Budgetary Control

Presented by: Presented to: Dr. Paramjit Kaur UBS, Panjab University.

Annu Malik Anshu Goyal Awadhesh Gaur Satyajeet Suman Yatendra Kumar
MBA(Gen, Section-A) 2012-13

Concept Of Budgeting
Formal process of financial planning using estimated accounting and financial data.
According to CIMA, Budget is a financial and /or quantitative statement, prepared and approved prior to a defined period of time of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital.

Budget is a systematic plan.

Concept Of Budgetary Control

It is a control measure in which actual state of affairs is compared with the budget so that any variations could be spotted and corrective actions could be taken before its too late. Budgetary Control is defined as "the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide a base for its revision.

Objectives & Functions Of Budgeting

1. 2. 3. 4. Planning Coordination Performance Evaluation Control

Objectives Of Budgetary Control

1. Defining goals and responsibilities: Laying down the goals and responsibilities of each individual so that everyone knows what is expected of him. 2. Basis for Performance Evaluation: Providing basis for the comparison of actual performance with the predetermined targets and investigation of deviation. 3. Optimum Utilization of Resources: Ensuring the best use of all available resources to maximize profit or production, subject to the limiting factors. 4. Coordination: Coordinating the various activities of the business and centralizing control. 5. Planned action: Engendering a spirit of careful forethought, assessment of what is possible and an attempt at it.

Types Of Budgetary Control Systems

Time Period
Long term budget Short term budget

Conditions
Current budget Basic budget

Capacity
Fixed budget Flexible budget

Coverage
Functional budget Master budget

Advantages of Budgeting
Budgeting compels and motivates management to make an early and timely study of its problems. It generates a sense of caution and care, and adequate study among its managers before decisions are made by them. Budgeting provides a tool through which managerial policies and goals are periodically evaluated, tested and established as guidelines for the entire organization. Budgeting co-ordinates and correlates all business activities. It enables management to decentralize responsibility without losing control of the business. It reveals weakness,inefficiencies,deviations in the organization very promptly which can be checked immediately to achieve a desired goal. Budgeting encourages productive competition, provides incentives to perform efficiently and gives a sense of purpose to each individual in the organization.

Limitations of Budgeting
Planning, budgeting or forecasting is not an exact science; it uses approximations and judgment which may not be cent percent accurate. At best budget is an estimate; no one knows precisely what will happen in future. The success and utility of budgeting depends on the cooperation and participation of all the members of the management. Many time budgeting has failed because executive management has only paid lip service to its execution. A budget is only a tool and does not eliminate nor take over the place of management . Executives generally feel circled in by a budget and its related figures. They fail to understand that budget is meant to provide detailed information, goals and targets which may help them in achieving the companys objectives. The establishment of budgeting process takes time . Also, sometimes too much is expected from a budget and in case expectations are not fulfilled, blame is put on the budget.

Budgeting vs Forecasting
Budgeting 1. A budget is a financial plan and a list of all planned expenses and revenues and budgeting is a process of preparing Budgets. 2.It is not merely forecasting of a particular event or estimating or prediction; it is a plan. 3.In simple terms, Budgeting is an attempt , at the beginning of the year (or at any other period), to plan the profit and loss account for the year and to aim for definite balance sheet at the end, instead of relying upon chance. 4.While the budget sets the targets for the company to achieve, 5.A budget starts as the same time of a new financial year. Forecasting 1. Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed. 2.Forecasting is estimating future events and there effects on budget. 3.Forecasting comes to an end after mere estimating and it can be made by a firm for forecast of general business conditions.

4.The forecast provides the company with an idea of what is expected. 5.However, a forecast is prepared a few months after the financial year.

Stages in planning process

1. Establishing objectives 2. Identify potential strategies 3. Evaluate alternative strategic actions 4. Select alternative course of action 5. Implement long term plan in form of annual report 6. Monitor actual results

7. Respond to divergence from plan

Budget Period
It is defined as the Period for which a budget is prepared. It can be : Short-term budget Long-term budget Length basically depends on: Type of business Length of manufacturing cycle Ease/difficulty in forecasting future market conditions

The Budget Committee

Its functions/objectives:
Decide the company's general policies and objectives Receive and review individual budgets Suggest changes, modifications in accordance with organizational objectives Approve budgets which then act as targets Receive and analyze performance reports regarding implementation of budgets Suggest corrective action to improve efficiency and achieve budgetary controls To locate any discrepancies and suggest corrective actions To participate in decision making in strategic issues like expansion, modernization, etc

