
control should be made mechanism for resource and control and it should be linked at all times
to overall corporate strategies and goals.

Citation:

Balogun, A. Ph.D, Mamidu, A.I. & Dr. Owuze, C.A. 1Department Banking and Finance,
Achievers University, Owo, Nigeria 2Department of Accounting, Achievers University, Owo,
Nigeria 3Department of Business Administration, Ambrose Alli University, Ekpoma, Nigeria

Journal of Educational Research in Natural and Social Sciences (JERNASS) Vol 1, No.1, 2015

Research Title 4: ​Reliance on budgetary control, manufacturing process

automation and production subunit performance

Abstract:

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The degree to which reliance can be placed on budgetary control in the assessment of production
subunit performance, particularly with the advent of manufacturing process automation
involving, for example, robots and CAD/CAM, is problematic. While budget-based control
systems are extensively employed in organizations, such usage does not provide clear evidence
of their utility as performance enhancement vehicles as advances are made in the automation of
manufacturing processes. The purpose of this paper is to report the results of a study which
examines the effect of automation on the link between reliance on budgetary control and
production subunit performance. The findings suggest that manufacturing process automation
moderates the relation between reliance on budgetary control and departmental performance. As
such, firms may benefit from a reliance on budgetary control in the evaluation of production
subunit performance as manufacturing processes become more automated.

Citation:

Alan S.Dunk

University of Western Sydney, Nepean, Australia

Available online 20 May 2002.

https://doi.org/10.1016/0361-3682(92)90020-S

Research Title 5: ​The development of budgetary control in Sweden

Abstract:

This paper deals with the development of budgetary control in Swedish industry since World
War II. We point to the different factors that historically have influenced the design and use of
budgetary control and end up with a discussion of current developments. Here we comment on
current changes in organizational structure and their impacts on the role of budgetary control.
Another current issue is the separation between management and operational control and its
effects on the design of the budgetary control system. Finally we discuss a changing balance

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between the use of systems and more informal ways of influencing people's actions and
decisions.

Citation:

OlofArwidiLars A.Samuelson

University of Lund, Sweden and Stockholm School of Economics, Box 6501, S-113 83
Stockholm.

Available online 25 May 2002.

https://doi.org/10.1006/mare.1993.1007

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Chapter – 4

Theories and Evaluations

Budget:
A budget is a formal quantitative expression of management plans.
Budgets can be made by managers at any level including a single person managing a machine or
operating a machine. In the context of business, the budget may have revenue, expenses and
profits, all in a single statement. But one can think of a budget for revenues alone, budget for
expenses alone.

Budgetary control methods

a)​ Budget:

· A formal statement of the financial resources set aside for carrying out specific activities in a
given period of time.

· It helps to coordinate the activities of the organization.

An example would be an advertising budget or sales force budget.

b) Budgetary control:

· A control technique whereby actual results are compared with budgets.

· Any differences (variances) are made the responsibility of key individuals who can either
exercise control action or revise the original budgets.

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Budgetary control and responsibility centers;

These enable managers to monitor organizational functions.

A responsibility center​ can be defined as any functional unit headed by a manager who is
responsible for the activities of that unit.

There are four types of responsibility ​Centre’s:​

a) ​Revenue Centre’s

Organizational units in which outputs are measured in monetary terms but are not directly
compared to input costs.

b) ​Expense Centre’s

Units where inputs are measured in monetary terms but outputs are not.

c) ​Profit Centre’s

Where performance is measured by the difference between revenues (outputs) and expenditure
(inputs). Inter-departmental sales are often made using "transfer prices".

d) ​Investment Centre’s

Where outputs are compared with the assets employed in producing them, i.e. ROI.

Advantages of budgeting and budgetary control

There are a number of advantages to budgeting and budgetary control:

· Compels management to think about the future, which is probably the most important feature of
a budgetary planning and control system. Forces management to look ahead, to set out detailed
plans for achieving the targets for each department, operation and (ideally) each manager, to
anticipate and give the organization purpose and direction.

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· Promotes coordination and communication.

· Clearly defines areas of responsibility. Requires managers of budget centres to be made

responsible for the achievement of budget targets for the operations under their personal control.

· Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick
against which actual performance is measured and assessed. Control is provided by comparisons
of actual results against budget plan. Departures from budget can then be investigated and the
reasons for the differences can be divided into controllable and non-controllable factors.

· Enables remedial action to be taken as variances emerge.

