Performance Budget, Time- Series Forecast, & Cost Benefit Analysis,

Please see the below the questions below that I would like to have individually answered. This assignment must consist of 1200+ words with 3 Scholarly Sources, the below reference must be used as one source. Please put the question number by the answer so that I know what answer goes with each question.**NO PLAGIARISM WHATSOEVER**

1.For this section, review Appendix 30 A on page 107.

1. Are funds allocated properly to program centers (or functions) based on performance?2.Which proposed performance improvements deserve highest priority?

3.What external factors can impact costs of program centers (or functions)?

2. Determine and justify if a centralized or decentralized budget approach makes most sense with respect to implementing a performance budget.3. After reviewing Question 3-31 on page 101 and Appendix 3-B, answer the following questions.1. Which method should be used?2. Based on the information available, what are the likely results for the next four quarters?

3. How can you estimate the validity of the trend?

4.Decide if you are comfortable extending the forecast an additional four quarters.5.Review information about Jamestown Clinic on p.156 (Question 4-47). Answer the following questions.1. Evaluate impact of variable costs to operational budgets as service levels change.

2. Consider benefits and costs if service levels increase to increase revenue.

6.Given the clinic can handle 1,000 additional patients, determine how much an outside organization should pay in order to send 1,000 additional patients per year.

