This briefing paper looks at the preparation of budgets. It considers what budgets are and looks at Cost Centres, Subjective Analysis, Profiling and Incremental and Zero Based budgets.
In theory a cost centre 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 of friction between service managers and the finance department at times. Controllability is a concept associated with shades of grey rather than black and white distinctions. Many costs are more or less controllable. And like fixed costs, in the long term all costs are controllable, or indeed variable.
Subjective Analysis is a generic accounting term for the classification of costs within a cost centre. Such descriptions include Employee costs, Supplies and Services and Transport. Similarly, the Chartered Institute of Public Finance and Accountancy has (for Local Authorities) issued within the Best Value Accounting Code of Practice a standard subjective analysis. It is recommended but non-mandatory.
Budget profiling is 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 £10,000 allocated to each month. This is a straight-line profile, after the way it would be illustrated graphically.
A snow-clearing budget of £120,000 may have a small amount allocated in September for preparatory work, such as filling grit pods, but the rest would be allocated to winter months.
Budget profiles can be established for every budget head. Some financial systems can cope with dozens. Straight-line , employee profiles that allow for pay-awards part way through 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 profile at a given point in time is then matched with the actual spend, plus any commitments, to give an accurate comparison of spend to budget. The profiled amount of budget is thus an accurate estimate of the proportion of budget that ought 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 common method in the public sector although some use is made of Zero Based Budgeting and some initiatives are taking place in Participatory Budgeting.
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