Budgetary Control (PDF)

TOPIC 3 BUDGETARY CONTROL  OUTLINE Budgetary Control Process Features of budgetary control system Types of Budgetary Control Responsibility Accounting  BUDGETARY CONTROL PROCESS Budgetary control is the establishment of a budgeting system to formulat...

TOPIC 3 BUDGETARY CONTROL  OUTLINE Budgetary Control Process Features of budgetary control system Types of Budgetary Control Responsibility Accounting  BUDGETARY CONTROL PROCESS Budgetary control is the establishment of a budgeting system to formulate financial action plans for the operations of an organisation and the system to direct such finances to achieved the desired actions specified in the budget It is a control technique whereby actual results are compared with budgets. MOF is responsible for the national budgetary control to ensure that the expenditure of the country as a whole are always within the available resources of the country \ 3  BUDGETARY CONTROL PROCESS Responsibility of the budgetary control lies with the respective head or CO of such organisations. The CO are expected to ensure that their expenditure are within the planned budgets of the organisations. Any positive or negative variances are determined. Report are to be prepared to the appropriate authority of any situations that might cause a change in the expected outcomes of the budget \ 4  BUDGETARY CONTROL PROCESS Budgetary control acts as a deterrent against misappropriation of funds. Rules establish procedures, but they also establish the boundaries of behaviour. Control assumes that expenditure must agree with appropriation. Appropriation expresses the intent of the authorising agent or the legislature. Control maintains information about expenditure to preserve an audit trail. The first requirement of a good system of budgetary control is to set up accounts for collecting data on inputs and outputs at the lowest distinct level of activity. \ 5  FEATURES BUDGETARY CONTROL SYSTEM 1. The organisations are broken down into various responsibility centres where each centre is to carry out identified activities. A detailed plan is formulated into a comprehensive budget 2. The objectives, output and outcomes of the organization are used as the bases of measuring performance 3. A performance indicator is developed to monitor and evaluate the performance and progress of each responsibility centre of the organisation 4. A continuous performance evaluation is carried out to determine the performance of the organization (output or outcomes) in comparison with the budget \  TYPES OF BUDGETARY CONTROL Fund Control This type of control refers to the procedures set up to ensure that the fund is properly kept and used in the right way. Revenue Control This type of control refers to the procedures set up to ensure the collection of revenues of the governments are from properly identified sources, there are proper monitoring of such collections and the revenues collected are accounted for properly in the correct funds and proper books of accounts. Expenditure Control This is the control procedure within the spending organisation to ensure that all spending is done exactly for the purposes that has been agreed. This is also known as Vote Control and is exercised by the accounting officer of the organisation.  TYPES OF BUDGETARY CONTROL Cost Control This is the control procedure to ensure the total cost incurred for any activity of an organisation is within the right valuation. Cash Control This type of control ensures that spending plans for a period are made by a department based on approved vouchers. Cash forecast need to be done to avoid any overspending request that would lead to deficit. Payment/Disbursement Control This procedure is to ensure that payment for any activities through preparation of payment vouchers is properly authorised. Salary/Payroll Control This control is to ensure that right amounts are paid to the right people in the organisation and at the right time to avoid fraud and payment to non- existing workers.  ADVANTAGES OF BUDGETING AND BUDGETARY CONTROL 1. Requires and forces management to think about the future, to look ahead, to set out detailed plans for achieving the targets for each department, and to anticipate and give the organisation purpose and direction. 2. Promotes coordination and communication. 3. Clearly defines areas of responsibility where managers of budget centres are to be made responsible for the achievement of budget targets for the operations under their personal control. 4. Provides a basis for performance appraisal where actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Deviations from budget can then be investigated. The reasons for the deviations can be divided into controllable and non- controllable factors. 5. Enables remedial action to be taken as variances emerge. 6. Motivates employees by participating in the preparation of budgets. 7. Improves the allocation of scarce resources. 8. Economises management time by using the management by exception principle.  