· Motivates employees by participating in the setting of budgets.

· Improves the allocation of scarce resources.

· Economizes management time by using the management by exception principle.

Problems in budgeting

Whilst budgets may be an essential part of any marketing activity they do have a number of
disadvantages, particularly in perception terms.

· Budgets can be seen as pressure devices imposed by management, thus resulting in:
a) bad labor relations
b) inaccurate record-keeping.

· Departmental conflict arises due to:

a) disputes over resource allocation

b) departments blaming each other if targets are not attained.

· It is difficult to reconcile personal/individual and corporate goals.

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· Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is
often coupled with "empire building" in order to enhance the prestige of a department.

Responsibility versus controlling, i.e. some costs are under the influence of more than one
person, e.g. power costs.

· Managers may overestimate costs so that they will not be blamed in the future should they
overspend.

Characteristics of a budget

A good budget is characterized by the following:

· Participation: involve as many people as possible in drawing up a budget.

· Comprehensiveness: embrace the whole organization.
· Standards: base it on established standards of performance.
· Flexibility: allow for changing circumstances.
· Feedback: constantly monitor performance.
· Analysis of costs and revenues: this can be done on the basis of product lines, departments or
cost centre’s.

Budget organization and administration:

In organizing and administering a budget system the following characteristics may apply:

a) ​Budget centres:​ Units responsible for the preparation of budgets. A budget centre may
encompass several cost centres.

b) ​Budget committee:​ This may consist of senior members of the organisation, e.g. departmental
heads and executives (with the managing director as chairman). Every part of the organisation
should be represented on the committee, so there should be a representative from sales,
production, marketing and so on. Functions of the budget committee include:

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· Coordination of the preparation of budgets, including the issue of a manual

· Issuing of timetables for preparation of budgets
· Provision of information to assist budget preparations
· Comparison of actual results with budget and investigation of variances.

c) ​Budget Officer:​ Controls the budget administration The job involves:

· liaising between the budget committee and managers responsible for budget preparation
· dealing with budgetary control problems
· ensuring that deadlines are met
· educating people about budgetary control.

d) ​Budget manual:

This document:

· charts the organisation

· details the budget procedures
· contains account codes for items of expenditure and revenue
· timetables the process
· clearly defines the responsibility of persons involved in the budgeting system.

Budget preparation

Firstly, determine the principal budget factor. This is also known as the key budget factor or
limiting budget factor and is the factor which will limit the activities of an undertaking. This
limits output, e.g. sales, material or labour.

a) Sales budget: this involves a realistic sales forecast. This is prepared in units of each product
and also in sales value. Methods of sales forecasting include:

· sales force opinions

· market research

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· statistical methods (correlation analysis and examination of trends)

· mathematical models.

In using these techniques consider:

· company's pricing policy

· general economic and political conditions
· changes in the population
· competition
· consumers' income and tastes
· advertising and other sales promotion techniques
· after sales service
· credit terms offered.

b) Production budget: expressed in quantitative terms only and is geared to the sales budget. The
production manager's duties include:

· analysis of plant utilisation

· work-in-progress budgets.

If requirements exceed capacity he may:

· subcontract
· plan for overtime
· introduce shift work
· hire or buy additional machinery
· The materials purchases budget's both quantitative and financial.

c) Raw materials and purchasing budget:

· The materials usage budget is in quantities.

· The materials purchases budget is both quantitative and financial.

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Factors influencing a) and b) include:

· production requirements
· planning stock levels
· storage space
· trends of material prices.

d) Labour budget: is both quantitative and financial. This is influenced by:

· production requirements
· man-hours available
· grades of labour required
· wage rates (union agreements)
· the need for incentives.

e) Cash budget: a cash plan for a defined period of time. It summaries monthly receipts and
payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses are:

· to maintain control over a firm's cash requirements, e.g. stock and debtors

· to enable a firm to take precautionary measures and arrange in advance for investment and loan
facilities whenever cash surpluses or deficits arises

· to show the feasibility of management's plans in cash terms

· to illustrate the financial impact of changes in management policy, e.g. change of credit terms
offered to customers.

Receipts of cash may come from one of the following:

· cash sales
· payments by debtors
· the sale of fixed assets

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· the issue of new shares

· the receipt of interest and dividends from investments.

Payments of cash may be for one or more of the following:

· purchase of stocks
· payments of wages or other expenses
· purchase of capital items
· payment of interest, dividends or taxation.

