BOOKKEEPING Form 3 Topic 13

GOVERNMENT BUDGETING PROCEDURE

Government Budgeting Procedure

Meaning of a Budget

Define a budget

: A budget is a set of interlinked plans that quantitatively describe an entity's projected future operations. A budget is used as a yardstick against which to measure actual operating results, for the allocation of funding, and as a plan for future operations.

The budgeting process typically begins with a strategy planning session by senior management. The management team then applies the agreed strategic direction to a series of plans that roll up into a master budget. The plans include a sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, sales and administrative budget, and fixed assets budget. All of these plans roll up into the master budget, which contains a budgeted income statement, balance sheet, and cash forecast. There may also be a financing budget in which is itemized the debt and equity structure needed to ensure that the cash requirements of the budget can be met.

A budget is subject to a number of problems, such as the "use it or lose it" mentality, whereby managers spend all funds allocated to their departments on the grounds that those expenditures form the basis for their budgets in the following year; not spending all allocated funds will therefore mean that the budget will likely be reduced in the following year

Steps in the Preparation of the Budget

State steps in the preparation of the budget

The main steps to prepare the master budget:

Form a budget committee
Review the long-term plan
Identify the principal budget factor and prepare the budget for it
Prepare the sales budget
Prepare the finished goods stock budget and production budget
Prepare budgets of resources for production: viz:
Material usage budget, based on the production budget, showing quantities and perhaps the cost for each type of material used
Machine utilization budget, showing operating hours required on each machine
Labour or wages budget, for all grades of labour
Prepare overhead cost budgets for maintenance, administration, distribution and others
Prepare the raw materials stock budget which will depend on the central plant’s needs for stock
Prepare the raw materials purchases budget in quantities and value for each type of material purchased. This budget is completed by adjusting the budgeted materials usage for the change in the raw materials stock budget
Prepare, debtors, creditors and cash budgets. The completion of the sales and purchases budgets allows budgets for debtors and creditors to be drawn up. The cash effects of all budgets are then summarized in the cash budget.
Co-ordinate and review budgets, a task which is facilitated by regular meetings of the budget committee. A review may indicate that some budgets need modifying to be compatible with others
Prepare the master budget, as a summary of all other budgets, and submit it to the board of directors for approval as plan for the following budget period.

The Purpose of Central Government Budgeting

Explain the purpose of central government budgeting

1. Reallocation of Resources:

Through the budgetary policy, Government aims to reallocate resources in accordance with the economic (profit maximization) and social (public welfare) priorities of the country. Government can influence allocation of resources through:

(i) Tax concessions or subsidies:

To encourage investment, government can give tax concession, subsidies etc. to the producers. For example, Government discourages the production of harmful consumption goods (like liquor, cigarettes etc.) through heavy taxes and encourages the use of ‘Khaki products’ by providing subsidies.

(ii) Directly producing goods and services:

If private sector does not take interest, government can directly undertake the production.

2. Reducing inequalities in income and wealth:

Economic inequality is an inherent part of every economic system. Government aims to reduce such inequalities of income and wealth, through its budgetary policy. Government aims to influence distribution of income by imposing taxes on the rich and spending more on the welfare of the poor. It will reduce income of the rich and raise standard of living of the poor, thus reducing inequalities in the distribution of income.

3. Economic Stability:

Government budget is used to prevent business fluctuations of inflation or deflation to achieve the objective of economic stability. The government aims to control the different phases of business fluctuations through its budgetary policy. Policies of surplus budget during inflation and deficit budget during deflation helps to maintain stability of prices in the economy.

4. Management of Public Enterprises:

There are large numbers of public sector industries (especially natural monopolies), which are established and managed for social welfare of the public. Budget is prepared with the objective of making various provisions for managing such enterprises and providing those financial help.

5. Economic Growth:

The growth rate of a country depends on rate of saving and investment. For this purpose, budgetary policy aims to mobilize sufficient resources for investment in the public sector. Therefore, the government makes various provisions in the budget to raise overall rate of savings and investments in the economy.

6. Reducing regional disparities:

The government budget aims to reduce regional disparities through its taxation and expenditure policy for encouraging setting up of production units in economically backward regions.