THE CONCEPT OF DECENTRALIZATION The concept of decentralization is the key concept related to the devolution of higher authority to the lower management Decentralization is also indicated by freedom, differentiation and responsiveness (Caldwell, 2003). It includes demand for less control and uniformity that subsequently reduce the size and cost associated with maintaining a large central bureaucracy. The concept of decentralization began in the late 1960s and 1970s in many western countries such as England, United States and Australia. This reform took placed in the government sectors which moved from the conventional style of bureaucracy. Decentralization was identified as a tool for more effective decision making while delegating autonomy and responsibility to the lower management level specifically for those who are accountable 10  THE CONCEPT OF DECENTRALIZATION IN MALAYSIA The financial management of the public sector in Malaysia was largely influenced by developed countries such as England and Australia. It is bounded by regulations namely Federal Constitution (96-112), Financial Act 1957, Audit Act 1957, Local Government Act 1976, Treasury Directives, Treasury circulations and accepted accounting principles such as GAAP and IAS. The financial management of the public sector is significantly affected by the country’s annual budget which sets up the flow of income and expenses forecast for the next year. Under the public sector paradigm shift from the Progressive Public Administration to New Public Management, Malaysia has been practicing the Modified Budgeting System (MBS) since 1990. MBS was believed to bring evolution to the country’s budgeting system with a distinct shift toward output orientation and greater delegation of authority. It has strengthened the concept of ‘Let Managers Manage’ previously introduced in the PPBS which makes the lower level management more accountable and responsible. 11  RESPONSIBILITY CENTRE Government departments are recognized as Pusat Tanggungjawab (PTj) or Autonomy Centres (Responsibility Centres) and have their own accountability and responsibility in managing financial resources based on their stated programs and objectives. Among the characteristics of decentralized financial management being practiced under PTj were responsibility based on the given authority and improved decision making through better budgeting process and decrease of bureaucracy. Individuals under this system have their own role to contribute to a better financial performance within the cooperation and guidance given by the higher authority. The measurement was based on the achievement of the outcome rather than the input being delivered. Thus, the financial performance depended on the PTj initiative which could subsequently create entrepreneurship among its members. In Malaysia, the financial decentralization reform has widely spread to include a small institution such as public schools. 12  RESPONSIBILITY CENTRE A responsibility centre can be defined as any functional unit in an organisation headed by a manager who is responsible for the activities of that unit.These enable managers to monitor organisational functions. There are four types of responsibility centres a. Revenue centres - an organisational unit in which outputs are measured in monetary terms but are not directly compared to input costs. b. Expense centres - an organisational unit where inputs are measured in monetary terms but outputs are not. c. Profit centres - an organisational unit where performance is measured by the difference between revenues (outputs) and expenditure (inputs). d. Investment centres - an organisational unit where outputs are compared with the assets employed in producing them. 13  RESPONSIBILITY CENTRE In Malaysia, to assist responsibility centres in their budgetary control and management of expenditure and subsequently enhancing efficiencies in financial documents preparation, a system known as e- SPKB was introduced. e-SPKB is an abbreviation for Electronic Budgetary Planning and Control System and it is an accounting systems used to control the budget.  Topic 3 BUDGETING IN PUBLIC SECTOR 1  Outline of the topic Define budget Importance of budget Legal Requirement of preparing the budget Functions of budget Components of budget Budget formulation process 2  Introduction Management accounting system provides information to managers, assisting them in planning, organising, controlling and co-ordinating activities within their authority Budgeting is the process of putting together the financial demands of government institutions to be met through various financial sources A budget is an authorised financial plan of the anticipated revenues and expenditures of the government’s organisation Budget is a short term financial planning tools 3  Definition of Budget “ Budget is a detailed plan that shows the financial consequences of an organization operating activities for a specified future time period. It acts as a financial model that summaries future operations and is usually viewed as a core component of an organization’s planning and control” Langfield-Smith, Thorne and Hilton (2012) “Detailed plan, expressed in quantitative terms that specify how resources will be acquires and used during a specified period of time.The procedures used to develop a budget constitute a budgeting system” Hilton (2009) 4  Role &Importance of Budget 1. As an instrument for planning and management of financial resources to ensure objectives are achieved as planned 2. Use to determine taxation levels or the amounts to be charged for services. 3. Providing the basis for controlling income and expenditure and authorize future expenditure. 4. Influence the economic position of the country and private sector activities. 5. In Malaysia, budget used to address the environment of the difficult global economic outlook and challenges and also domestic 5 issues, by focusing on a few strategies.  Strategies highlighted in Budget 2022 What are this year’s features? 