Steps in preparing a cash budget

i) ​Step 1:​ set out a pro forma cash budget month by month. Below is a suggested layout.

Mont Mont Month

h1 h2 3

Rs Rs Rs

Cash receipts

Receipts from debtors

Sales of capital items

Loans received

Proceeds from share

issues

Any other cash receipts

Cash payments

Payments to creditors

Wages and salaries

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Loan repayments

Capital expenditure

Taxation

Dividends

Any other cash

expenditure

Receipts less payments

Opening cash balance b/f W X Y

Closing cash balance c/f X Y Z

ii) ​Step 2:​ sort out cash receipts from debtors

iii) ​Step 3​: other income

iv) ​Step 4:​ sort out cash payments to suppliers

v) ​Step 5:​ establish other cash payments in the month

Master Budget:
Master budget for a big organization summarizes the goals of all subunits of an organization -
either business divisions if the company is organized along divisional lines or managerial
functions if the company is organized along functional lines.
The master budget consists of expected or projected income statements, balance sheets, and a
cash flow statement, along with supporting schedules.
Benefits of Budgeting or Imperative for Budgeting
The advocates of budgeting state that the process of preparing budget forces executives to
become better managers. Budgeting schedule of a company puts planning where it belongs - in
the forefront of every manager's mind. It also forces him to review his performance in the last

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period and identify good practices that enhanced performance and issues that contributed
negatively to performance.
The formal budgeting system has the following major benefits.
1. Budgeting due to its formal time table or schedule compels managers to think ahead apart
from taking care of their current activities.
2. Budgeting, due to its approval and authorization by the superiors, provides definite
expectations that are the best framework for judging subsequent performance.
3. Budgeting helps in coordinating the various departments of the organization. The budget
harmonizes the goals (objectives) of the individual departments into the organization wide goals
(objectives).
Budgetary control at department level is encouraging department level personnel to plan their
operations for the forthcoming period. Both outputs and inputs are to be planned. If possible
outputs and inputs are converted into revenues and costs.

The accounting system of the company will prepare the actual revenues and costs generated at
the end of the period as well as during the period. The department managers have the
responsibility to carry out the day to day activities to achieve the best possible results with their
plan/budget as the guiding document.

Budgets can be made flexible so that cost estimates are in relation to the output produced.

Variance analysis can be done to pinpoint the variables that changed during the period and their
effect on actual results.

Budgetary control system facilitates participation of department managers as well as senior level
managers in explicitly planning for the future. The plan can be optimized with various
optimization techniques.

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These techniques include linear programming (for product mix problems), transportation (for
planning transport of finished goods) and assignment (assigning machines for jobs or operators
for jobs) and other operations research techniques. A formal budgeting system can question the
department managers on whether they have applied the optimization techniques or not and where
necessary advise them to use those techniques and provide specialist support in cases where
necessary.

OPERATING FINANCIAL
BUDGET BUDGET

consists of :- consists of

Budget P/L acc: get: Cash budget

Production budget Balance sheet

Materials budget Funds statement

Labour budget

Admin. budget

Stocks budget

f) Other budgets:

These include budgets for:

· administration
· research and development
· selling and distribution expenses
· capital expenditures
· working capital (debtors and creditors).

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References
Horngren, Charles, T., Gary L. Sundem, and William O. Stratton, Introduction to Management
Accounting, 13th Ed., Prentice Hall, 1999.
http://www.fao.org/3/w4343e/w4343e05.htm

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Chapter – 5

Problems and Solutions

Illustration 1:
1) A company recently starting manufacturing operations on 1st January 2010 has made
adequate arrangements for funds required for fixed assets. It wants you to prepare an estimate of
funds required as working capital. It is to be remembered that:

(a) In the first month there will be no sale, in the subsequent month sale will be 25% cash and
75% credit. Customers will be allowed one month credit.

(b) Payments for purchase of raw materials will be made on one month credit basic.

(c) Wages will be paid fortnightly on the 22nd and 7th of each month.

