Question

Compare and contrast line-item, performance, program, and zero-base budgets in terms of purpose, scope, ease of preparation, actual usage, information provided, and the skills necessary to prepare them. While most budget scholars extol the virtues of clearly-stated, well-justified, well-presented, performance-based budgets, most practitioners continue to rely upon older, object-of-expenditure (line-item) formats. Why do you think that this is so? What is lost from this inattention to performance-based criteria? What specific budgetary practices deserve the most attention and what specifications might be taken to increase practitioner commitment to such under-utilized practices as performance-based budgeting? What criteria do you think should be the most important for the evaluation of public/non-profit budgets? Why?   

Answer 1

Line-Item Budgeting

Line-item budgeting is still the most widely used approach in many organizations, including schools, because of its simplicity and its control orientation. It is referred to as the "historical" approach because administrators and chief executives often base their expenditure requests on historical expenditure and revenue data. One important aspect of line-item budgeting is that it offers flexibility in the amount of control established over the use of resources, depending on the level of expenditure detail (e.g., fund, function, object) incorporated into the document.

The line-item budget approach has several advantages that account for its wide use. It offers simplicity and ease of preparation. It is a familiar approach to those involved in the budget development process. This method budgets by organizational unit and object and is consistent with the lines of authority and responsibility in organizational units. As a result, this approach enhances organizational control and allows the accumulation of expenditure data at each functional level. Finally, line-item budgeting allows the accumulation of expenditure data by organizational unit for use in trend or historical analysis.

Although this approach offers substantial advantages, critics have identified several shortcomings that may make it inappropriate for certain organizational environments. The most severe criticism is that it presents little useful information to decisionmakers on the functions and activities of organizational units. Since this budget presents proposed expenditure amounts only by category, the justifications for such expenditures are not explicit and are often unintuitive. In addition, it may invite micro-management by administrators and governing boards as they attempt to manage operations with little or no performance information. However, to overcome its limitations, the line-item budget can be augmented with supplemental program and performance information.

Performance Budgeting:

Performance budget may be defined as a budget based on functions, activities and projects. Performance budgeting may be described as a budgeting system, where under input costs are related to the end results, i.e., performance.

According to the National Institute of Bank Management, Mumbai, the PB is the process of analyzing, identifying, simplifying, and crystallizing specific performance objectives of a job to be completed over a period, in the framework of the organizational objectives, the purpose and objectives of the job.

Purpose of Performance Budgeting:

The performance budget is an instrument through which financial resources are allocated according to purposes and objectives. The costs of various programmes proposed for achieving these objectives are clearly indicated.

It also presents data for measuring worth performance of the accomplishment of objectives set under each programme. The focus of attention is not only on expenditure but also on achievement. Both are integral parts of financial planning and expenditure authorization.

Program and Planning (Programming) Budgeting (PPB)

Program budgeting refers to a variety of different budgeting systems that base expenditures primarily on programs of work and secondarily on objects. It is considered a transitional form between traditional line-item and performance approaches, and it may be called modified program budgeting. In contrast to other approaches, a full program budget bases expenditures solely on programs of work regardless of objects or organizational units. As these two variations attest, program budgeting is flexible enough to be applied in a variety of ways, depending on organizational needs and administrative capabilities.

Program budgeting differs from approaches previously discussed because it is much less control- and evaluation-oriented. Budget requests and reports are summarized in terms of a few broad programs rather than in the great detail of line-item expenditures or organizational units. PPB systems place a great deal of emphasis on identifying the fundamental objectives of a governmental entity and on relating all program expenditures to these activities. This conceptual framework includes the practices of explicitly projecting long-term costs of programs and the evaluation of different program alternatives that may be used to reach long-term goals and objectives. The focus on long-range planning is the major advantage of this approach, and advocates believe that organizations are more likely to reach their stated goals and objectives if this approach is used.

However, several limitations exist in the actual implementation of this approach, including changes in long-term goals, lack of consensus regarding the fundamental objectives of the organization, lack of adequate program and cost data, and the difficulty of administering programs that involve several organizational units. Yet despite its limitations, program budgeting is often used as a planning device while budget allocations continue to be made in terms of objects and organizational units—a process that has been adopted in many schools throughout the nation. As with performance budgeting, PPB information may be used to supplement and support traditional budgets in order to increase their informational value.

Zero-Based Budgeting

The basic tenet of zero-based budgeting (ZBB) is that program activities and services must be justified annually during the budget development process. The budget is prepared by dividing all of a government's operations into decision units at relatively low levels of the organization. Individual decision units are then aggregated into decision packages on the basis of program activities, program goals, organizational units, and so forth. Costs of goods or services are attached to each decision package on the basis of the level of production or service to be provided to produce defined outputs or outcomes. Decision units are then ranked by their importance in reaching organizational goals and objectives. Therefore, when the proposed budget is presented, it contains a series of budget decisions that are tied to the attainment of the entity's goals and objectives.