6  Art 99 (1) FC Art 99 (2) TI 29-51 & (3) Framework for Budget Sec 15 Art 100 FPA 1957 FC Art 101 FC 7 Regulatory framework for preparation of budget Art 99 (1) FC “In respect of every financial year, the YDPA shall cause to be laid before the House of Representative a statements of the estimated receipt & expenditure of the Federation for a that year and shall laid before the commencement of that year unless parliament decided not to.” Art 99 (2) & (3) “.. The estimates of expenditure shall show the total sums required to meet the expenditure charged on the CF , and the sums required to meet expenditure for other purposes proposed to be met from the CF” 8 Regulatory framework for preparation of budget Art 100 FC Expenditure to be met from the CF (except charged exp) to be included in a bill known as Supply Bill. Supply Bill aprroved by parliament known as Supply Act Art 101 FC ‘Supplementary estimates’ Sec 15 FPA 1957 Budget prepared must show division & subdivision of expenditure proposed, amount expected to be received & spent on the year & purpose of the expenditure TI 29-51 Budget preparation for Federal & States is the responsibility of Secretary General reporting to Treasury or State Financial Officer respectively. 9  Functions of Budget Expansion Fiscal Policy Contraction Instrument Neutral Planning Co-ordination Management Communication Instrument Control Evaluation Motivation 10 Functions of Budget – Fiscal Policy Instrument Government spending policies that influence macroeconomic conditions of the country Involves taxation measures to provide revenue for the government to spend on the development programmes of the country. Budget serves as an allocation, distribution and stabilisation functions.  Allocation fin. Resources – to various activities i.e. economic, social, administration.  Distribution- free education, books & subsidies for lower level income groups.  Stabilisation – strengthen economic growth, diversify the sources of growth, reduce unemployment & zero- inflation. 11 Functions of Budget – Fiscal Policy Instrument  3 possible position of fiscal policy i. Expansion- increase in govt expenditure / a decrease in taxes that causes the government’s budget deficit to increase or its budget surplus to decrease ii. Contraction- a decrease in government and or increase in taxes that causes the government ‘s budget deficit to decrease or its budget surplus to increase iii. Neutral- a balanced budget where government spending equal to tax revenue 12 Functions of Budget – Management Instrument Budget plays a greater role in the planning, control and evaluation of governmental operations Six component /purposes of Budget process cycle i. Planning ii. Co-ordination iii. Communication iv. Control v. Evaluation vi. Motivation 13  Planning To develop objectives and preparing various budgets to achieve those objectives. Long term plan (systematic and formal)– strategic or corporate planning Short term plan (accept present environment)– budgeting Set forth the objectives of the organization and the proposed way of accomplishing them. Achieved by expressing in monetary terms the inputs needed to achieve the planned activities of the budget period. 14  Planning (contd) Planning on type, quantity, quality of services to be provided are not normally evaluated and adjusted through the open market mechanisms and often most critical to the public interest Planning and decision making is a joint process – citizen (individual or groups), legislative and executive bodies. 15  Coordination Serves as a useful tool through which the actions of the different parts of an organization can be brought and reconciled into a common plan. Compels managers to examine the relationship between their department’s operation and those of other departments to identify and resolve conflicts 16  Communication Must be definite line of communication in an organization -to be kept informed of plans, constraints and policies to which the organistion is expected to conform E.g. Top management communicate its expectations to lower level management, so that all parties understand the expectations and can co-ordinate their activities to attain them 17  Control To ensure objectives set at planning stage will be achieved and all divisions of the organization are cooperating to achieve that goal. Control Devices – Legislative control over Executive & Executive control over Government Agencies or departments. Budget prepared should shows clearly the input and resources allocated to each governmental organization's divisions to permit them to undertake the tasks for which they are responsible. 18  Control Exercised by comparing Budgeted results with Actual results to ensure exp level not Accounting system exceeded budget level must provide information that enables the agencies or departments to keep their expenditures within limitation imposed. Good system of budgetary control is to set up accounts for the collecting data on inputs and output at the lowest distinct level of activity. 19  Evaluation Provides definite objectives for evaluating performance at each level of responsibility. A financial report (compare the budgeted & actual revenue & expenditure) – basis for evaluating compliance to accounting standards. Any variances between budget and actual represent a divergence from what was planned to happen. Reasons for variances need to be analysed & to be corrected to ensure planned performance is achieved. All levels of management should have a relevant, accurate and timely report of actual and budgeted position. 20  Motivation Device for influencing managerial behaviour and motivating managers to perform in line with organizational objectives. A budget provides a standard that under certain circumstances, a manager may be motivated to strive to achieve. 