It consists of.
1. Major functional heads Sales Manager Production manager Personnel Manager Finance manager, etc 2. Budget Controller

Budget Manual
Defines the responsibilities and authority of different levels of management Establish organizational hierarchy Definition and clarification of terms used in the budgets Definition of organizational and functional objectives Fixation of responsibility for preparation and implementation of budgets Specification and timings of statements and reports Exhaustive programme of budget preparation

ORGANIZATIONAL OBJECTIVES SHORT TERM PLANS LONG TERM PLANS CAPITAL BUDGET SALES BUDGET CAPITAL EXPENDITURE BUDGET

PRODUCTION BUDGET

R&D BUDGET MANPOWER BUDGET

CASH FLOW BUDGET BUDGETED P/L ACCOUNT BUDGETED BALANCE SHEET MASTER BUDGET

Budgeting Process

Elements of Successful Budgeting Plan

Accurate forecasting of business activities. Coordinating business activities. Communicating the budgets. Acceptance and cooperation. Reasonable flexibility. Providing a framework for evaluation.

Budgetary Control Vs Standard Costing

Although budgetary control and standard costing both are based on some common principles; both are pre-determined, comparison is made with the actual costs and both systems need a revision of the standards or the budget, but there are some differences 1. Budgetary Control is the limit on the expenditure above which expenses should not exceed whereas Standard Costing is a technique where minimum standards are set to be attained by the actual performance. 2. Budgetary control covers as a whole in terms of revenue and expenditures such as purchases, sales, production, finance etc. Standard costing is related to a product and its cost only. 3. Budgetary control is applicable to utmost all business organizations. Standard costing is applicable to manufacturing, concerns producing standard products and services. 4. Budgetary control is concerned with a specific period and is based on the totals of amounts i.e. estimated costs of required factors of production like material, labour etc. Whereas standard costing is not used for forecasting purposes. They are planned costs under the ideal circumstances. It is concerned with the standard costs, which are worked out generally per unit of production.

Key Factor
The factor which governs the quantity which is manufactured or sold is known as key factor. The ICMA terminology defines a key factor as a factor which at any time or over a period may limit the activity of an entity often one where there is a shortage or difficulty of supply. This will have an adverse effect over the achievement of budget. Therefore it must be identified and its effect on each of the budget is to be carefully considered during the preparation of budget. Key factor can be changed by the management action.

Some Key Factors:

Materials: Availability of supply. Restrictions imposed by licenses, quotas, etc. Labor:
General shortage. Shortage in certain key processes.

Plant:
Insufficient capacity due to lack of capital. Insufficient or lack of space. Insufficient or lack of market. Bottlenecks in certain key processes.

Some Key Factors

Sales:
Low market demand. Shortage of experienced salesmen. Inadequate advertisement for want of money.

Management:
Lack of know-how. Inefficient executives. Insufficient research into product design and methods. Lack of capital thereby restricting policy.

Rolling Budget
This is a budget which is updated continuously by adding a further period ( a month/quarter) and deducting a corresponding earlier period. Budgeting is a continuous process under this method of preparation of budget.

Once the first period elapses, the forecast for that period is dropped and the forecast for the future period beyond the existing budget period is added, thereby 12 months forecast is available. Where future costs or activities could not be predicted and forecast reliably, this method is useful.
A rolling budget calls for considerably more management attention than is the case when a company produces a one-year static budget, since some budgeting activities must now be repeated every month

Fixed Budget
It is defined as a budget which is designed to remain unchanged irrespective of the volume of output or turnover attained.
It is a rigid budget and is drawn on the assumption that there will be no change in the budgeted level of activity. It does not take into consideration any change in expenditure arising out of change in the level of activity. A fixed budget will, therefore be useful only when the actual level of activity corresponds to the budgeted level of activity

Flexible Budget
It is defined as a budget which by recognizing the difference in behavior between fixed and variable costs in relation to fluctuation in output, turnover, or other variable factors such as number of employees is designed to change appropriately with such fluctuations. It is prepared after making an intelligent classification of all expenses between fixed , semi variable and variable because the usefulness of such a budget depends upon the accuracy with which the expenses can be classified.

A flexible budget gives different budgeted costs for different levels of activity.

