Budgeting
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- Created by: chrissieko
- Created on: 30-11-22 23:45
Budgetary control
There are three types of control operating within the organisation
- Social - people doing the norm to fit in
- Administrative - rules and regulations, output controls
- Self-control - how an individual identifies and complies with administrative and so
- Social - people doing the norm to fit in
- Administrative - rules and regulations, output controls
- Self-control - how an individual identifies and complies with administrative and so
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Financial Control
Tend to use output controls Performance is judged on the basis of financial results. For output control to operate 4 conditions must exist
- must have an objective
- measurable outputs
- "predictive model"
- an opportunity to take action
- must have an objective
- measurable outputs
- "predictive model"
- an opportunity to take action
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Feedback and Forward Control
Feedback control - actual costs and revenues achieved against those that were budgeted.
Forward control - forecast costs and revenues against predetermined or budgeted levels
Forward control - forecast costs and revenues against predetermined or budgeted levels
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Medium-Term Expenditure Framework
This is designed to balance what is affordable against the policy framework of the government & it has two main objectives:
- Setting fiscal targets
- Allocating resources to strategic priorities within these targets
- Setting fiscal targets
- Allocating resources to strategic priorities within these targets
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How MTEF improves the budget
- Clarity of policy objective
- improved predictability
-comprehensive coverage over public services
- improved transparency in the use of resources
However, it is only effective if:
funding is predictable, ministers and budget holders are held accoun
- improved predictability
-comprehensive coverage over public services
- improved transparency in the use of resources
However, it is only effective if:
funding is predictable, ministers and budget holders are held accoun
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Advantages and Disadvantages of decentralised budgeting
Advantages - The manager at the operational level takes decisions, which generates motivation, and leads to better decisions
Disadvantages - Training non-financial managers' MA skills create a cost, there are problems with coordination & control once de
Disadvantages - Training non-financial managers' MA skills create a cost, there are problems with coordination & control once de
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Potential Behavioural Problems 1
Goal incongruence - the goals do not line up with the overall goals of the organisation
Tunnel Vision & myopia - managers focus too much on performance to the detriment of other activities
Gaming - manipulating figures to gain strategic benefit
Tunnel Vision & myopia - managers focus too much on performance to the detriment of other activities
Gaming - manipulating figures to gain strategic benefit
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Potential Behavioural Problems 2
Sub-optimisation - focus on some objectives leads to ignoring others
Measure fixation - temptation to misreport a measure to make it look positive
Ossification - unwillingness to change once performance measures have been set
Measure fixation - temptation to misreport a measure to make it look positive
Ossification - unwillingness to change once performance measures have been set
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Incremental Budgeting
Uses the current period's budget as the basis to establish the following period's budget
Advantages - easy to explain and understand, quick to implement
Disadvantages - no need to justify spending, errors are carried forward (budgetary slack), can stifle
Advantages - easy to explain and understand, quick to implement
Disadvantages - no need to justify spending, errors are carried forward (budgetary slack), can stifle
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Zero Based Budgeting
Each element of the budget is to be justified regardless of if they were in the budget already.
Advantages - justifies spending, focuses on value for money, involves operational managers, clear links between budget and objectives
Disadvantages - Questio
Advantages - justifies spending, focuses on value for money, involves operational managers, clear links between budget and objectives
Disadvantages - Questio
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Activity Based Budgeting
Cost Drivers and the expected activity level are used to calculate budget figures
Advantages - cost drivers accurately reflect the cause of costs, focus on overhead and support costs
Disadvantages - timely, may require a cultural change, costing systems
Advantages - cost drivers accurately reflect the cause of costs, focus on overhead and support costs
Disadvantages - timely, may require a cultural change, costing systems
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Rolling Budgets
Continuously updated by adding another accounting period when the earliest accounting period has expired.
Advantages - budgets are up to date and relevant
Disadvantages - Time-consuming, requires a budgeting resource, and therefore, is more costly, alw
Advantages - budgets are up to date and relevant
Disadvantages - Time-consuming, requires a budgeting resource, and therefore, is more costly, alw
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Planning, Programming and Budgeting system
Objectives of programmes are identified & the costs and benefits of alternative ways of achieving these objectives.
Advantages - budget links to the organisation's objectives, improved coordination between departments, collaborative
Advantages - budget links to the organisation's objectives, improved coordination between departments, collaborative
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Planning Programming and Budgeting 2
Disadvantages - Time-consuming, complicated, output data may not be readily available, departments clash over resources due to shared budget
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Project Budgets
The project budget is the financial resources allocated to the achievement of the project
- Accounting is kept separate from the operational budget.
-Reforecasting
- Cross-departmental charges
- Accounting is kept separate from the operational budget.
-Reforecasting
- Cross-departmental charges
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Capital Budget
Capital Budgeting is the process by which the firm decides which long-term investments to make.
Usually prepared separately from revenue budgets. They are prepared for periods longer than one year (5-10)
Usually prepared separately from revenue budgets. They are prepared for periods longer than one year (5-10)
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Limiting factors of capital budgets
Availability of finance - a major constraint on capital expenditure in the public service
Governmental controls - control in finance (the amount borrowed), control of spending (funding is ring-fenced)
Revenue implications - capital budget impacts revenu
Governmental controls - control in finance (the amount borrowed), control of spending (funding is ring-fenced)
Revenue implications - capital budget impacts revenu
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Beyond Budgeting (BB)
Encourages holistic and flexible approach to directing an organisation's activities rather than following rigid budgets, rules and regulations.
Advantages - Fast response, innovative strategies
Disadvantages - recommended changes my not lead to performanc
Advantages - Fast response, innovative strategies
Disadvantages - recommended changes my not lead to performanc
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The Principles of BB
Governance and Transparency
Accountable teams
Goals and Rewards
Planning and Controls
Accountable teams
Goals and Rewards
Planning and Controls
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Cash Budgets
Estimation of cash inflows and outflows for an organisation for a specific period of time.
Cash is important because a failing business will still show a profit in the Income Statement but have run out of cash so therefore can not pay workers and contin
Cash is important because a failing business will still show a profit in the Income Statement but have run out of cash so therefore can not pay workers and contin
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Fixed Price Approach
Based on the price level when the budget is set (Apr-Mar in the UK public sector often preceding November)
Advantages - prices are known at a point in time and the degree of change from the base year to this time can be accurately assessed.
Disadvantage
Advantages - prices are known at a point in time and the degree of change from the base year to this time can be accurately assessed.
Disadvantage
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Outturn basis
Known and estimated price and pay increases are incorporated right up to the end of the financial year in question
Advantages - inflation is already built into the budget
Disadvantages - high inflation can lead to greater inaccuracies in the budget, and
Advantages - inflation is already built into the budget
Disadvantages - high inflation can lead to greater inaccuracies in the budget, and
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Outturn vs Fixed
Outturn is generally more accurate as long as inflation remains relatively low. Both methods should be used to consider developments from last year
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Other cards in this set
Card 2
Front
Financial Control
Back
Tend to use output controls Performance is judged on the basis of financial results. For output control to operate 4 conditions must exist
- must have an objective
- measurable outputs
- "predictive model"
- an opportunity to take action
- must have an objective
- measurable outputs
- "predictive model"
- an opportunity to take action
Card 3
Front
Feedback and Forward Control
Back
Card 4
Front
Medium-Term Expenditure Framework
Back
Card 5
Front
How MTEF improves the budget
Back
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