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NEWPORT INTERNATIONAL JOURNAL OF CURRENT
RESEARCH IN HUMANITIES AND SOCIAL SCIENCES
(NIJCRHSS)
Volume 3 Issue 1 2023 Page | 5

Evaluation of Incremental Budgeting System in

Nigeria

1
Ugwu Jovita Nnenna and 2Eze Chidinma Esther

1
Department of Publication and Extension Kampala International
University Uganda
2
Department of Education Kampala International University Uganda

ABSTRACT
The commonest approach used in preparing budget in Nigerian tertiary institutions is incremental budgeting (IB).
This involves a method where the previous year budget figures will be reviewed, usually upward to accommodate
any expected increase in the following year’s budget. For this approach, the only source for preparing the budget is
the use of preceding year’s budget figures, with little or no consideration of other determining factors; not even with
the current or previous two years’ actual financial achievement/figures because hardly will they be available. Usually
the Nigerian tertiary institutions audited accounts will not be ready until after three to four years after the end of
the institutions’ financial years. Hence, the assumed justification for continuous use of IB budgeting system is
simplicity of obtaining the data, and less time in its preparation. This is because the users of IB are reluctant to make
any further inquiry into the efficiency of the system to know whether the method is good enough to achieve the
desired performance of the institutions. However, some scholars have strongly criticized IB, because the system is
rigid and the basis for preparing the budget could be misleading. This approach is further perceived to be weak and
may not be accepted if it should be sampled for opinion among the users of the budgeting system. This paper
discussed the problems of incremental budgeting system in Nigeria.
Keywords: Incremental Budgeting, Nigeria, Financial year, Budget Performance

INTRODUCTION
The Chartered Institute of Management Accountants (CIMA) as cited by [1] defines budget “as a plan quantified
in monetary terms, prepared and approved prior to a defined period of time, usually showing planned incomes to be
generated or expenditure to be incurred during that period, and the capital to be employed to attain a given objective.
Accounting data collection will aid in the provision of useful economic information for decision making. The broad
objective of budget preparation is to integrate the decision to achieve the plan”. Some specific reasons for preparing
budget according to some authors and researchers [2] include:
i. coordinate the activities of various parts of organization
ii. ensure that parts are in harmony with each other
iii. aid the planning of the period operations
iv. communicates plans to the various responsibility secure
v. control activities
vi. evaluate the performance of officers
vii. motivate officers and managers to strive to achieve the organizational goal.
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The aim of a budget is to articulate a realistic plan into action taking into consideration all the necessary variables
(that may affect its success or failure) with the strong determination to achieve a specific goal. The budget is usually
for a defined period of time, say one year and is referred to annual budget. The annual budget can be broken down
by month for say the first three months where quarterly budget could be developed and monitored [2]. In the
budget administration, a committee is usually constituted and will consist of management staff or most senior officer
who will present the major segments of the organization. The officer is to ensure that the components of the entire
budget are realistically established and satisfactory coordinated. Usually the functional heads of an organization will Page | 6
be responsible for the preparation and presentation of their budgets taken into consideration the budget manual and
or circular to that effect. The committee will review the functional budgets accordingly and where necessary call for
defence for appropriate corrections before receiving approval. The purpose of the review is not only for approval,
but more importantly to ensure that the budget is adequately implemented to achieve its determined goal. Budget
performance therefore depends on the extent of implementation [3-5]. The budget preparation and presentation,
setting up committee, reviewing the budget for compliance and amendment, then implementation, monitoring and
control activities are to ensure that realistic performance is achieved within the budget period. Measuring budget
performance in the government tertiary institutions mainly entails setting of realistic standards, implementing and
monitoring, comparing the actual achievements with predetermined objectives and controls for any variance that
may occur. In practice, the stages of budget preparation will include among others:
i) determining the limiting factors
ii) negotiation of budget with those responsible for the implementation and superior officers and
iii) coordination and review of functional budgets.
The inclusion of these factors becomes obvious in order to ensure that the budget performance is satisfactory.
Another obvious defect is the inability of the system to define actual performance in year under review. In spite these
logical procedures in the process of preparing, presentation and implementation of the incremental budgeting
system, its acceptability and mainly performance are not satisfactory [3]. The reservation is that, adequate attention
is not given to the budgeting system in terms of performance. Besides, the same monotonous process is always
adopted every year without taken notice whether or not the method is providing satisfactory results.
In the Nigerian tertiary institutions, the only commonest approach used in preparing budget is incremental
budgeting (IB). As the name implies, it is a method where the previous year budget figures will be reviewed, usually
upward to accommodate any expected increase in the following year’s budget. For this approach, the only source for
preparing the budget is the use of preceding year’s budget figures taken little or no consideration of other
determining factors; not even with the current or previous two years’ actual financial achievement/figures because
hardly they will be available. Usually the Nigerian tertiary institutions audited accounts will not be ready until after
three to four years after the end of the institutions’ financial years. The assumed justification for continuous use of
IB budgeting system is simplicity of obtaining the data, less time in its preparation and no more. This is because the
users of IB are reluctant to make any further inquiry into the efficiency of the system to know whether the method
is good enough to achieve the desired performance of the institutions. [4] has strongly criticized IB, as he believes
that the system is rigid and that the basis for preparing the budget could mislead. The author equally believes that
the approach is weak and may not be accepted if it should be sampled for opinion among the users of the budgeting
system. The two objectives of the paper are directly traced from the problems stated in the preceding paragraphs i)
to find out whether budget performance is dependent on budgeting system.
The Concept and Objective of Budgeting
Resource input both in the private and public sectors are scarce, therefore must be properly and adequately planned
to achieve optimal results in a defined period of time. Individual organizations including governments at all levels
have to effectively plan and control their resources through budget to achieve a target goal. Budget is the frame-
work that provides the guideline to arrive at the predetermined goal. The historical French word for budget is
known as bougettee meaning, small bag: but it was first used in England to describe the white leather bag that held
the seal of the medieval court of the exchequer. Therefore, the minister’s bag containing his proposals for financing
government expenditure became his budget. Budget is a plan that provides answers to three important questions in
any organization, formal or informal: first, what is the desired goal or goal to be achieved? Second, when is the goal
to be achieved and thirdly, how is to be achieved? This is because any organization without goal, any performance
or production lacks directions, problems are unforeseen, and therefore result will be hard to interpret [5]. Planning
involves objective and result oriented thinking well ahead, taken into consideration known and unknown variables
factors. Budget is therefore a formal expression of an organizational plan. [1] sees budget as a formal manifestation
of organizational plans, goals, and objectives which covers all aspects of the operations for a designated time period
usually one year; it is a tool used in providing organizational target and directions. Walter (2009) considers budget