Sales Budget
Operating or Functional Budget It is the most important budget as all budgets such as production, inventory, personnel, administration, selling & distribution budget are all affected by the sales budget and are dependent upon the revenue derived from sales. Developing a sales budget requires forecasting future sales levels. ABC Company Ltd. Sales Budget for the Year Ending December 31, 2010 Products A B Total Budgeted Sales Units 70,000 80,000 1,50,000 Budgeted Sales Price (Rs.) 80,000 1,20,000 Total (Rs) 56,00,000 96,00,000 1,52,00,000

Forecasting Sales
Factors to be considered in forecasting sales: 1) Information concerning past performance. 2) Info. Regarding present conditions in the co. and in each sales territory. 3) Data concerning industry and general business conditions (business barometers). Important business indicators:

1) Gross National Product: Total market value of output of goods and services produced in the entire economy. 2) Personal Income and purchasing power of the population. 3) Unemployment conditions 4) Governmental policies

The Production Budget

It is an estimate of the quantity of goods that must be produced during the budget period. Aim is to supply finished goods of a specified quality to meet marketing demands. Stated in physical units i.e. Quantity Is similar to purchases budget. A manufacturing company prepares a production budget.

Steps
PRODUCTION = SALES + CLOSING STOCK - OPENING STOCK

Production = Units to be produced

Sales = Budgeted Sales( from Sales budget) Closing Stock = Desired closing inventory of finished goods (x% of next quarters budgeted sales) Opening stock = Beginning inventory of finished goods (Closing Inventory for Q1 = Opening Inventory for Q2)

Example

Direct Labor Budget

The direct labor budget is developed from the production budget. Direct labor requirements must be computed so that the company will know whether sufficient labor time is available to meet the budgeted production needs. By knowing in advance how much labor will be needed throughout the budget year, the company can develop plans to adjust the labor force as situation requires. Companies that neglect budgeting, run the risk of facing labor shortages or having to hire and lay off workers at awkward times. Erratic labor policies lead to insecurity, low morale, and inefficiency

Example of Direct Labor Budget

Hampton Freeze,Inc. Direct Labor Budget For The Year Ended December 31,2003

1 Required production in cases 14,000 32,000

2 36,000

3 19,000

4 101,000

Year

Direct labor hours per case

0.40

0.40

0.40

0.40

0.40

-------Total Direct Labor hours needed 5,600 12,800

-------14,400

-------7,600

-------40,400

--------

Direct labor cost per hour

$15.00

$15.00

$15.00

$15.00

$15.00

-------Total direct labor cost* $84,000

-------$192,000

-------$216,000

-------$114,000

-------$606,000

=====

=====

=====

=====

=====

* This schedule assumes that the direct labor work force will be fully adjusted to the total direct labor hours needed each quarter.

 The first line in the direct labor budget consists of the required production for each quarter, which is taken directly from production budget. The direct labor requirement for each quarter is computed by multiplying the number of units to be produced in that quarter by the number of direct labor hours required in making a unit. For example, 14,000 cases are to be produced in the first quarter and each case requires 0.40 direct labor hour, so a total of 5,600 direct labor hours (14,000 cases 0.40 direct labor hours per case) will be required in the first quarter. The direct labor requirements can than be translated into budgeted direct labor costs. How this is done will depend on the company's labor policy

Explanation of the direct labor budget for Hampton Freeze Inc.

Explanation contd..
In direct labor budget schedule above the management of Hampton Freeze Inc. assumes that the direct labor force will be adjusted as the work requirements change from quarter to quarter. In that case, the direct labor cost is computed by simply multiplying the direct labor hour requirements by the direct labor rate per hour. For example, the direct labor cost in the first quarter is $84,000 (5,600 direct labor hours $15 per direct labor hour). However many companies have employment policies or contact that prevent them from laying off and rehiring workers as needed Suppose, for example, that Hampton Freeze has 25 workers who are classified as direct labor and each of them is guaranteed at least 480 hours of pay each quarter at a rate of $15 per hour. In that case, minimum direct labor cost for a quarter would be as follows: 25 workers 480 hours per worker $15 per hour = $180,000 Note that in direct labor budget the direct labor cost for the first and fourth quarters would have to be increased to a $180,000 level if Hampton Freeze's labor policy did not allow it to adjust the work force at will.