(d) Other expenses will be paid one month in arrear except that 5% of selling expenses are to be
paid immediately on sale being affected. The estimated sales and expenses for the first six
months, spread evenly over the period subject to

(a) above are us under

RS. RS.
Sale 360000 Administrative Expenses 54000
Material Consumed 150000 Selling Expenses 42000
Wages 60000 Depreciation on fixed assets 50000

The article produced is subject to excise duty equal to 10% of the selling price. The duty is
payable on March 31, June 30, September 30, and December 31 for sales up to February 28, May
31, August 31and November 30 respectively

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Prepare cash Budget for each of the six months indicating the requirement of the working
capital

Solution:

​Cash Budget

​For the six-month ended on June 30, 2010

Particular January Rs. February Rs. March April May Rs. June Rs.
Rs. Rs.
Receipts: -
Opening Balance - (-) 7500 (-) 45000 (-) 39200 (-) 26200 (-) 13200
Cash Sales - 18000 18000 18000 18000 18000
Receipts From customer - - 54000 54000 54000 54000
Cash Available (A) 10500 27000 32800 45800 58800
Payment:
Wages 7500 10000 10000 10000 10000 10000
Materials - 25000 25000 25000 25000 25000
Manufacturing Exp. - 8000 8000 8000 8000 8000
Administrative Exp. - 9000 9000 9000 9000 9000
Selling Exp. - 3500 7000 7000 7000 7000
Excise Duty - - 7200 - - 21600
Total Payment (B) 7500 55,500 66200 59000 59000 80600
Closing Balance (A-B) (-) 7500 (-) 45000 (-) 39200 (-) 26200 (-)13200 (-) 21800
Note: The Company Needs overdraft facility to the extent indicated above for every month​.

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Illustration 2:

A Glass Manufacturing Company requires you to calculate and present the budget for the next
year from the following information.

Sale:

Toughened glass Rs. 300000

Bent toughened glass Rs. 500000
Direct material Cost 60% of sales
Direct Wages 20 Workers @ Rs 150 per month
Store and spares 2.5% on Sales
Depreciation on Machinery Rs. 12600
Light and Power Rs. 5000

Factory Overhead:

Indirect Labour: Works Manager Rs. 500 per month

Foreman Rs. 400 per month

Repairs and maintenance 10% on direct wages

Administration, selling and distribution expenses Rs. 14000 per year.

Solution:

Master Budget

For the Period ending on…..

Particular RS. Rs. Rs.

Sales (As per budget)

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Toughened Glass .. Units @ Rs. 300000

Bent Toughened glass .. Units @ Rs. 500000 800000
Less: Cost of Production (as per of
production Budget)
Direct Materials .. Units @ Rs. 480000
Direct Wages 36000
Prime Cost 516000
Factory Overhead:
Variable: Stores & Spares (2.5%of sales) 20000
Light & Power 5000
Repair & Maintenance 8000 33000
Fixed: Work Manager Salary 6000
Forman Salary 4800
Depreciation 12600
Sundries 3600 27000
Work Cost 576000
Gross Profit 224000
Less: Administration, Selling & Distribution 14000
O/H
210000

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Illustration 3:

Prepare a flexible budget for production at 80% and 100% activity on the basis of the following
information:

Production of 50% capacity 5000 Units

Raw Material Rs.80 Per Unit
Direct Labour Rs. 50 Per Unit
Expenses Rs. 15 Per Unit
Factory Expenses Rs. 50000 (50% fixed)
Administration Expenses Rs. 60,000 (60% variable)

Solution:

Flexible Budget

Sr Particular Activity
No. 80% (8000 100% (10000
Units) Units)
Rs. Rs.
A Fixed Expenses
Fixed factory expenses (50% of Rs. 50,000 25000 25000
Fixed Administrative expenses (40% of Rs. 60,000 24000 24000
Total 49000 49000
B Variable Expenses
Material @ 80 Per Unit 640000 800000
Labour @ 50 Per Unit 400000 500000
Expenses @ 15 Per Unit 120000 150000

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Factory Expenses @ 5 Per Unit 40000 50000

Administrative Expenses @ 4.80 Per Unit 57000 72000
Total 1306600 1572000
Total A+B 1355600 1621000
Calculation of Factory Expenses per Unit (Total – Fixed)

Rs. 50,000 -25,000 = ​25,000 ​=@ 5 Per Unit

5,00
Calculation of Administrative Expenses per unit
Rs.60,000 * 60%=​36,000​=@ 7.20 Per Unit
5,00

Illustration 4:
The following information is abstracted form the books of Mahalaxmi Co. Ltd., for the six
months of 2010 in respect of products XX.
The following units are to be sold in different months of the year 2010.
January 2200
February 2200
March 3400
April 3800
May 5000
June 4600
July 4000

There will be work in progress at the end of the month. Finished units are equal to half the sales
of the next month's stock at the end of every month ( including December, 2009). Budgeted
production and production cost for the half-year ending 30th June, 2010 are as follows:

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Production (Units) 40000

Direct material per unit Rs.5
Direct Wages per unit Rs.2
Factory Overheads apportioned to production Rs. 160000
You are required to prepare the product Budget and production Cost Budget for the six months
of the year 2010.

