Chapter Two: 2. Budget Classification and Reform

CHAPTER TWO
2. Budget Classification And Reform

† Chapter Objectives:-
† At the end of this unit, you should be able to
† Define budget classification
† Discuss the functions of budget formats
† Identify the type of budget/reform
2.1 Features and Importance of Budget
Classification
Budget classification is one of the fundamental building blocks of a sound
budget management system.
A budget classification system provides a normative framework for both
policy decision making and accountability.
primary aim of a classification scheme should be to ensure that the budget
complies with three key principles of sound budget management:
The principle of comprehensiveness
The principle of unity
The principle of internal consistency
Classifying expenditures and
revenues correctly is important for:-
† Policy formulation and performance analysis

† Allocating resources efficiently among
sectors;
† Ensuring compliance with the budgetary
resources approved by the legislature; and
† Day-to-day administration of the budget
Characteristics of Budget Classification
There are several characteristics that budget
classification scheme should possess to serve these
purpose
The budget classification must be pertinent.
The classification structure should possess degree
of uniformity
The budget classification must be practical
Finally, the structure should be manageable
2.2. Budget Reform
2.2. 1. Line-Item Budgeting
it also called Traditional Budget
Line-Item budgeting focuses on itemized classification of
expenditures.
In a line item system, expenditures for the coming year are listed
according to objects of expenditure, or “line items.”
This kind is most used in many developing countries.
The line-item budget, which is the most widely used of all
budgeting systems.
line item budgets are simple and effective in controlling funds.
Table 2.1 line-Item Budgeting..\PB hand out\Chapter Two.docx
2.2.2. Program Budgeting
Unlike the line-item budget, which lists total departmental
appropriations by items for which the city will spend funds, a
program budget displays a series of “mini-budgets,”
Program budgeting is the planning, authorization and
execution of expenditure in terms of programs.
Program budgeting clearly requires not only budgeting in
terms of programs, but also the systematic use of program
performance information
Program budgeting classification, the budget would frame a
programmed structure to attain a particular objective and
specify spending to attain it.
Advantages of Program Budgeting
†It enables an organization to purposefully allocate its
scarce resources.
†Producing a transparent budget.
†Focusing attention on community goals, needs, and
capabilities..
†Achieving maximum use of the citizens’ taxes.
†Serving wider community interest.
†Encouraging a more coordinated and efficient government
administration.
†Maintaining a sound and stable financial program.
Disadvantages of Program Budgeting:
One serious disadvantage for
administrators/managers is that it limits their
flexibility to shift dollars from one program to
another.
True program budgeting is quite time consuming.
Time is required to establish and maintain the
system.
programs tend to overlap, et
2.2.3 Performance Budgeting
The expenditures and money allocation would be determined
based on how the activity/project would be performed.
A performance budget is a presentation that clearly explains
the relationship between performance goals and the costs for
achieving targeted levels of performance.
A performance budget starts with an overview of what the
agency intends to accomplish in the budget year.
Performance Budgeting is a term that applies broadly to any
number of budgeting formats that attempt to incorporate the
measurement of results as an important consideration in the
allocation of budget resources.
These performance measurements are :-
Input Measures. These are the volume of resources (such as
personnel, operating expenses, and capital) used or total
expenditures (costs) consumed to achieve a given output.
Workload Measures. These are indices that assess the level
of effort required to carry out an activity. .
Output Measures. These are the quantifying of goods and
services performed or delivered to customers.
Efficiency Measures. These are indices that assess or
compare how much output was achieved per unit of input
(costs).
Effectiveness Measures. These are the indices that assess
how well a program achieved its goals and objectives.
Merits And Demerits Of Performance Budgeting
Merits of performance budget
allows for more flexible use of fiscal resource
It improves productivity; linking performance to budget allocation,
improves accountability, allows more decentralized decision-making
and more creative management
Assign clear ownership: By quantifying goals and objectives
Demerits of Performance Budgeting
Require engagement: Performance budgeting calls for both top-down
and bottom-up buy-ins, exacerbating disengagement in employees.
Less useful for practical performance
It requires advances programming's

2.2.4. Zero-based Budgeting (ZBB)
ZBB compels businesses to build a new budget from scratch;
starting from the baseline of "zero" as the name suggests
ZBB was designed to control expenditures by identifying the
purposes and measuring the effectiveness and efficiency of all
activities.
Zero Base Budgeting involves the following important aspects:
 It emphasizes on all requisites of budgets.
 Evaluation on the basis of decision packages and systematic
analysis,
 Planning the activities promotes operational efficiency and
monitors
Advantages and Disadvantages of ZBB
†Improved accuracy:
†Increased efficiency:
†Optimized resource allocation: allows for the identification and elimination of the poor
values,
†Aligned with business objectives

†Fostered congruence: ZBB is a top-down approach that requires
Disadvantages of ZBB
Depleted resources:
Unable to measure the unmeasurable:
Extensive training: Limited expertise on the method
Encourage subjectivity:
2.2.5. Activity-based Budgeting (ABB)
Activity-based budgeting (ABB) calculates the total cost needed to hit the target of
the anticipated level of activities (thus its name).
This top-down method first calls for the identification and thorough scrutiny of all
the activities that drive cost.
This analysis will then give grounds for allocating resources to achieve the level of
activities that was anticipated beforehand.
To give an example, you run a small toy manufacturer. Your forecast for the next
year says that sales would be 10,000 units, each of which is assigned the same Cost
of Goods Manufactured (COGM) at Birr 5. Employing ABB, you should compute a
budget of Birr 50,000 (10,000 * 5).
ABB could be easily confused with ZBB: Rather than starting from the basis of
zero,
ABB allocates resources by studying the efficiencies of the activity that is under
review. Instead of starting everything from scratch, people leverage activity-based
analysis to streamline the process.
҉Enhanced efficiency:
҉Cost management
Advantages And Disadvantages of ABB
҉Eliminated redundancy
→ Disadvantages of ABB
oSuck out scarce resources: Just
oFoster short-termism:
oABB gives decision-makers fewer options than ZBB for
cutting the budget.
2.2.6. Outcome Based Budgeting
The outcome budget reflects the endeavor of the Government
to convert outlays into outcomes by planning expenditure,
fixing appropriate targets and quantifying deliverables of each
scheme.
The focus is not on programs but on the results the
organization says it will achieve
A recent trend in government budgeting involves increasing
the level of accountability for public resources-how much
money is being spent on each program or agency and the
return on public’s investment.
Here, service organizations estimate how much outcome they
will provide and at what cost.
This approach begins with using priority outcomes as a focal point for
budgeting and connects resources necessary to achieve those outcomes
by using performance data and evidence to make budget decisions
An extensive list of the factors causing difficulty in the successful
implementation of outcome-based budgeting
†Outcome assessment.
†Outcome information utility.
† Outcome information response.
†Outcome specification.
†Costing system requirements.
†Competing budgetary systems.
†Relevant criteria in addition to outcomes
†Bureaucracy.
Figure 2.1 Outcome Based Budget Management
DiagramE:..\PB hand out\Chapter Two.docx
Individual Assignment
1) write the difference between public budgeting and private
budgeting.
2) what makes performance budget differ from program
budgeting?
3) what is the difference b/n activity based budget and
outcomes based budget?
4) what makes outcomes budgeting differ from the rest of
budget approaches?
5) write the difference between public Expenditure and
private Expenditure.?
Guide Line
Maximum Page Two
Deadline 20/1/2021 At 10:00 LT

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CHAPTER TWO

2. Budget Classification And Reform

† Policy formulation and performance analysis

†Aligned with business objectives

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