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as a financial statement, a monetary statement or quantitative course of action prepared and approved before a given
period of time stating the policies to be pursed during the time and ways of achieving the target. [3] describes
budget in the following words: plan, forecast, standard, or even prediction depending on the nature of the
organization. Reviewing these various opinions, explanations and or descriptions, budget could therefore be
summarized as conscious and objective financial and related non financial plans and guidelines of an organization to
achieve a specified level of activities in a specific period. On the government aspect, [6] sees budget as an aggregate
policy instrument for organizing and articulating governmental goals and objectives often expressed in terms of Page | 7
programmes and projects usually accompanied by a financial plan and the instruments for not only attaining pre-
determined goals but also for imposing checks and balances on the relationship between government and the
governed. In line with this explanation, [7] describes government budget as a political and administrative
instrument by which the executive and the legislative bodies endeavour to allocate scare resources among the various
organs of government either at state or federal level. This descriptions rather than definitions of budgets are
comprehensive enough to bring out exactly what government budget is all about. [8] defines budget as a future
plan of action for the whole organization or section thereof. In fact, it is a tool guiding the management of
government organization in directing and controlling the financial and non financial activities to achieve and
measure its goals in a defined period of time.
Process of Budgeting in the Nigerian Public Sector
Budget involves planning the inflows and outflows of financial (and non-financial, but related) resources in the
various departments, segments or divisions of an organization in a particular period of time with a view to achieving
a defined goal. Budget process in the public sector is not much different from the private sector. It is a complete set
of events occurring every year in the same sequence. Usually it begins from each department or government agency
by putting together or calculating mainly the expected costs of maintaining current ongoing services or activities.
Making provisions for new activities and then adding to those costs any further developments of the services which
are considered desirable. For instance, expected services like the education, agriculture, housing, health, and other
social services will be proposed; and any specific services and their corresponding costs including overhead,
personnel and capital for the budget period/coming year. The expected internally generated revenue will equally be
contemplated and tabulated for the same budget period. The internal revenue is usually credited to the government
account otherwise used to supplement the budgeted expenditure (if approved). The budgets are then coordinated by
the accountants often referred to as directors of finance of various ministries and parastatals into an overall budget
proposal. This procedure could be described as the budget formulation and approval. One major difficulty usually
encountered in the government organization, is that output from the various resources inputs cannot be measured
in figurative terms or value. That is, the quality and amount of the services provided cannot be seen or touched. This
is contrary to the manufacturing sector, where for instance, the output can easily be seen, countered or touched in
terms of unit produced. The main feature of government organization budget is greatly concerned with the resource
inputs in the form of expenditure. On the other hand, a private organization will focus on the relationship between
resource inputs and outputs in order to assess the performance. In government organizations, hardly emphasis is
placed on what can be achieved from a given resource input allocated to provide required public services. In addition,
emphasis will not be on measuring managerial performance in terms of profitability in a particular year. In the recent
years however, efforts have been made to overcome these deficiencies through developing measures of outputs with
which the budgeted resource input can be compared with the actual achievement in a fiscal year. The various methods
of performance measurements in this organization are mainly concerned with the budgeting system and will include:
rolling or continuous budgeting, zero-base budgeting; activity-base budgeting; incremental budgeting; planning
programme budgeting systems and programme performance budgeting [8-9]. They are of the view that budgets
could be used for planning communication, motivation, standard for measurement of performance and evaluation of
economic and social policy. However, the authors have failed to state how this could be achieved in measuring the
performance.
Incremental Budgeting System and Performance
Before any annual budget in a government could be contemplated or prepared, a base of such budget must be
established from where the process will commence. With the base, common starting point for the preparation of the
coming year budget is the current year’s budget, incorporating the current level of operating activity and current
budgeted allowances for current activities. This are then adjusted for expected changes that may likely occur during
the next year. This approach is referred to as incremental or traditional budgeting. This is because the budget
processes is concern mainly with the increment (and hardly decrease) in operations or expenditure which would take
place during the next budget year [2]. Increment means always there is an increase [7]. For instance, the allowance
for budgeted expenditure may be based on the previous budgeted allowance plus an increase to cover any expected

