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CHAPTER 5: Various Budgetary Models - Coggle Diagram
CHAPTER 5: Various Budgetary Models
TRADITIONAL BUDGETTING SYSTEM
Based on line item and object expenditure
Characteristics of TBS
Focused on items or objects of expenditure
Concerned with financial input than the output of its activities
Not concerned with the attainments of policy objectives and their relationship to costs
The presentation of the budget is on organizational basis (ministry or department) rather than looking at expenditures of a particular program
Less concerned with the performance
Advantages of TBS
This is a simple budgeting system and can be easily understood by the users. Hence, facilitate the users in preparation of the budget.
Information presented from this budgeting system can easily be incorporated into the accounting system. This is because, transactions are categorized based on object of expenditure that is similar to the government accounting system.
Budgeted and actual revenues and expenditure ensures detailed comparisons to be made
Drawbacks of TBS
Data provided is useful primarily for short-term planning only.
Information presented in the budget expenditure did not state clearly the purpose of the current and future utilization of resources.
As a result, the long run goals of the organization may be jeopardized.
It is oriented more towards providing a framework of financial information that complies with legal requirements rather than providing useful management-type information.
Emphasized “what the government bought and not on what the government did
It did not give sufficient information towards legislators and the public on why the government bought those particular items.
It did not give the managers freedom and power nor authority to adjust allocation according to the needs or situation.
Input orientation that leads to ineffective budget allocation.
Budget document can be too bulky and long due to they comprise all detail information of what they have bought for all categories.
The performance of the budget is measured only from the financial aspect that is on actual expenditure incurred. Therefore, the information on the effects, outcomes and benefits of the programs and activities undertaken are not yet emphasized
Known as Line Item Budgeting (LIBS) and it as introduced in 1969
PROGRAM AND PERFORMANCE BASED BUDGETING SYSTEM (PPBS)
Programs and Performance Based Budgeting System (PPBS) was used by majority of the developing nations.
Fundamentals of PPBS
Identify objectives
Programs planning & structuring
Developing performance indicator
Performance evaluation
In Malaysia, PPBS was introduced in 1969 under Treasury Circular5/1968.
This system helps management make better decisions on the allocation of resources to achieve government objectives through various alternatives.
PPBS is needed to increase the complexity of modern life, increase in demands for government services, shortage of funds to meet the demand and the need to determine priorities, design programs and control budgets
Characteristics of PBBS in Malaysia
It focuses on overall agency objectives.
Emphasizes programs/activities to meet the objectives.
Emphasizes objectives of spending.
The main objective is to evaluate performance and to ensure various agency/departments attain the objectives. (Evaluation of success)
It is management-oriented that uses the principle ‘let managers manage’.
Involved Performance Evaluating such as:
It is meant to assess the achievement of objectives of programs/activity of each agency.
It involves a comparison between the actual output & planned output and identifying the causes for any variance between the two.
Performance indicators must be developed for financial and physical performance of programs/activities undertaken.
Development of Performance Indicators refers to the selection of suitable units of measurement which reflect the output of each activity/program in either qualitative or quantitative term.
Advantages of PPBS
Provides better information on management effectiveness
Systematic & continuous performance evaluation furnish information for future planning & decision making
Programs planning & structuring facilitate prioritization
Drawbacks of PPBS
Goals & objectives of individual agencies are not clear
Difficult to develop performance indicator
MODIFIED BUDGETING SYSTEM (MBS)
Also known as Malaysian Budgeting System introduced in 1990s.
Based on fundamental management principles of Letting managers manage
Aim to improve resources allocation by bringing more efficient management of government programs through improved accountability
Objectives of MBS
To improve programs performance in the utilization of funds (improve policy)
To improve on the distribution and allotment of funds according to priorities set
To upgrade on accountability especially amongst lower officers.
To improve public sector accountability through Program Agreements and Exemption Reports (to avoid fraudulent activities)
Prudent use of resources without waste, fraud and abuse of power.
Flexibility in management resources – provide freedom for the programs manager to adjust the allocation given
More generalized approach rather than a stricter approach to control the expenditure.
Evaluate the performance of programs and take corrective action to overcome the problems identified.– remedial action.
Characteristics of MBS
Expenditure Target
Programs Agreement & Exceptions Reports
Cycle of Program Evaluations
More generalized approach to expenditure control
Expenditure Target
Limit or ceiling imposed on an agency in the implementation of expenditure. The ceiling will be decided upon by both the Treasury and agency
Consist of:
a) Existing Policy - Refers to programs that have already been approved by Law, the Cabinet, the Ministry, the Treasury or any other authority and are still being implemented in the current year and would continue to be implemented in the following year.
b) New Policy – refers to programmes planned to be implemented in the next budget period. They are also extension or enlargement of existing policy. (Add up to existing policy, introduction of new courses, establishment of new departments or units)
c) One-Off – refers to the unavoidable expenditure, non-annual or non-recurrent expenditure. It is considered as one-time purchase
Programs Agreement
The most vital element of MBS
An agreement between the Treasury and the agency on the desired performance on the part of the agency for a particular financial year.
