chapter 7 audio lecture

Slide 2: 

Chapter 7 BUDGETING: CONTROLLING THE ULTIMATE RESOURCE

Definition of Budget: 

Definition of Budget A BUDGET is a plan expressed in terms of projected activity and proposed expenditures

For Sound Budgeting: 

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: 

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: 

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: 

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): 

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: 

Types of Budgets Revenue and Expense Personnel and Labor Production (Activity Forecast) Fixed Variable (including the step budget) Master, Composite Departmental

Budget Designations: 

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) : 

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: 

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: 

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 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: 

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: 

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: 

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: 

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: 

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: 

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: 

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 General Audit The Audit Trail : track each expenditure from its approved budget entry through its actual expenditure.

The General Audit (cont’d): 

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.