3
ADDITIONAL BUDGETING CONCEPTS
The learning objectives of this chapter are to:








define line-items and responsibility centers, and distinguish between line-item and responsibility center budgeting;
S
M
define and discuss flexible budgeting;
I
define and discuss performance budgeting;
T
define and discuss zero-based budgeting;
introduce forecasting and explain which forecasting techniques are useful
H when historical data are available and which are useful
when such data are not available; and
,
address additional budgeting issues related particularly to governments, specifically focusing on limitations on management actions,
explore the issue of centralization versus decentralization in the budget process;
examine the presentation of budget information categorized by program or function;
the role of budget reserves, and communicating the budget to the public.
INTRODUCTION
A
D
A
M
76
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
The basic elements of budgeting are discussed in Chapter 2. This chapter focuses on
some additional elements of budgeting for governmental, health care, and not-for-profit
organizations.
2
This chapter begins with a discussion of budget development using a line-item
0
approach, as contrasted with a responsibility
center approach. A line-item expense is
a specific class or category of resource
0 used by an organization. For example, salaries
are a line-item. By contrast, a responsibility center approach divides the budget into
8
units for which individual managers are held accountable. A government might have
T who is responsible for the total amount spent on
a parks department with a manager
parks. The total budget for the government could be divided into line-items that would
S
indicate the total amount being spent on salaries, on supplies, and so on. Alternatively,
it could be divided by responsibility center, indicating the total amount budgeted for
parks, the amount for police, and so on. Or it could be divided by line-item and
responsibility center.
The chapter then considers the issue of centralization versus decentralization in the
budget process. Different organizations have different philosophies as to how centralized
budgeting should be.
Following that, the chapter moves on to a discussion of different ways of organizing and presenting budget information. In addition to reporting budget information by
line-item or responsibility unit, another alternative is to organize the budget by program.
Program budgets focus on the costs and revenues of specific programs. For example, we
Chapter 3 • Additional Budgeting Concepts
77
could evaluate the town’s new safety awareness program, which draws resources from
both the police and fire departments. That program budget would include some elements
from each of those two responsibility centers. Functional budgets represent yet another
way to look at an organization, focusing on the main functions of the organization. For
example, the police and fire department budgets could be combined in total to report on
the public safety function of a government.
The chapter then moves to a discussion of a variety of budgeting techniques:
• Flexible budgeting takes into consideration the fact that the actual output level often
differs from expectations. Managers must have some way of controlling operations
in light of varying levels of activity.
• Performance budgeting is an approach designed to improve the focus on outcomes
in the budget process.
• Zero-based budgeting is a technique that requires annual justification of all items in
a budget, rather than just the incremental change.S
• Forecasting focuses on how managers make predictions of expenses, revenues, and
M
other items in the budget.
I
The chapter finishes with a discussion of some unique aspects of budgeting for
T
governmental organizations.
H
LINE-ITEM AND RESPONSIBILITY CENTER BUDGETS
,
Budgets are most often created to provide information by line-item and/or by responsibility center. Line-item expenses represent specific individual types of expenses, such as
A
wages or supplies. Responsibility centers are organizational subdivisions that a specific
D
person is responsible for supervising.
For example, suppose that the Hospital for Ordinary
Surgery (HOS) expects to
A
spend $100 million in the coming year. One way that the expense budget might be
M
organized would be by line-item, as follows:
Hospital for Ordinary Surgery
2
Expense Budget
0
for the Coming Fiscal Year
ISBN 1-323-02300-3
Salaries
Supplies
Utilities
Rent
Interest
Total
0
$ 60,000,000
25,000,000
8
4,300,000
T
7,700,000
3,000,000
S
$100,000,000
This is referred to as a line-item budget. Managers need to know the amounts
of money budgeted for salaries versus supplies, two of the line-items in the budget. However, this budget is limited in its ability to help managers implement and
control the plan. There are many managers in a hospital, each responsible for a different part of the organization. If the organization is to hold individual managers accountable for what happens in their areas, the managers must have specific budgets for
their parts of the organization. Those parts of the organization are called responsibility
centers.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
78
Part II • Planning
For example, HOS might have a responsibility center expense budget that would
appear as follows:
Hospital for Ordinary Surgery
Expense Budget
for the Coming Fiscal Year
Radiology
Nursing
Pharmacy
Laboratory
Operating Room
Administration
Total
$ 13,000,000
10,000,000
5,000,000
7,000,000
50,000,000
15,000,000
$100,000,000
S
By preparing a budget for each
M responsibility center (department or cost center),
managers know the amount they are authorized to spend. Then the organization can
track how well the managers and Iunits do in keeping to that spending level. However,
providing a manager with only a T
total amount for a responsibility center makes it difficult to control spending. Combining line-item and responsibility center information
H
provides managers with more information
and a better ability to control spending (e.g.,
see Table 3-1).
,
Notice how the budget format in Table 3-1 provides information on the budgeted
spending for each responsibility unit and also provides detailed breakdowns of how
much each responsibility unit will be
A spending on each line-item.
D
CENTRALIZATION VERSUS DECENTRALIZATION
A
An organization’s budget process isMoften characterized by its degree of centralization or