Solution:
Production Budget (in Units)
January February March April May June Total
Estimated Sales 2200 2200 3400 3800 5000 4600
Add: Closing Stock 1100 1700 1900 2500 2300 2000
3300 3900 5300 6300 7300 6600
Less: Opening stock 1100 1100 1700 1900 2500 2300
Production 2200 2800 3600 4400 4800 4300 22100

Production cost of Budget

(Production: 22,100
Units) Rs.
Direct Material @ Rs. 5 for 22,100 units 1,10,500
Direct Wages @ Rs. 2 for 22,100 units 44,200
Factory Overheads @ Rs. 4 for 22,100 units (Rs. 1,60,000/40,000 units) 88,400
Total Production Cost 2,43,100

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Chapter – 6

Case Study

Case Study 1 | ​Budgeting, Budgetary Control and Performance Evaluation: A

Case Study of Allterrain Service Group (ATS)
Abstract: Budget as a profit planning device sets standard of performance of managers, while
budgetary control is a tool implored by management to keep track of actual performance to
ensure budgeted standards are met. In the course of this research work 44 workers at various
managerial levels were taken as sample population. A well designed questionnaire was used to
obtain data through personal interview and administration of the questionnaires, both qualitative
and quantitative methods were used in analysing the data collected, a secondary data source was
also used. This research was work conducted with special reference to Budgeting, Budgetary
Control and Performance Evaluation system of Allterrain Services Group with the view to
ascertain the role that the budget plays in the company and how the key actors of the budget
engage its uses in their daily operational activities.
Introduction
Budgetary control as a proven management tool (Chandler, 1990) helps organization
management, enhances improved performance of any economy in different ways. Its primary
function is to serve as a guide in financial planning operation; it also establishes limits for
departmental excesses. It helps administrative officials to make careful analysis of all existing
operations, thereby justifying, expanding, eliminating or restricting present practice (Musselman
and Hughes, 1981).
Problem Statement
This research therefore is set out to investigate factors contributing to budgetary ineffectiveness.
The study examines the budgeting, budgetary control and performance at ATS which gives rise
to the following questions:
i. How is the budgeting participatory process at ATS?
ii. ii. Do managers neither understand the principles underlying the budget nor
understand the importance of budgeting and budgetary control in relation to their
projects.
iii. iii. What are the manager‟s approaches to information requested to address their
budget challenges.

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iv. iv. How do the project managers link their daily operational costing to the benchmark
set in the budget?
v. v. How do managers factor the addendum in relation to changes in scope of work to
the budget?
​The Concept of Budgeting and Budgetary Control:
The end result of this planning is to minimize cost and maximize profit, which is also a
benchmark for judging management performance profit planning in the short term, which is
generally carved out of an agreed or signed-off budget.
Reynolds also listed the outcome of the reliability to establish and use a formal budget structure
as follows:
i. Lost sales due to under production
ii. Excessive inventory costs due to over productions.
iii. Excessive personnel turnover.
iv. General lack of control over the outcome of business operations in terms of profit.
Budget Classification in this case study:

ATS Budget Manual:

¬ there is no laid down budget cycle.
¬ the need to clarify the roles and responsibilities of the principal actors in the budget review
process.
¬ to improve finance effectiveness and efficiency.
Budget Cycle - 'Finding Time':
It is important for the budget to operate and put budget into place before the beginning of a new
financial year, management should be able to know beforehand, what their expenditure will look
like in the coming year, what their income level and the underlying operating margin of the
group will be like in the coming year, thereby putting measures or making decision on the future
of the group based on the budget assumption.

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Importance of Budget and Budgetary Control:

External and Internal bodies are dependent in budget and budgetary control.
1. Corporate Governance.
2. Stakeholders
3. Debtors
4. Creditors
5. Board Members
6. Higher Management Authority
7. Staffs and workers
8. Bankers

Budget Process – ATS:

Budget Review :
In this Company Budget review has done monthly, quarterly, yearly.
Higher Management observes variances between budget plan and actual accomplished work.
In below we mentioned scope of variances:
If the cost (cost of goods sold) of a product is higher than budgeted cost then sales price will be
increased and total sales will be decreased.
Management will look over Fixed and Variance cost price of production.
Why Compare Actual and Budget?
If the difference is huge in percentage or amount with budget and actual then budgetary control
takes place. Otherwise the organisation will face loss in future. It will be detrimental in
organisational operation structure.

