Wednesday 16 January 2019

Budgeting Techniques - Budgeting Methods

Budgeting Techniques

The concept of budgeting techniques have been developed to improve the budget process by strengthening relations with the planning, accounting, strategic options, implementation and evaluation. This section will briefly discuss the techniques of budgeting: a traditional Budgeting, planning, programming and Budgeting System (OUTPUT BUDGETING), and Zero-Base Budgeting (ZBB).

A. Traditional Budgeting

The traditional annual budget (repeated yearly) and additional (departing slightly from the previous year)". This is done by cash in current dollars. It is also in the form of a line-items such as personnel or maintenance. This system is basically a financial plan forecasted expenditure stated in the type and number of objects that must be purchased and an estimate of the funds needed to finance them for a specific period, usually one year.

Traditional budgeting System, therefore, provides a means for national Governments to enhance accountability with regard to the utilization of funds and to ensure that each expenditure in accordance with the original plan and. This serves as the basis for setting financial accounting control procedures required to meet defined accountability and compliance requirements (Kenneth s. 1978). In modern times, the traditional budgeting is also becoming an instrument of economic management and planning 

Furthermore, one of the main characteristics of this type of budget allocation stability is that, not only in absolute allocation but also in terms of proportional, with marginal increases due to inflation or other consequence, relatively constant from year to year. The main features and objectives of this approach are the central financial control and accountability. Currently, most developing countries use traditional budget system that is based on the ' classic ' rules which comply with the principles of sound accounting, centralization, the principle of budget annuity, gross and specifications.

Weaknesses of traditional budgeting


However, there is considerable criticism of the traditional budget. One of the fundamental weakness of the budgetary process is the use of the current year the revision of estimates of income and expenditure as a starting point to determine the budget for the following year with regard to traditional input than output. This means that traditional budget does not provide a way to create resources and policy choices, and performance monitoring. As the traditional budget have failed to relate the purpose for the fee, it is not considered as effective as tools for making economic decisions.


The second weakness of traditional budgeting is that there is an insufficient relationship between the annual budget and longer-term development plans. This is because incremental budgeting stresses short-term objectives and neglects the long-term nature of government planning and objectives. Thus, it cannot solve the problem facing the developing countries, in particular it can't allocate limited resources among competing needs, and to realize the plans formulated. The second Weakness of traditional budgeting is that there is a sufficient relationship between the annual budget and long-term development plan ... This is because the incremental short-term budget and ignore the nature of long-term objectives emphasize government planning and the purpose of so doing, cannot solve the problems faced by developing countries, in particular cannot allocate limited resources among competing needs, and to realize the plans formulated.


A third weakness is that the centralization of the preparation of the budget and the Division of the Department of stiff making it difficult to achieve a national goal in its entirety, to deal with conflicts and overlaps and gaps between departments. Single-year budget and the incremental approach often results in waste of spending money at the end of the fiscal year, so the economy suffers. In addition, incremental approach means that most of the expenditures were never examined. Performance is measured by whether the funds have been spent and not whether the objectives have been achieved.
Finally, the process of separate budgets for recurrent and capital expenditure or routine and development may be arbitrary, inhibit the proper evaluation of the service, their needs and their overall costs. In many developing countries, capital expenditures can be seen often mistaken, being a value greater than spending on the construction of a new building for example recurring versus pay teachers or road maintenance.

Benefits of the traditional budgeting

However, traditional budgeting system has its benefits. It is simple, easy to control and reduce conflict. That ensure that the public's trust, legality, honesty, responsibility and financial solvency of local Government continued support by utilizing the principles of budgeting of completeness , unity, accuracy, clarity, and publicity. The most important reason by using incremental budgeting is that many of the activities conducted in the previous years either mandatory, or so important to organizational goals the meeting, that they will have to continue year in year out '. They argued that "it seems reasonable, therefore, to concentrate on only the changes from the previous year, as this may be all that controlled it.

"The budget can be understood as an iceberg with the largest section so far below the surface, beyond the control of anyone. Items in the standard and budget implied re-enacted each year unless there is a specific reason to challenge them. " 

The second reason to use incremental budgeting is that it concerns the complexity of the budgetary process. Those "boundaries decision maker knowledge, information, and cognitive ability means that additional calculations such as AIDS budget is" necessary.

By concentrating only on new programs, or changes in existing programs, the information should be collected and analyzed can be restricted with the human ability to process and evaluate.
Another reason to use incremental budgeting is that it narrows the open area with strife, thereby reducing conflicts (some one) argues. Those who "by focusing on gradual change, the arguments over the budget allocation is limited to a relatively small amount. The vast proportion of the annual budget allocation was "indisputable.

B. Planning Programming Budgeting System (Output Budgeting)

This system was developed in the private sector, then transferred to a non-profit organization and non-public in the early 1960 's. This was adopted by the U.S. Department of Defense, and extended to all departments of the Federal Government by President Johnson in 1965. This was carried out, or at least experimenting, with in State and local government, both in the United States and the United Kingdom.