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increase in prices. [3] sees incremental budgeting system as a budget prepared using a previous period’s budget or
actual performance as a basis with incremental amounts added for the new budget period. The system is only seen
as a tradition, no more. [7] confirms that the incremental budgeting approach is used extensively in government
parastatals because of its simplicity. However, he criticizes the system as having a problem of not being efficiency
based and seems to transfer the problem of the previous financial year into the next because of the use of the same
parameters on yearly basis. In line with this problem, [3] also states that the approach fails to take into account
changing circumstances, and encourages spending up to the budget to ensure a reasonable allocation in the next Page | 8
period. It could also lead to spend it or lose mentality. [1], also state that the budgeting system lacks budget
expertise, no evaluation of alternatives, flexible budgeting is ignored and that future cost implication is equally
ignored. All these definitions and views failed to address issue on the budget performance with which to measure
the level of implementation. Performance in budget is not as simple as it sounds because people often mean different
things when they talk about performance generally. [10] define performance as the end result of activity and the
appropriate measure selected to assess corporate performance is considered to depend on the type of organization to
be evaluated and the objectives to be achieved through that evaluation. Authors like [11-12] believe that
Performance measurement include: i) the use of statistical evidence to determine progress toward specific defined
organizational objectives and (ii) the process of developing measurable indicators that can be systematically tracked
to assess progress made in achieving predetermined goals and using such indicators to assess progress in achieving
these goals. Performance measurement in budget could therefore be described as the process whereby a focused
organization establishes parameters within which budgeted goals and objectives are compared through resource
inputs and control with a view to achieving them and improving future objectives. Performance measurement
indicator in this type of study will involve comparing of approved budget with the achievements for any variation
that may occur. However, the more attractive area in any budget implementation and performance is expenditure
and its control. Expenditure is said to be controllable if the management has discretion in choosing to incur it or can
significantly influence its amount within a given, usually short period of time.
The purpose of expenditure control is to maintain a cost of a product or service to within a realistic standard.
Expenditure control involves all methodologies of controlling costs for efficient utilization of resources to achieve
the objective of an organization. It therefore becomes a process and any devising techniques that will continually
guide and monitor expenditure that could give rise to immediate control action by management for effective
measurement and corrections. For expenditure control and measure for budget performance evaluation, standard
costing and variance analysis are exceptionally important tools because they reveal and play essential role in the
financial analysis and decision making by the management of an organization, government or private sector. When
implementable standards are put in place, taking into consideration wastage and other losses, and the actual
performance deviates positively or negatively from the predetermined level of performance, then there will be a
question of why budget or expenditure variance [13]. The basic concept of variance is simply the difference between
actual costs incurred/revenue generated and standard or budgeted costs/revenue applied to an activity or service
process in a period. What will the management do if variance has been established? First, the management should
recognize that the variances are only a starting point, a clue for investigation and secondly, from the view point of
control. These variances should be measured as soon as possible. The longer the delay, the staler would be the data
and the fewer the opportunities for corrections [5]. In other words, variance analysis is the analysis of performance
by means of variances and it is aimed at promoting management action at the earliest possible stage. In a sentence,
the accurate analysis and follow-up of variances is what pays off in budget control.
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This is an Open Access article distributed under the terms of the Creative Commons Attribution License
(http://creativecommons.org/licenses/by/4.0), which permits unrestricted use, distribution, and reproduction in
any medium, provided the original work is properly cited.
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9. Bammeke, S. A. (2008). Public sector accounting and finance for decision making, Lagos: SAB & Associates
Limited.
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Examination, Lagos: VI Publishing Limited. Page | 9
Ugwu Jovita Nnenna and Eze Chidinma Esther (2023). Evaluation of Incremental Budgeting System in Nigeria.
NEWPORT INTERNATIONAL JOURNAL OF CURRENT RESEARCH IN HUMANITIES AND SOCIAL
SCIENCES (NIJCRHSS), 3(1): 5-9.

© Ugwu and Eze

This is an Open Access article distributed under the terms of the Creative Commons Attribution License
(http://creativecommons.org/licenses/by/4.0), which permits unrestricted use, distribution, and reproduction in
any medium, provided the original work is properly cited.