Direct Material Budget

Direct materials budget is prepared after computing production requirements by preparing a production budget. Direct materials budget or materials budgeting details the raw materials that must be purchased to fulfill the production requirements and to provide for adequate inventories. The required purchases of raw materials are computed as follows:

Raw materials needed to meet the production schedule Add desired ending inventory of raw materials -------Total raw materials needs Less beginning inventory of raw materials -------Raw materials to be purchased

XXXX XXXX -------XXXX XXXX -------XXXX ======

Preparing a budget of this kind is one step in a company's overall material requirements planning (MRP). MRP is an operations management tool that uses a computer to help manage materials and inventories, The objective of material requirements planning (MRP) is to ensure that the right materials are on hand, in the right quantities, and at the right time to support the production budget.

Example of Direct Materials Budget: Hompton Freeze

Hampton Freeze, Inc. Direct Materials Budget For the Year Ended December 31, 2009 1 Required production in cases 14,000 Quarter 2 32,000 3 36,000 4 19,000 Year 1,01,000

Raw materials needed per case (pounds)

15
-----------

15

15

15

15

----------- ----------- ----------- ----------4,80,000 5,40,000 2,85,000 15,15,000 54,000 28,500 22,500 22,500

Production needs (pounds) 1 Add desired ending inventory of raw material

2,10,000 48,000 ------------

------------ ------------ ------------ -----------5,34,000 5,68,500 3,07,500 15,37,500 48,000 54,000 28,500 21,000

Total needs Less beginning inventory of raw materials

2,58,000 21,000 ------------

------------ ------------ ------------ -----------4,86,000 5,14,000 2,79,000 15,16,500 $0.20 $0.20 $0.20 $0.20 ------------ ------------ ------------ -----------$97,200 $102,900 55,800 $303,300 ======= ======= ======= ======= 50% 50%

Raw materials to be purchased Cost of raw materials per pound Cost of raw materials to be purchased Percentage of purchases paid for in the period of the purchase Percentage of purchase paid for in the period after purchase

2,37,000 $0.20 -----------$47,400 =======

50%

50%

Schedule of Expected Cash Disbursement for Materials 2 Accounts payable, beginning balance 3 4 5 6 First-quarter purchase Second-quarter purchases Third-quarter purchase Fourth-quarter purchase Total cash disbursement $25,800 23,700 $23,700 48,600 $48,600 51,450 $25,800 47,400 97,200 1,02,900 27,900 ---------$301,200

$51,450 27,900 ---------- ---------- ---------- ---------$49,500 $72,300 $100,050 $79,350

1 Ten percent of the next quarter's needs. For example, the second-quarter production needs are 480,000 pounds. Therefore, the desired ending inventory for the first quarter would be 10% 480,000 pounds = 48,000 pounds. The ending inventory of 22,500 pounds for the quarter is assumed 2 Cash payments for the last year's fourth-quarter materials purchases.

3 $47,500 50%; $47,500 50%.

4 $97,200 50%; $97,200 50%. 5 $102,900 50%; $102,900 50%. 6 $55,800 50%. Unpaid fourth quarter's purchases appear as accounts payable on the company's end of year balance sheet

Selling and Administrative Expense Budget

Selling and administrative expense budget lists the budgeted expenses for areas other than manufacturing.

In large organizations this budget would be a compilation of many smaller, individual budgets submitted by department heads and other persons responsible for selling and administrative expenses.
For example, the marketing manager in a large organization would submit a budget detailing the advertising expenses for each budget period.

Example

Explanation (Hampton Freeze)

Like the manufacturing overhead budget the selling and administrative expense budget is divided into variable and fixed cost components. In the above example the variable selling and administrative expense is $1.80 per case. Consequently, budgeted sales in cases for each quarter are entered at the top of the schedule. These data are taken from the sales budget.

The budgeted variable selling and administrative expenses are determined by multiplying the budgeted sales in cases by the variable selling and administrative expense per case.
For example, the budgeted variable selling and administrative expense for the first quarter is $18,000 (10,000 cases $1.80 per case). The fixed selling and administrative expenses (all given data) are then added to the variable selling and administrative expenses to arrive at the total budgeted selling and administrative expenses. Finally, to determine the cash disbursement for selling and administrative items, total budgeted selling and administrative expense is adjusted by adding back noncash selling and administrative expenses (in this case, just depreciation).