21  Components of Budget Federal Revenues National State Revenues Revenue Local Government Revenues Operating Expenditure National Development Expenditure Expenditure 22  Federal Revenues Government Accounting Standard No.3 (PPK) 1. Tax revenue -Duties & Tax imposed by law (direct & indirect tax revenue) 2. Non-tax revenue -Receipts from registration payments, licences & permits, receipt from sales of good, rent, etc. 3. Other receipts -Repayments from expenditure, inter departmental credits, etc. 4. Revenue from Federal Territories -Tax & non-tax revenue collected on behalf of the government. E.g. receipts from licences & permits, premium & quit rent, sales of assets. 23  State Revenues Part III, 10th Schedule of FC Revenue from toddy shops Revenue from lands, mines and forests Revenue from licenses other than those connected with mechanically propelled vehicles, electrical installations & registration of businesses Entertainment duty Fees in courts other than federal courts Fees and receipts in respect of specific services rendered by department of the State Governments. Receipts in respect of water supplies, including water rates Rents on State property Fines and Forfeiture in courts other than federal courts Zakat, Fitrah and Baitumal and similar Islamic religious revenue Treasure trove 24  State Revenues (contd) Articles 112C(1) FC – provides that the Federation shall make to the states of Sabah & Sarawak in respect of financial year Part IV of the 10th Schedule- Special Grant for Sabah & Sarawak Part V of the 10th Schedule – additional sources of revenue 25  Local Government Revenues Section 39, Part V, Local Government Act 1976; i. All taxes, rates, rent, licence fees, dues & other sums or charges payable to the local authority ii. All charges or profits arising from any trade, service or undertaking carried on by the local authority iii. All interest in any monies invested by the local authority and all income arising from or out of the property of the local authority iv. All Other revenue accruing to the local authority from the Federal or State Government, statutory body, other local authority or other sources. 26  National Expenditure 1. Operating or Management Ependiture i. Art 98 FC – Charged Expenditure ii. Art 100 FC – Supply Expenditure 2. Development expenditure i. Incurred for development purposes, amount usually large. ii. To finance, govt will borrow from internal or external fin. Institutions. iii. Allocated to Domestic Social Services such as education and health,economic services such as transport and public utilities, internal security and defence 27  Budget Management Division (BMD) Prepared by Budget Review Officer of Budget Management Division (BMD) BMD objectives; i. Allocate financial resources for the implementation of such plans & programmes. ii. To ensure that allocation is utilised in the most effective and efficient manner iii. Examine and analyse agencies plan and programmes conform to the National Budget Policy 28  Budget Management Division (BMD) BMD functions; i. To determine that allocation of federal resources is in line with the national objective and policy. ii. To make sure that all Ministries / Depts / Agencies spend allocation effectively and efficiently according to the approved budget. iii. To manage grants allocated to the State and local authorities base on FC and decision of the Cabinet and NFC 29  Public Service Department (PSD)  Control personnel in the public service mainly concerned with the operating budget  Main objectives- to be high –performance public service personnel agencies in developing personnel workforce that provide quality services through policy formulation and HR management  The function include planning, management and development 30  Economic Planning Unit (EPU) Responsible for the preparation of development plans for the nation. The objectives & Function Function on budget related activities: Concern on the 5-years development plan 31  Budget Preparation Process Prior 2002, budget is prepared & approved on annual basis. Beginning 2002, budget preparation & examination process will be carried out once for every 2 years. Changes purely administrative – do not effect FC & FPA 1957. National budget will continue to be submitted to parliament for consideration & approval annually. Treasury have to prepare allocation annually for submission to parliament, the detail examination and reviews of ministries’ proposal will be done once every 2 years. 32  Rationale for the changes in budget examination & reviews Help to increase quality & efficiency of budget allocations – allow consideration of both ‘short term fiscal policies’ and ‘medium-term objectives & policies’ such as the ‘5 years Development Plan’ & ‘Outline Perspective Plan’ Facilitates assessment on fiscal position of the govt which lead to improvement in govt’s cash flow planning & management. Allow govt’s borrowing programmes to be determined accurately in advance to minimize under / over borrowing. Resources – manpower, time, money at the Treasury Ministries, Govt’ agencies can be redirected to other beneficial programmes & activities – such as to ensure faster project implementation. 33 Agencies prepare and JANUARY submit new year estimates Call circular for new year estimates MARCH Receive submissions and BRO makes individual study APRIL Preliminary Hearing MAY-JULY Budget Hearing AUGUST-SEPTEMBER Approval of new year estimates by the Ministry of Finance and Cabinet SEPTEMBER-DECEMBER SEPTEMBER Parliament debates and Budget document printed and approves new year budget submitted to Parliament Budget execution by Agencies END OF DECEMBER Minister of Finance issues Warrant for expenditure 34 TYPES OF BUDGETING TECHNIQUES TOPIC 3  2 Budgeting techniques applicable in Malaysia TBS PPBS MBS OBB