decentralization. When one imagines the development of a budget for an entire organization, the process may seem overwhelming. Developing detailed line-item budgets for
individual responsibility centers breaks
2 the budgeting process down into more manageable pieces. These budgets may be prepared primarily by the manager of the responsibil0
ity center or by higher levels of management.
Table 3-1
0
Line-Item and Responsibility Center Budget8
Hospital forTOrdinary Surgery
Expense
S Budget
for the Coming Fiscal Year
Radiology
Nursing
Pharmacy
Laboratory
Operating
Room
Administration
Total
$ 3,700,000
$ 8,000,000
$1,300,000
$4,000,000
$32,000,000
$11,000,000
$ 60,000,000
Supplies
3,600,000
1,200,000
3,500,000
2,500,000
13,700,000
500,000
25,000,000
Utilities
3,400,000
100,000
100,000
200,000
400,000
100,000
4,300,000
Rent
2,300,000
700,000
100,000
300,000
3,900,000
Salaries
Interest
$13,000,000
$10,000,000
$5,000,000
$7,000,000
$50,000,000
7,700,000
3,000,000
$15,000,000
$100,000,000
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Total
400,000
3,000,000
Chapter 3 • Additional Budgeting Concepts
79
Top
Management
CEO, COO, CFO
Middle
Management
Middle
Management
S Line Managers
M
FIGURE 3-1 Top-Down: Budgets are developed by top management
and then disseminated to
I
middle managers and line (first-level) managers for implementation.
T
Responsibility center budgets can be prepared in aHcentralized fashion by the organization’s top management. In such an instance, the responsibility center managers are told
the budgeted amount and are expected to achieve the ,budgeted result. This is sometimes
Line Managers
Line Managers
referred to as a top-down budget (see Figure 3-1). It is often hard for responsibility center
managers to achieve such top-down budget expectations because it is very difficult for top
A
managers to be aware of all of the factors affecting spending in each responsibility unit. At
D create the budgets for their own
the other extreme, responsibility center managers would
centers and inform the top management of their spending plans for the coming year. This
A
could be described as a bottom-up budget (see Figure 3-2). However, responsibility center
managers are rarely knowledgeable about the overallM
limitations on financial resources
available to the organization. Their bottom-up budgets may exceed such limitations.
2
0
Top
Management
0
CEO, COO, CFO
8
T
S
Middle
Management
ISBN 1-323-02300-3
Line Managers
Line Managers
Middle
Management
Line Managers
FIGURE 3-2 Bottom-Up: Budgets are developed by the lowest level of management, and passed up
for review, negotiation, modification, and approval.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
80
Part II • Planning
Some organizations tend to be more centralized in the budgeting process, while others are less centralized. Rarely, however, would one see either of the extreme situations
described in the preceding paragraph. In fact, one can think of the process of top-down
budget management and bottom-up budget development as being complementary.
In general, all budgets will start with some input from top management. Broad policy
goals are formulated by top executives, policy makers, and, in the case of government,
political representatives. These goals should reflect public needs and preferences as well
as the mission and strategy of the organization. Most organizations then incorporate their
responsibility center managers into the process by asking unit or department heads to
prepare detailed budgets, incorporating the broad objectives that top management has
provided.
A bottom-up approach allows the individuals who are most involved with the
day-to-day activities and specific aspects of the organization’s operations to be involved in
the planning process. This empowerment of employees often leads to better morale and
better results. However, it requires top
S managers who are willing to accept some degree of
decentralization. In very autocratic, centralized organizations, where top managers desire
M
to retain high levels of control, a top-down budget is more likely to be employed.
In some cases, organizationsI have multiple goals that cut across departments. In
such cases, top management may T
need to make resource allocation decisions. At other
times, unit managers may initiate new proposals. They may see a need for something
new that the organization does notH
currently do at all. For example, a mid-level manager
at the HOS might suggest conducting
, a blood-pressure screening of shoppers at local
supermarkets. After proposing the concept, the manager may be given the responsibility
of developing the special-purpose budget for the program.
Centralized budgeting and decentralized
budgeting each have advantages and disA
advantages. Top-down has a speed advantage. Decisions can be proposed, adopted, and
D In times of crisis, speed may be a critical element.
implemented with a minimum of delay.
The primary disadvantage is that itAis much harder to get cooperation and commitment
from the people at all levels of the organization to carry out the budget. Bottom-up budM and support for the budget. However, it not only
geting is better for gaining consensus
is time-consuming, but also creates the need for negotiation and compromise. It works
better when times are stable than in times of crisis or significant change.
2
As noted, most organizations use neither top-down nor bottom-up budgeting exclu0 more common. Such approaches combine direction
sively. Hybrid approaches are much
from top-level management with inputs from below. Ideally, the result is a budget that
0
takes into account the overall organizational needs and expectations, and also incorpo8 knowledge that may exist at lower levels of the
rates the creativity and superior detailed
organization.
T
S
PROGRAM AND FUNCTIONAL BUDGETS
Line-item and responsibility center are two common ways to classify budget costs, but
they are not the only approaches. Budgeted costs can be divided by type of program or
by functional area.
Program Budgets
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Suppose that HOS specializes in three programs: Oncology (cancer care), Rhinoplasty
(nose jobs), and Cardiac Surgery (heart operations). Budgets can be prepared that would
show expected revenues and costs of each major program. This could be done for regular
programs or for special projects or specific services. If HOS made budgets for different
programs, it could prepare program budgets to evaluate each program’s profitability and