The Cash Budget

Objectives To ensure that sufficient cash is available at all times to meet the level of operations that are outlined in various budgets. Also to have enough cash to meet liquidity needs. Plan investments in case of cash surplus Fill cash deficiency through bank loans/credits Plan discounts

Period of Cash Budget

Operational cash planning : cash budgets may be prepared monthly, weekly or even daily to meet informational requirements Short-range : Indicates cash inflows and outflows as generated by the annual profit plan Long-range : does not disclose detailed estimates of revenue and expenses. It is timed as per long-range profit plan.

R & D Budget

The Research and Development Budget is the most important tool for planning and controlling research and development costs. It compels management to think in advance about the fairness of these expenses both in total amounts and in each field of research programme. It helps in coordination with the companys plans and projects. Since the R&D programmes compete with other desirable activities in allocation of funds, coordination is need to balance financially immediate and long term company plans. Also, this budget guides the R&D department to plan correctly the staff and equipment requirements and special facilities needed for work.

Capital Expenditure Budget

Capital Expenditures is referred as amount of money needed to spend on capital items or fixed assets such as land, buildings, roads, equipment, etc. that are projected to generate income in the future. Capital expenditures to be budgeted include replacement, acquisition, or construction of plants and major equipment. Capital Expenditure Budget is plan prepared for individual capital expenditure projects. It is one of the most important areas of managerial decisions. Capital expenditure involves long-term commitments. Also ,the benefits of capital expenditure spread over a long period of time.

 The capital expenditure aims at minimizing errors while making capital expenditure decisions. It is necessary that business firms should establish definite procedures and methods for evaluating the merits of a project before funds are committed. After alternative capital expenditure projects have been investigated regarding sales, manufacturing costs, marketing costs,etc the most important alternative should be selected Short range and long range projects- Capital expenditure budgets are prepared both for short range and long range projects depending on the requirements of the business firms. Short range projects These are implemented during the current accounting period . Long range projects-These are not executed in the current period. They are expressed only in general terms,they become budget commitments only when the time for there implementation approaches.

Budgeted Balance Sheet

A Projected B/S represents the expected financial position at a particular date. The Projected B/S is prepared from the Budgeted B/S at the beginning of the budget period and the expected changes in the account balances reflected in the operating budgets, capital expenditure budgets and cash budgets. If any of the accounts or relationship in the projected balance sheet are not according to the managements requirements and objectives, the operating plan might have to be changed.

ZERO BASE BUDGETING (ZBB)

Method of Budgeting whereby all activities are evaluated each time the budget is formulated and every item of expenditure in the budget is fully justified. It involves starting from scratch or zero. . The base line is zero rather than last year's budget.

Traditional Budgeting: Departmental managers need to justify only increases over the prior years budget (incremental budget). This implies what is already being spent is automatically sanctioned. Current Expenditure + Estimate of next years budget ZBB approach requires considerable documentation. In addition to all of the schedules in the usual master budget, the manager must prepare a series of decision packages in which all of the activities of the department are ranked according to their relative importance and the cost of each activity is identified. Higher level managers can then review the decision packages and cut back in those areas that appear to be less critical or whose costs do not appear to be justified.

So! What is a Decision Package?

A decision package is a document that identifies and describes a specific activity in such a manner that the management can:
1) Evaluate it and rank it against other activities competing for limited resources 2) Decide whether to approve or disapprove it.

Applications of ZBB
1) Each separate activity of the org. is identified and called a decision package.
2) Each decision package must be justified. 3) Alternatives for each decision packages are considered in order to select better and cheaper options for the package. 4) Managers rank their decision packages in order of priority for resource allocation.

5) Resources are allocated to the packages.

Advantages ZBB
1. Optimum allocation of resources, as it is based on needs and benefits.

2.
3. 4. 5. 6. 7. 8. 9. 10.

Drives managers to find cost effective ways to improve operations.

Detects inflated budgets. Municipal planning departments are exempt from this budgeting practice. Useful for service departments where the output is difficult to identify. Increases staff motivation by providing greater initiative and responsibility in decision-making. Increases communication and coordination within the organization. Identifies and eliminates wasteful and obsolete operations. Identifies opportunities for outsourcing. Forces cost centers to identify their mission and their relationship to overall goals.

Limitations ZBB
Difficult to define decision units and decision packages, as it is time-consuming and exhaustive. Forced to justify every detail related to expenditure. The research and development (R&D) department is threatened whereas the production department benefits. Necessary to train managers. Zero based budgeting (ZBB) must be clearly understood by managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process. In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details. Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.