Agency / Programs should seek to achieve the targets sets in the programs agreement
Exception Report
A report to be submitted by the agency / programs in the event that targets set in the programs agreement are not achieved.
Reasons should be given as to why targets were not achieved. Thus, they must ask for exemption from having to comply by agreement. (Clarify why unable to achieve the target)
Programs Evaluation
An evaluation of the programs to determine the extent to which targets have been achieved.
A schedule of programs to be evaluated and the issues to be addressed must be included in the Programs Agreement.
Each program should be evaluated once in 5 year.
Criterion of effectiveness – objective orientation
Criterion of efficiency – cost optimization – cost effectiveness
Generalized Approach to Expenditure Control
This approach emphasizes on two main elements (based on 2 principles of MBS “Devolution of Authority” & “Accountability to Match Authority”:
Provision of greater flexibility/authority to managers throughout an organization and particularly to the line management level. The flexibility/authority usually relates to decision regarding how a given amount of resources are to be deployed.
Stricter control over aggregate resources whereby supplementary allocations are rarely provided or even considered. Breaches of aggregate control are dealt with swiftly and effectively.
Advantages
Central Budget Level
Improve identification of priority expenditure in budget submission
Eliminate a major cause of the ‘gambling’ attribute of the budget process by shifting the focus of budget examination from ‘cutting expenditures’ to identifying the best mix of resources within a constraint of past and targeted programs performance
Reduce paperwork in the preparation of budget submissions and in the conduct of budget examination
Allow more time to discuss new policy proposal and its modification
To provide the Budget Management Division with better information on programs performance
Assist review agencies such as Malaysian Administrative and Modernization Planning Unit (MAMPU) and Accountant General Department to carry out their role more effectively
Departmental Headquarters Level
Increase the department’s opportunity to use strategic planning as the basis for budget preparation
Enable more top-down approach to budgeting
Enable controlling officer to play a more active role in budgeting and to use it as a management device
Improve communications of top management priorities to lower level managers and staff
Allow finance divisions in headquarters to become more involved in matters of programs policy and programs evaluation and less in matters of line-item control
Line-Management Level
To improve motivation among line managers through increasing awareness and understanding of top management priorities through programs agreement
Greater flexibility in the deployment of resources within aggregate constraints
To enable budget preparation at the line-management level to take place at the same time as the preparation of work plans, that is two or three months before the beginning of the year and thereby make budgeting at this level a more meaningful exercise
To enable the financial plans regarding input, output and impact to be used as a management tool
To enable better integration of decision-making of financial and programs policy
Critical Evaluation of MBS
The term MBS itself is unclear or unsuitable. Normally the name of a budget system should reflect the concept on which it is based e.g. PPBS, LIBS – one is tempted to ask: Modification of what? –we don’t get the answer.
MBS is only a ‘package of modification to the budget process’- as the Consultant, Rizui an Australian himself had suggested. Note that, during the budget examination, the existing policy is considered first and the new policy and one-off proposal are considered next.
MBS has all the elements of PPBS, objectives, programs, structure and performance evaluation, Hence, it cannot be considered as a Separate or new Budget Systems.
The Program Agreement prepared under MBS helps the operating agencies concentrate on the target or output or impact agreed to be achieved in a given year. This a positive thing about the modification to the budget process.
ZERO BASED BUDGETING SYSTEM (ZBB)
ZBBS was developed by Peter Phyer from Texas Instruments Company. It also was adopted in 1971 by the new Governor Jimmy Carter.
ZBBS spreads towards many states and local jurisdictions and was adopted by the Federal Government when Carter become the President in 1977.
It continues in many states and local government in the US but has been largely discarded within Federal Services.
Formats of ZBBS
Development of decision packages for each agency. Each package contain a summary analysis of each program within the agency. These packages are ranked by the agency head in accordance with his/her perception of overall agency priorities.
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Requires each decision package to be evaluated by top management to determine whether it is justified for further funding. Programs that considered ineffective are either discarded, modified or combined with other agencies for the cost of efficiencies.
Advantages of ZBBS
Allows management an opportunity to review operations in depth and make recommendations for changes
Helps managers identify redundancies and duplications among different departments
Specific priorities of departments and divisions are identified more easily
Budgeting enables a performance audit to determine whether each project or activity has been performed as efficiently as planned
Drawbacks of ZBBS
Takes a considerable amount of time to go through the process of reviewing operations in enough detail to justify costs each budget cycle without relying on past expenditures.
Require extensive amount of paperwork