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In light of that, ATS may appoint a budget controller to coordinate the budgetary activities and
the budgeting team which should consist of representatives of each project for various activities
within this organization. The task of the team can be considered under the following headings:​T

Case Study 2 | ​APPLICATION OF BUDGETS AND BUDGETARY

CONTROL MEASURES IN A NON-PROFIT ORGANIZATION: A CASE
STUDY OF CATHOLIC CHURCH, DELTA

Budgetary control systems according to Wagh and Gadade (2013) are a control system that
motivates as well as monitor the activities and personnel, as they perform all the financial and
curricular activities in a patterned and systematic manner. Budgeting and budgetary control
occupy an important place among techniques used in planning and control functions of an
organization (Kipkembo, 2013). Budgetary control as important management tool propels
organizations and enhances improved performance of the economy in a variety of ways (Baiman
and Evans, 1983). It also assists administrative officials to make a careful and reasonable
analysis of all existing operations, thereby justifying expanding, eliminating, restricting or
diversifying the present practice (Fisher et al. 2000). For Steven (2000) budgetary and control
entail a different pattern of decisions in an organization which is capable of determining its
objectives, purposes, goals and how these goals are achieved by establishing principle policies
and plans. On the other hand, budgets are management tools that put managers in control of the
financial health of their company (Manso, 2014). Piercel (2004) stated that limited resources call
for the need to plan and exercise control over their use and that budgets are the most effective

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way of corporate planning and control. The aim of this long paper, therefore, is to evaluate
budgetary and budgetary control practices in educational organizations as a way to assess the
effectiveness of budgeting decisions.
The traceability of the origin of the concept of a budget, budgeting, and budgetary control goes
back to the Bible time, particularly the days of Joseph in Egypt. Bible records report that nothing
was given out of the treasure without a written order (Ohiokha and Igbinosun 2012).
Budgeting and budgetary control in organizations are formally associated with the beginning of
industrial capitalism for the industrial revolution of the eighteenth century (Akintoye, 2008).
Jensen (2003) states that the emergence of scientific management philosophy with its emphasis
on thorough information as a basis for making decisions provided a great stimulus for the
development of management accounting and indeed budgetary techniques. However, in the early
stages of budgeting focus is on preparation and presentation of credible information to legitimize
accountability and transparency as a means to permit correct performance appraisal and
consequent rewards (Ohiokha and Igbinosun, 2012).
Budget, a short term finance planning tool of management is used to focus attention on a
company’s finance and overall operations of an organization (Jayamaha and Silva, 2012).
Howell and Sakurai (1992) define a budget as a plan of dominant individuals in an organization
expressed in monetary terms and subject to the constraints imposed by the participants and the
environment, indicating how the available resources may be utilized to achieve whatever the
dominant individuals agreed to be the organization’s priorities. This definition as noted by
Ohiokha and Igbinosun (2012) is that recognition is given to the constraint confronting budget by
other participants who are to ensure that objectives, targets, and goals stated in the budget are
actualized. A budget is a financial plan for the future that is able to identify objectives and the
actions needed to achieve those objectives (Hansen and Mowen, 2008). Smith (2007) views
budgets as a collection of plans and forecasts. As seen budgets reflect the future plan of action of
the entire organization. The Chartered Institute of Management Accounts (2000) defines a
budget as a quantitative statement for a defined period of time which may include planned
expenses, assets, revenues, and liabilities. A budget makes an organization to be objectively
focused, accelerates the coordination of activities and enhances control while control naturally is