This new budgeting System able to contribute to achieving efficiency in resource allocation. As such, this will increase the benefits derived from the activities of the Government. In addition, this is a comprehensive financial planning and management system in which alternative ways to deliver public services are evaluated and decisions are made by using sophisticated analytical techniques. He argues that given the opportunity to introduce output budgeting and cost accounting program in the process of planning and budgeting,. However in relation to budget at least, no one actually identified and focused on the requirements of the corresponding accounting program.

The purpose of output budgeting 

The main purpose of output budgeting is to ensure that "the limited resources allocated in such a way that it will produce the greatest beneficial impact on overall goal". output budgeting is a model aimed at helping management make better decisions about the allocation of resources among alternative ways to achieve the organization's objective.

In considering output budgeting is required to distinguish between the program structure and program analysis that might be done to achieve those goals. Program structure provides a framework for connecting resources and activities with a purpose.

 In this case, output budgeting involves cutting the normal organizational structure so that the proper input may be taken together. Meanwhile, an analysis of the program deals with the analysis of costs and benefits of each program so that it can be made a choice. It has stated that the output budgeting could require a cost-benefit analysis of well developed or the effectiveness of the system of assessment of costs to take into account the expected/planned changes in activities. The consequences of this concept is that the output of each program should be measured in a way that captures the impact of benefit throughout the program.

From the above description, it can be concluded that the main concept of this technique is that it is primarily concerned with the need to focus on program activities rather than departments in planning and budgeting. This means that it focuses on outputs rather than inputs and outputs must be measured.

The output budgeting is the idea of ' product management ' which assumes that the measured output. However, in measuring output in the public sector and non profit organizations there are serious practical difficulties to be overcome. This is because, it is difficult to determine the goals and to measure it. For example in the organization-oriented services such as education, health and environmental benefits. In addition, Theirs even if defined, is rarely measured, and its effectiveness in meeting the needs of a particular activity can only be judged in a very subjective term".

The effort to implement a system of output budgeting in such circumstances is a fundamental error in the selection of the Model of Management Control". He pointed out that the appropriate control model where the objectives were ambiguous and non-measurable output is ' political ' control. Politicians, in General, prefer with destination country as vague as possible. The aim is in the nature of political purposes and cannot be considered in terms of technical means". Therefore, it is clear a goal considered by engineering a major goal not output budgeting. In this case:

"Even the determination of the true cost is not as simple as it might at first seem. Many. The activities of the multi-purpose nature and it is not always clear how these costs should be allocated activities specific to the category ' output " 

For example local authority library services may exist to meet both the needs of education and recreational needs of the community. The allocation of costs between the two aspects often will be very difficult to make. They point out that for many public sector organizations output budgeting might, therefore, be considered as one example of a technique that is a result of the vote. This is because of the limitations of the practical, and the impossibility of satisfactory implementation.

Furthermore,  "output budgeting has failed every place and every moment. Nowhere has OUTPUT BUDGETING has been established and influence government decisions in accordance with the principles of its own ".

The argues that "output budgeting have failed not because of the absence of sufficient data, or measurement techniques, or the lack of sufficient training, but because of the fundamental shortcomings of more"). The introduction of output budgeting has not succeeded everywhere, because most misunderstood concept in an environment that has traditionally been resistant to change and with little consideration of the practical reality involved. As a result, output budgeting be theoretically sound, but how practical operational budget account, plan and manage the Government Finance.Some one argued that output budgeting may not succeed because of the Orthodox approach to the planning and control of the management cybernetic model is not always suitable for the activities of the public sector.

C. Zero Base Budgeting

Before transferring to public sector and not-for-profit activities, Zero Base Budgeting (ZBB) comes from private industry. As confirms that appear proceedings is ZBB has been adopted by various industry organizations in various sectors of the economy, as well as by State and local governments. ZBB is designed to serve primarily as a management tool, but it can also serve to control. In addition, ZBB can be integrated into a more comprehensive policy making process that includes, budgetary planning and management systems. In addition, the ZBB can be integrated into a more comprehensive policy making process that includes, budget planning and management system.

ZBB is the most radical alternative to incremental budgeting system. It is not only designed to serve primarily as a management tool, but it can also serve to control the Agency spending. David Wise (1988) States that the ZBB is designed to address the issue of the budget when a clear relationship between input and output is still lacking. The principle is that the budget made for one year and at the end of that year the new budget must be built from scratch. The fundamentals of zero budgeting mechanism requires all functions of an organization is re-evaluation each year from a base of zero". However, in terms of budgeting for the Organization of this great complex is the case meaningless.

Furthermore, the ZBB is budgeting technique that was developed specifically for the center of the input or load centers. The argued that this technique can be used for the operational budget for the Center's input in the control of management. Cost centers are measured when the burden of the cost of the Center responsibilities but not the monetary value of output. They point out: they show:

"This usually applies to public organizations in which there are clear but not output the measured either at all, or it can be measured in monetary terms but are not physically." 

The basic concept of ZBB is that the budget for the Central input allocated by activity. All activities, regardless of whether they are new or already existing, must be justified in its entirety every time a new budget was compiled . They must also be counted to the extent of costs and starting from zero level.

