Preparing Budgets

August 2010

This briefing paper looks at the preparation of budgets. It considerswhat budgets are and looks at Cost Centres, Subjective Analysis, Profiling andIncremental and Zero Based budgets.

In theory a costcentre can be defined as a method of dividing up costs between departments. Or,that managers are responsible for controlling costs within a cost centre.

Controllability is an issue expanded upon below. It is a source offriction between service managers and the finance department at times.Controllability is a concept associated with shades of grey rather than blackand white distinctions. Many costs are more or less controllable. And likeFixed costs, in the long term all costs are controllable, or indeed variable.

SubjectiveAnalysis is a generic accounting term for the classification of costs within acost centre. Such descriptions include Employee costs, Supplies and Servicesand Transport. Similarly, the Chartered Institute of Public Finance andAccountancy has (for Local Authorities) issued within the Best Value AccountingCode of Practice a standard subjective analysis. It is recommended butnon-mandatory.

Budget profilingis an attempt to match an annual budget to spending patterns during the year.For example, salaries for a fixed establishment tend to be the same every month(unless there is a pay award), so a £120,000 annual budget would have £10,000allocated to each month. This is a straight-line profile, after the way itwould be illustrated graphically.

A snow-clearingbudget of £120,000 may have a small amount allocated in September forpreparatory work, such as filling grit pods, but the rest would be allocated towinter months.

Budget profilescan be established for every budget head. Some financial systems can cope withdozens. Straight-line , employee profiles that allow for pay-awards part waythrough a financial year, quarterly profiles, end of year, start of year,weekly – say for a budget head where the spend is driven in such a fashion.Custom profiles, such as the snow-clearing already mentioned can be calculated.

The budget profileat a given point in time is then matched with the actual spend, plus anycommitments, to give an accurate comparison of spend to budget. The profiledamount of budget is thus an accurate estimate of the proportion of budget thatought to have been consumed at a given point of the financial year.

Budgets can be analysed in three ways: Objectively through cost centres,subjectively and through profiling. Incremental budgeting is the most commonmethod in the public sector although some use is made of Zero Based Budgetingand some initiatives are taking place in Participatory Budgeting.

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