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conducted through the comparison of actual costs with a flexible budget (Ohiokha and
Igbinosun, 2012).
For every organization, the process of preparing budgets is a means of translating the planned
objectives into detailed, workable plans of action. Garrison and Noreen (2003) suggest that
budgeting is the most reliable approach to managing if used with care and good judgment fully
recognizes the dominant role of the manager and provides a framework for implementing such
fundamental aspects of scientific management by objectives, effective communication,
continuous feedback, responsible accounting, and management flexibility.
According to Igbuzor (2005), budgeting is simply the process of preparing a budget. It refers to
the procedures and mechanisms by which the budget is prepared, implemented and monitored
(Naidoo, 2010). Preparing a good budget in today’s organizations requires a responsible
leadership. Apart from that, there must be accurate and reliable information, as well as effective
monitoring and control over the execution of the budget plan. Budgeting is the process whereby
the plans of an organization are translated into an itemized, authorized and systematic plan of
operation, expressed in monetary terms for a given period (Jensen, 2003).
1.2 Statement of the Problem
In the 21st century, organizations worldwide, both private and public, have realized the need to
restructure and revise their activities for a better quality service delivery pattern. One of the most
radically affected aspects of these organizations is the budget and budgetary control.
Recognizing the role of budget and budgetary control lending organizations leverage so much on
it, in the private sector, several departments, whose main business is the implementation and
monitoring of budgets, have been established and in the public sector where budget monitoring
and strategy implementation committees have become an integral part of the administrations.
The followings are the problems that can interrupt the system of budgetary control:

If the actual results are completely difference from the target, the budget can lose its
significance as a means of control. Whereas a fixed budget is not able to adapt to changes, a
flexible budget will recognize changes in behavior and can be amended to fall into line with

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changing activities. However this calls for checking the overall effective performance of budget
and budgetary control on management performance.

Lack of budgets in planning and control has required in the indiscriminate use of fund
meant for more viable activities. The inability of many organizations to plan and accomplished
budget goals is traceable to their inability to apply controls in their budget system.
1.3 Objectives of the Study
1. The study sought to know the application of budgets and budgetary control measures in a
nonprofit organization. Specifically, the study sought to;
1. determine the relationship between budgets and budgetary control measures and
non-profit organization.
2. examine the nature of budget and budgetary control measures of Apostolic Church Delta

3. identify the challenges that Apostolic Church, Delta faces in their budget and budgetary
control practices.

1.6 Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this
study and can also be used by non-researchers to build more on their research work. This study
contributes to knowledge and could serve as a guide for other study.
1.7 Scope/Limitations of the Study
This study is on application of budgets and budgetary control measures in a non-profit
organization. The study will be carried out at apostolic church, Delta.
Limitations of study
1. Financial constraint: Insufficient fund tends to impede the efficiency of the
researcher in sourcing for the relevant materials, literature or information and in the
process of data collection (internet, questionnaire and interview).
2. Time constraint​: The researcher will simultaneously engage in this study with
other academic work. This consequently will cut down on the time devoted for the
research work.

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1.8 Definition of Terms

budget: A ​budget is an estimation of revenue and expenses over a specified future
period of time.
Budgetary control: A system of management control in which actual income and
spending are compared with planned income and spending, so that you can see if plans
are being followed and if those plans need to be changed in order to make a profit.
Non-profit organization: is a group organized for purposes other than generating profit
and in which no part of the organization's income is distributed to its members, directors,
or officers.

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Chapter – 7

Conclusion

Understanding

The first step in budgetary control is to prepare a budget and then implement it as per the
planning. However, only preparation and implementation isn’t sufficient. There should be a
comparison made regularly between the actual performance and budgeted performance.
Continuous and proper reporting should be done. To ensure the success of a budgetary control
system, proper follow-up actions has to be taken immediately for the reports submitted.

Implementation of a Budgetary Control System: 7 Necessary Steps

The following points highlight the seven necessary steps for successful implementation of a
budgetary control system, i.e, (1) Organisation for Budgetary Control, (2) Budget Centres, (3)
Budget Manual, (4) Budget Officer, (5) Budget Committee, (6) Budget Period, and (7)
Determination of Key Factor.

Successful Implementation of a Budgetary Control System Step # 1. Organisation for

Budgetary Control:

The proper organisation is essential for the successful preparation, maintenance and
administration of budgets. A Budgetary Committee is formed which comprises the departmental
heads of various departments. All the functional heads are entrusted with the responsibility of
ensuring proper implementation of their respective departmental budgets.

Successful Implementation of a Budgetary Control System Step # 2. Budget Centres:

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A budget centre is that part of the organisation for which the budget is prepared. A budget centre
may be a department, section of a department or any other part of the department. The
establishment of budget centres is essential for covering all parts of the organisation. The budget
centres are also necessary for cost control purposes. The appraisal of performance of different
parts of the organisation becomes easy when different centres are established.

Successful Implementation of a Budgetary Control System Step # 3. Budget Manual:

A budget manual is a document which spells out the duties and also the responsibilities of the
various executives concerned with the budgets. It specifies the relations among various
functionaries.