Theoretically, the basic component of ZBB is a package of decisions. Meanwhile, activity packages decisions designed to describe the basics of any institution in some detail. As the process of budgeting, ZBB is planning and control mechanisms and include elements of setting goals, making decisions, and evaluation.

An approach is generally characterized as the top-down process of communication which involves two basic steps. The first step is one of differentiation for unit activities; decisions are analyzed and developed in the form of decision packages in the context of the minimum level of effort (usually below the level when the expenditure). The second step is one of integration; all packages decision ranks, first in every decision, and then the unit vertically throughout the Organization in the hierarchy decision units. The ranking Procedure can be achieved through cost-benefit analysis or evaluation of subjective.

Meanwhile, the ZBB requires that all activities will be identified in a package of decisions, which are systematically analyzed and ranked in order of their significance. The process of rating this activity relates to the desire and the availability of resources and try to set priorities among these activities. However, since these activities are ranked based on the level of resources actually available, limited resources can determine the cut-off point beyond which activities will not be funded. This indicates that top management at the highest level do not have to rank all of the Organization's package of decisions, but only the cut-off level. In this case,  that "this cut-off technique means that we are left with a budget process that is worn a little relationship with the concept of zero base budget". They point out: they show:

""The consequences of behavior resulting from the use of the technique of cut-off should not be ignored. A system which ensures that the decisions of all packages above cut-off some point received more higher without supervision at the level of the hierarchical ranking in may, also resulted in low priority ' pet ' above program priorities and the program is important. " 

To overcome such unwanted strategy, suggested that should be required not only to assign the specified criteria for either program rankings, but also to introduce several ways of monitoring adherence to these criteria.

As a practical matter, the budget base zero-has many potential advantages over other budget system. The main advantage-zero budgeting basis is that, unlike the supplementary budget, does not consider last year's allocation of resources is certainly appropriate for the current year. ZBB can be said to produce, in a form that is easily accessible, better information management and more.

A typical Manager's comment in the some one state that are:

"Zero base is a useful device management control. A form that requires people to organize and develop their Managers information more able, I think, to make decisions on the basis of improved reporting systems. " 

In this case, ZBB can provide a framework for the design of integrated planning, budgeting, accounting, reporting and evaluation system. ZBB can also be used to complement or reinforce existing, budget planning and management system. The argues that "zero base budgeting process forces managers at all levels to identify their specific objectives, to measure them, and to evaluate the cost effectiveness of alternative ways of achieving them ". They believe this is that it improves the quality of management decision.

In order to improve information management, ZBB also involves the participation of a lower level of management in the process of budget and the smaller unit is a big decision this engagement will be. This increased participation is profitable; again, from a manager at Georgia State:

""I love the zero-base. We used to make this budget up in the Office with very little communication with the operation of those budget format Now make us reach to the lowest level for information that has benefits for everyone even beyond drawing up budgets ".
From the explanation above, it seems that the fundamentals of the program zero has managed to increase the participation of management in the process of planning and budgeting, encouraging cost effectiveness, eliminate inefficiencies, and allow more flexibility in the decision making. However, the ZBB also forced management to abandon traditional budgeting practices and receive different approaches to resource allocation.

Another advantage for zero statutes is that the unexpected events that occurred during the financial year can be more easily adjusted. This is because the basic information for the purpose of modifying has been generated. Although some of the benefit that has been claimed to base budgeting system-zero there is enough criticism as well. Some one States that "Although the technique is conceptually sound, fundamental weakness over the ZBB is that it greatly overestimates the ability of humans to Count '. This is because the decision package approach have been developed. However, even with this development the number of package decision that a complex organization will result in effectively blocking a zero annual base study for all functions.

A further weakness of ZBB is that which involves the development of a package of decisions. As a result, an increase in the administrative burden for those involved in the preparation of the budget. Procedures that applied to the zero-basis of highly structured and formal budgeting. So in practice, need to be very skilled participants to formulate a budget.


The function used to determine the budget of income and expenditure, shape and implement policies, provides public information and to ensure the control of the law. In addition, economic considerations suggest that the budget has several functions such as allocation, distribution and stabilization.

The role of the budget depends on the budget system has been supported by the budget structure and classification. The rapid Increase in public spending and the complexity in the activities of the Government has been making managerial functions is very difficult. As a result of traditional budgeting system cannot respond to adopted this variable to ensure efficiency and effectiveness in the implementation of the development plan. Thus, alternative budgeting techniques for planning, programming and budgeting system and Zero Base Budgeting developed.

However, the implementation of the planning, programming and Budgeting System (output budgeting) and Zero Base Budgeting (ZBB) in public sector organizations has apparently been hard, and the experience has been disappointing. The main problem in applying the systems of budgeting, it is difficult to determine objectives, and measure the output ...

This is because the objectives were ambiguous and output that are not measurable since, in the activities of the Government, the goal is usually ambiguous, and the final output is not measurable, the effects of the intervention are not known and these activities are often repetitive. In other words, they could not bring about change in the function of planning and budgeting.

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