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Chapter 5: Various Budgetary Models - Coggle Diagram
Chapter 5: Various Budgetary Models
Good Budgeting
To provides the right climate for good decisions, excellence and controls all activities, and is intelligent and timely for organisations (Finney 1993).
Characteristics
1) Managers’ involvement.
2) Clear definition of long-term goals.
3) Rational allocation of resources.
4) Continuous improvement.
5) Supported by accounting information system.
Budgeting System
Traditional Budgeting System (TBS) / Line Item Budgeting System (LIBS)
First budgeting system used in Malaysia.
Detailed budget examination is entirely based on line item expenditure or objects of expenditure
Characteristics
1) Focused on items/objects of expenditure.
2) Concerned with financial input than the output of its activities.
3) Not concerned with the attainments of policy objectives and their relationship to costs.
4) The presentation of the budget is on organizational basis (ministry or department) rather than looking at expenditures of a particular program..
Advantages
1) Simple budgeting system and can be easily understood by the users. Hence, facilitate the users in preparation of the budget.
2) Information presented from this budgeting system can easily be incorporated into the accounting system.
Drawbacks
1) Data provided is useful primarily for short-term planning only.
2) Information presented in the budget expenditure does not state clearly the purpose of the current and future utilization of resources.
3) It is oriented more towards providing a framework of financial information that complies with legal requirements rather than providing useful management-type information.
4) It did not give the managers freedom/power/authority to adjust allocation according to the needs or situation.
Programs and Performance Based Budgeting System (PPBS)
Used by majority of the developing nations.
In Malaysia, PPBS was introduced in 1969 under Treasury Circular5/1968.
Helps management make better decisions on the allocation of resources to achieve government objectives through the selection of the best feasible alternatives.
Characteristics
1) It focuses on overall agency objectives.
2) Emphasizes programs/activities to meet the objectives.
3) Emphasizes objectives of spending.
4) The main thrust is to evaluate performance and to ensure various agency/departments attain the objectives. (Evaluation of success)
Increasing 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
Advantages
1) To provides better information on management effectiveness.
2) Systematic & continuous performance evaluation furnish information for future planning & decision making.
3) Programs planning & structuring facilitate prioritization.
Drawbacks
1) Goals & objectives of individual agencies are not clear.
2) Difficult to develop performance indicator.
Modified Budgeting System (MBS)
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.
Characteristics
1) Expenditure Target.
2) Programs Agreement & Exceptions Reports.
3) Cycle of Program Evaluations.
4) More generalized approach to expenditure control.
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.
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.
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 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.
Zero-Based Budgeting System (ZBBS)
Developed by Peter Phyer from Texas Instruments Company.
Starts from the premise that no costs or activities should be factored into the plans for the coming budget period, just because they figured in the costs or activities for the current or previous periods.
Formats
1) Development of decision packages for each agency. Each package will 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.
2) Requires each decision package to be evaluated by top management to determine whether it is justified for further funding. Programs that are considered ineffective are either discarded, modified or combined with other agencies for cost efficiencies.
Burden of proof on the manager and demands justification for the entire budget in detail.
Advantages
1) Allows management an opportunity to review operations in depth and make recommendations for changes.
2) Helps managers identify redundancies and duplications among different departments.
3) Specific priorities of departments and divisions are identified more easily.
4) Budgeting enables a performance audit to determine whether each project or activity has been performed as efficiently as planned.
Drawbacks
1) 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.
2) Require extensive amount of paperwork.