Successful Implementation of a Budgetary Control System Step # 4. Budget Officer:

The Chief Executive who is at the top of the organisation, appoints some person as Budget
Officer, The budget officer is empowered to scrutinize the budgets prepared by different
functional heads and to make changes in them, if the situation so demands. The actual
performance of different departments is communicated to the Budget Officer.

He determines the deviations in the budgets and takes necessary steps to rectify the deficiencies,
if any. He works as a coordinator among different departments and monitors the relevant
information. He also informs the top management about the performance of different
departments. The budget officer will be able to carry out his work fully well only if he is
conversant with the working of all the departments.

Successful Implementation of a Budgetary Control System Step # 5. Budget Committee:

In small scale concerns, the accountant is made responsible for preparation and implementation
of budgets. In large scale concerns a committee known as Budget Committee is formed. The
heads of all the important departments are made members of this committee. The committee is
responsible for preparation and execution of budgets. The members of this committee put up the

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case of their respective departments and help the committee to take collective decisions, if
necessary. The Budget Officer acts as co-ordinator of this committee.

Successful Implementation of a Budgetary Control System Step # 6. Budget Period:

A budget period is the length of time for which a budget is prepared. The budget period depends
upon a number of factors. It may be different for different industries or even it may be different
in the same industry or business.

The budget period depends upon the following considerations:

(a) The type of budget i.e., sales budget, production budget, raw materials purchase budget,
capital expenditure budget. A capital expenditure budget may be for a longer period i.e., 3 to 5
years: purchase, sale budgets may be for one year.

(b) The nature of demand for the products.

(c) The timings for the availability of the finances.

(d) The economic situation of the cycles.

(e) The length of trade cycles.

All the above mentioned factors are taken into account while fixing the period of budgets.

Successful Implementation of a Budgetary Control System Step # 7. Determination of Key

Factor:

The budgets are prepared for all functional areas. These budgets are inter-dependent and
inter-related. A proper co-ordination among different budgets is necessary for making the
budgetary control a success. The constraints on some budgets may have an effect on other
budgets too. A factor which influences all other budgets is known as Key Factor or Principal
Factor.

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There may be a limitation on the quantity of goods a concern may self In this case, sales will be a
key factor and all other budgets will be prepared by keeping in view the amount of goods the
concern will be able to sell. The raw material supply may be limited; so production, sales and
cash budgets will be decided according to raw materials budget. Similarly, plant capacity may be
a key factor if the supply of other factors is easily available.

The key factor may not necessarily remain the same. The raw material supply may be limited at
one time but it may be easily available at another time. The sales may be increased by adding
more sales staff, etc. Similarly, other factors may also improve at different times. They key
factor also highlights the limitations of the enterprise. This will enable the management to
improve the working of those departments where scope for improvement exists.

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Chapter – 8

Bibliography

1. Meaning
a. myaccountingcourse.com -​ ​https://bit.ly/bud_meaning1
b. accountingnotes.net -​ ​https://bit.ly/bud_meaning2
c. accountlearning.com -​ ​https://bit.ly/budmeaning3

2. Definition
a. Dummies.com - ​https://bit.ly/Kenneth-Boyd
b. yourarticlelibrary.com - ​https://bit.ly/Koontz-Donnell​,
https://bit.ly/BrownHoward-Batty
c. accountingnotes.net -​ ​https://bit.ly/3bXS7EI
d. accountingtools.com -​ ​https://bit.ly/Steven-Bragg
3. Needs of budgeting and budgetary control - ​https://bit.ly/2RnrDod
4. Essentials and objectives of budgeting and budgetary control -​ ​https://bit.ly/3dZMxnf
5. Review of Literature
a. Research Title 1:​ ​https://bit.ly/2x3lxmc
b. Research Title 2:​ ​https://bit.ly/3aV7Xj8
c. Research Title 3:​ ​https://bit.ly/34lgIk9
d. Research Title 4:​ ​https://bit.ly/2XuSN0v
e. Research Title 5:​ ​https://bit.ly/34jdPAg
6. Theories and Evaluation -​ ​https://bit.ly/39VPbqG
7. Problems and Solutions -​ ​https://bit.ly/2yKHdnx
8. Case Study
a. Case Study 1:​ ​https://bit.ly/3aTfYFl
b. Case Study 2:​ ​https://bit.ly/2JTTsjH

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