The central thrust of ZBB is the elimination of outdated efforts and expenditures and the concentration of resources where they are most effective. This is achieved through an annual review of all program activities and expenditures, which results in improved information for allocation decisions. However, proper development requires a great deal of staff time, planning, and paperwork.

Experience with the implementation of this approach indicates that a comprehensive review of ZBB decision packages for some program activities may be necessary only periodically. Additionally, a minimum level of service for certain programs may be legislated regardless of the results of the review process. As a result, ZBB has had only modest application in schools, although the review of program activities makes ZBB particularly useful when overall spending must be reduced.

Stages of Zero Base Budgeting:

1. Corporate objectives should be established and laid down in detail.

2. Each separate activity of the organization is identified and called decision package. A decision package is a document that identifies each activity and describes it in such a fashion so that management can (i) evaluate it and rank it against other activities competing for limited and scarce resources, and (ii) decide to approve or disapprove it.

3. Budget staff will compile operating expenses for packages approved by the depart­mental head.

Advantages of Zero Base Budgeting:

Zero Base Budgeting has some distinct advantages, some of them are outlined below:

(i) The proposals for funds are strictly considered on merit basis and funds are allocated on the basis of priority.

(ii) This technique motivates managers to evolve cost effective ways of performing jobs. New ideas also emerge.

(iii) Obsolete operations and wastages are identified and eliminated.

(iv) Decision packages improve coordination within the firm and strengthen communi­cation between different departments.

(v) Managers become aware of the value of inputs helping them to identify priorities.

(vi) Zero Base Budgeting is particularly useful in areas like service departments where it is often difficult to identify and quantity output.

(vii) ZBB aims at motivating the staff to take greater interest in the job because it involves staff in decision taking process.

(viii) ZBB is useful especially for service departments where it may be difficult to identify output.

The process of classification in performance budgeting follows the under-mentioned steps:

(a) Prepare a comprehensive list of all the objectives and scope of work of the Ministry/ Department or Undertaking;

(b) Frame from this list a functional classification that indicates vividly the range of work of the Ministry, Department or Undertaking;

(c) Lay down the programmes and activities in such a manner as would lend itself to treatment for allocation of funds from the priority point of view;

(d) The programmes and activities be so classified as to facilitate the compilation of ac­counts and computation of costs. It may also facilitate the consideration of alternative courses of action for arriving at a specified goal of action.

Advantages of Performance Budgeting:

Following are some of the striking advantages of performance budgeting:

(a) It enables the correlation of the physical and financial aspects of every programme and activity. The existing budgetary system does not make such a correlation possible.

(b) It helps in effecting improvement in the procedure of budget formulation and review­ing the actual progress of programmes at all levels of government.

(c) It helps improving decision-making and management of programmes and objectives, a sort of indirect help to the administrative authorities.

(d) It leads to overall efficient financial management and programmes and projects. It eliminates the callous waste of money that occurs during the closing months of the financial year to avoid the lapse of the financial grants.

(e) It facilitates the better appreciation and review of the objectives of the government, the direction of outlays and the results accruing out of these outlays, for the benefit of the legislature.

(f) It affixes the responsibility very precisely. It indicates who was responsible for what and earmarks authority for executing the work for the next year.

(g) It provides a clear and true picture of spending and revenue alternatives.

(h) It clearly shows as to what was done in the previous year and at what cost, both unit- wise and programme-wise.

History of Performance Budget:

In 1949, Hoover Commission of USA innovated this budget. The performance budgeting was gaining importance when Second Hoover Commission submitted its report in 1955 for its wide range of precision and acceptance, particularly in Government Departments where some special information is required to be performed.

Performance budgeting was popularly used when U. S. Government gave its formal recognition.

ADVANTAGES OF PROGRAM BUDGET

• It helps in determining the priority of the projects.
• It helps in planning and managing the delivery of services in the future.
• It monitors the allocation of resources to a project and how they are used to meet the goals of the organization.
• It helps in identifying areas where cost reduction can be done and savings can be made.
• It helps in spotting the areas where higher funds are required.
• It brings accountability to the organization. Since each project has its respective budget, performance measurement can be done and accountability can be set.

Apart from the advantages, there are many disadvantages of program budgets. Let us have a look at them.

DISADVANTAGES OF PROGRAM BUDGET

• Program budget requires a lot of information and it can take ample time to find out exact financial resources required. In addition, during the year when any changes need to be made to the resources required, it becomes very difficult to make a balanced budget.
• Sometimes, overlapping causes several changes to the budget. Like for example, the municipality department may include the electricity repair expenses in the budget, which may or may not incur. This leads to budgeting of dual expenses.
• If the program budget is incorrect, it can lead to increase in costs.
• The program budget sometimes makes it difficult to evaluate the performance of the project. Multiple layers of administrators govern a project. Finding out the actual
• performance of any level of administrator can become a daunting task.