Zbb vs Traditonal Budgeting

Zbb 1.Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year's budget. 2.It is a method of budgeting where all activities are re-evaluated each time. 3.Zbb starts from scratch or zero. Traditional Budgeting 1. In traditional approach of budgeting, the managers start with last year's budget and add to it (or subtract from it) according to anticipated needs. This is an incremental approach to budgeting in which the previous year's budget is taken for granted as a baseline. This approach is called incremental budgeting. 2. Assumes activities and methods of working will continue in the same way. 3. Managers start with last year's budget

4.It leads to increse staff involvement which 4. No incentive for developing new ideas may lead to motivationand greater interst in and no incentives to reduce costs which the job. discourage employees.
5.It ensures that the best possible methods of performing are used only when new ides are emerged. 5. Assumes activities and methods of working will continue in the same way.

Performance budgeting introduction

Introduction The financial system of our country during the British period was characterised by high degree of centralisation, adherence to rigid financial rules and procedures, integration of accounts and audit etc. After independence, attempts have been made to make the financial administration performance-oriented, with a view to bringing about efficiency and economy in the implementation of plans, programmes and activities. Efforts were made to make the budget an efficient tool of plan implementation. The result has been the introduction o f the performance budgeting system in the government

Performance Budgeting

Key Facts
Entire panning and budgeting framework is result oriented Used in government/public sector operations Uses statements of mission goals and objectives to explain why the money is being spent Comprises of 3 elements : The result (final outcome) The strategy (different ways to achieve) Activity/outputs (what is actually done ) In private sector CPM (Corporate Performance Management) is a counterpart of PBB

Process
Classification of objectives Specification of objectives Analysis of activities Establishing control norms Clear lines of authority and responsibility Evaluation

Performance Budgeting in contrast to Traditional Budgeting Methods

Performance budgeting represents a significant departure from traditional lineitem budgeting. A line-item budget is primarily a tool for controlling expenditures. A line-item budget typically spells out the level of spending allowed for specific purposes. As the fiscal year progresses, departmental spending must be within these amounts unless formal budget amendments are approved. Under spending in one category cannot automatically be used to supplement another category.

Sample Line-Item Budget Department of Economic Development FY1993 FY1994 Personnel Costs $1,813,015 $1,870,417 Employee Benefits 3,37,527 Travel In-State 60,533 Travel Out-of-State 1,12,105 Repairs and Maintenance 20,220 Rentals and Leases 4,54,123 Utilities and Communication 1,70,232 Professional Services 13,55,752 Supplies & Operating Expenses 1,88,380 Transportation Equipment Maintenance 2,611 Transportation Equipment Purchases -0Other EquipmentPurchases 13,278 Total Expenditures $4,527,776 $5,143,416

3,98,196 86,000 1,98,000 48,201 3,77,000 1,97,500 13,97,000 4,28,102 43,000 80,000 20,000

While line-items can be useful in helping managers with internal control, they are not as useful as a policy or decision making tool. They assure elected and administrative officials that money is being spent only for approved purposes, but they do not show what is being accomplished with the money.

Other major drawbacks of line-item budgets include: They promote inertia, with the focus being on making marginal changes from year to year. They can result in inefficient and uneconomical activities because management is not permitted enough Flexibility to address changing situations and often must use it or lose it at the end of the year. They invite micromanagement, encouraging questions such as why are we spending so much on supplies? rather than how have our efforts increased manufacturing exports this year?
In contrast, performance budgeting has more of a policymaking orientation. It: Connects - plans, measures, and budgets; Forces departments and policymakers to think about the big picture; Provides better information about the impact of budget decisions on people; Gives departments increased budgetary flexibility and incentives for generating budget savings; Allows for on-going monitoring to see if agencies are moving in the right direction; Strengthens legislative decision making and oversight; Enhances financial accountability to citizens, decision makers, and governmental monitoring agencies; and Supports better management and evaluation.

REFERENCES
Lal, Jawahar (2009) Cost Accounting. 4th Ed. New Delhi: Tata McGraw Hill Education Pvt. Ltd.

http://www.accountingformanagement.com/budgeting_and_planning.htm
http://en.wikipedia.org/wiki/Budgeting Lal, Jawahar . Accounting for Management. New Delhi: Himalaya Publishing House

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