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6._power_points__week-4_chapter-7.pptx
Chapter 7
BUDGETING: CONTROLLING THE ULTIMATE RESOURCE
Objectives
Enumerate the requirements of successful budgeting.
Introduce the budget as a special-purpose financial plan that is an essential part of the department manager’s planning function.
Enumerate the various types of budgets employed and identify the commonly encountered budget periods.
Objectives (cont’d)
Differentiate between traditional budgeting and zero-based budgeting.
Enumerate the steps in the budget cycle.
Relate the dynamics of the budget approval process to the development of the budget.
Identify the steps in budgetary control through analysis of budget variances.
Definition of Budget
A BUDGET is a plan expressed in terms of projected activity and proposed expenditures
For Sound Budgeting
Sound organizational structure: clear budget responsibility.
A consistent, defined budget period
The development of adequate statistical data
A reporting system that reflects the organizational structure
A uniform code of accounts
An audit system for timely explanation of variances are.
The Budget as a Plan
A statement of anticipated results (e.g. expected revenue)
A basis for future or continuing plans
A statement of intended accomplishments; more than a forecast or guess
The Budget as a Control Tool
Provides accountability
A basis for monitoring the use of resources
A basis for comparison of planned vs. actual performance
Budget Periods
The fiscal year: defined, sequential period (often the same as calendar year); the most common cycle, with twelve accounting periods.
Long range Budget: associated with special projects and/or capital improvements; may cover three to five years (or longer).
Budget Periods (cont’d)
Periodic Moving Budget: as each period (e.g. three or six months) is completed, an equal time period is added; allows the manager to use the most up-to-date projections.
Milestone Budgeting: associated with major initiatives; budget periods are not uniform; they are tied to the projected time frame for the major activities of the project.
Types of Budgets
Revenue and Expense
Personnel and Labor
Production (Activity Forecast)
Fixed
Variable (including the step budget)
Master, Composite
Departmental
Budget Designations
Operating budget including:
Statistical (or activity) budget
Expense budget
Revenue budget
Capital budget
Cash budget
Zero-based or Planning-programming-budgeting system (PPBS)
planning oriented
past dollar allocations are not the basis for new projections
cost justification based on various aspects of project
longer time periods (as years, for a major project)
time consuming: all basic assumptions questioned
potential downside of reopening old conflicts
best use: for one-time, major project
Incremental Budgeting
immediate past year(s) budget is increased by some percentage
generally used with annual budget period
an efficient, practical approach when no major changes anticipated
object-oriented: categories of personnel, materials, etc.
potential downside: significant changes might be overlooked
ongoing programs, methods, practices are not challenged.
Budget Process: Initial Preparation
overall limits set by top level management
department managers reviews and updates assumptions
priorities and initiatives for coming year noted
detailed projections of income and cost developed
Budget Process: Review and Approval
budget justification review with senior officials
compromise, bargaining
cost containment review
external review by public review boards, if program is subject to such analysis
Budget Process: Implementation
approved allocation is activated
periodic (e.g. monthly) reconciliation of planned vs. actual expenses
budget variances accounted for
potential for budget cuts or budget “freeze” – contingency plan made
periodic internal and external audit
Major Budget Categories
Capital expenses (e.g. equipment)
Supplies (e.g. consumables)
Special expenses: equipment lease or rental, contractual services, maintenance and repairs, specialty references (books and software), software license fees, staff training and development
Personnel budget (wages, salaries, benefits)
Factors in Wage and Salary Calculations
Minimum wage laws, state and federal
Union contract stipulations
Organizational wage and salary scale
Cost of living increase
Area wage and salary consideration
Merit raise or bonus pay
Special adjustments (e.g. longevity employment)
Budget Justification
Support documentation for specific requests, e.g.:
equipment specifications
projected training needs
cost comparisons between options
detailed calculations of dollar amounts
The Budget Cut
Reduce or eliminate specific expenditures
Tie to budget justification information
Identify categories of desired vs. essential expenditures (e.g. optimal level of employee training program vs. necessary patient care supplies)
Identify categories which cannot be cut (e.g. a contracted sign-on bonus; a software license agreement fee)
Variance Analysis
The primary purposes of VARIANCE ANALYSIS are to obtain information with which to improve financial planning and to correct practices that affect expenditures.
Budget Variance Analysis
Verify the accuracy of posting.
Review specific object codes in terms of:
Over or under budget for the period, but not for the year.
Over or under budget for the year
Review codes where actual costs are under budget; will this money be spent by year’s end? Can it be shifted to another category? Look for codes reflecting major costs not yet posted.
The General Audit
The Audit Trail: track each expenditure from its approved budget entry through its actual expenditure.
The General Audit (cont’d)
Example One: Trace employee payment by employment record, job title, hours worked, paycheck issued and processed.
Example Two: Trace equipment purchase by purchase requisition, installation date, the actual location at time of audit, and entry of appropriate information in master inventory of equipment.