decide whether it can afford each program. For example, if rhinoplasty is mostly elective
Chapter 3 • Additional Budgeting Concepts
81
surgery, and the program loses money, as shown in the following budgets, the hospital
might use that budget information to decide to eliminate the program:
Hospital for Ordinary Surgery
Program Budgets
for the Coming Fiscal Year
Revenues
Expenses
Profit /(Loss)
Oncology
Rhinoplasty
Cardiac
Total
$40,000,000
37,000,000
$ 3,000,000
$12,000,000
17,000,000
$ (5,000,000)
$50,000,000
46,000,000
$ 4,000,000
$102,000,000
100,000,000
$ 2,000,000
Governments, by contrast, often have a weak ability to match revenues and expenses
by program. In many cases, the government uses its general tax revenues to support a
S have the ability to create specific
wide range of programs. In other cases, governments do
budgets such as the preceding HOS budget. For example,
M revenues and expenses for
education are often matched against each other, especially for local governments.
I
The preceding numerical example is highly summarized.
However, a budget could
be prepared for each program that also shows line-item
T and responsibility center details
that make up the total revenues and expenses.
Note in the preceding example that the totalHcost of the three programs is
$100,000,000, the same as the total expenses for HOS in
, the earlier examples. This means
that all costs from the responsibility center budgets in Table 3-1 have been allocated to
these three programs. Some allocations may be fairly arbitrary. For example, it is hard
to determine how much of the administration cost of the
A hospital rightfully should go to
each program. HOS must be careful in its decisions. If it closes the Rhinoplasty program,
D
it may not be able to eliminate some of those allocated costs.1
Functional Budgets
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M
When not-for-profit organizations report their annual results to outsiders, they often prepare
functional financial statements. These statements separate activities into their major func2
tions. Consider Meals for the Homeless (Meals), for example.
The organization’s primary
mission is to provide meals. However, suppose that it also
provides
counseling to some of
0
its clients. The role of the counseling is to direct the homeless to various government agen0
cies and other charities that can provide them with assistance.
Also, there are fund-raising
and administrative departments. A budget for Meals for 8
the Homeless might be categorized
as shown on the top of the next page.
T
In this budget, Meals is using a functional segregation
of its primary program
services, separated from its supporting activities. However,
S it is also providing information
by line-item. It would also be possible for there to be a subdivision of this budget by
responsibility centers. For example, the program service Meals might be provided by a
Kitchen department that cooks the meals, a Distribution department that delivers meals to
soup kitchens and other locations, and a Serving department that serves the meals to the
homeless. Each department might have its own manager, responsible for the costs of that
department. Thus, the Meals column under Program Services might be subdivided into
ISBN 1-323-02300-3
1
Often some costs of running an organization do not relate to individual services. For example, suppose
that HOS’s building must be heated in the winter. The heating cost is not specifically a cost of Oncology,
Rhinoplasty, or Cardiac Surgery. However, it is a cost of the organization. Such costs are often referred to as
indirect, overhead, or joint costs and are frequently allocated to specific programs or services. That means that a
portion of the total overhead cost is assigned or charged to each program or service. There are a wide variety of
possible allocation approaches, from a simple division (one-third each to Oncology, Rhinoplasty, and Cardiac)
to more sophisticated alternatives. See Chapter 4 for additional discussion of cost allocation.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
82
Part II • Planning
Meals for the Homeless
Expense Budget
for the Coming Fiscal Year
Program Services
Salaries
Supplies
Rent
Other
Total
Supporting Activities
Meals
Counseling
Management
and General
FundRaising
Total
$ 500,000
900,000
100,000
50,000
$1,550,000
$25,000
1,000
5,000
2,000
$33,000
$60,000
6,000
15,000
8,000
$89,000
$40,000
20,000
5,000
4,000
$69,000
$ 625,000
927,000
125,000
64,000
$1,741,000
three individual responsibility center
Sbudgets by line-item that total to the amount shown
in the preceding budget.
M
BUDGETING TECHNIQUES I
The budget process is described in T
Chapter 2. At this point, the chapter addresses several
specific budgeting techniques: flexible budgeting, performance budgeting, zero-based
H
budgeting, and forecasting.
,
Flexible Budgeting
Preparing a budget requires many assumptions and predictions. One of the most promiA level. Workload refers to the volume of goods or
nent of these involves the workload
services that the organization will provide.
If the volume of services, cost of services, and
D
revenues related to services all rose and fell in equal proportions, this might not create a
significant problem. However, thatA
is generally not the case. Revenues may change in a
sharply different proportion than costs.
M Managers need to be able to anticipate such variations. A flexible budget is a tool to aid managers in this area.
A flexible budget is an operating budget for varying workload levels. For example,
suppose that Leanna Schwartz, executive
director of Meals for the Homeless, expects to
2
provide 40,000 meals and has the following operating budget for the coming month:
0
Meals
for the Homeless
0Operating
Budget
8 for Next Month
T
Revenues
Donations
S
City
Total Revenue
$105,000
60,000
$165,000
Expenses
Salaries
Supplies
Rent
Other
Total Expense
$ 46,000
100,000
12,000
6,000
$164,000
Surplus
$
1,000
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
This budget provides Meals with confidence that they will have a good month. A
surplus of $1,000 is projected. But what will happen if the number of meals provided is
greater or less than expected?
Chapter 3 • Additional Budgeting Concepts
83
Assume that donations do not change if the number of meals provided changes.
However, Middle City is paying Meals $1.50 for each meal provided. If the number of
meals increases or decreases, revenue will change. Also, some of the expenses are fixed
costs; that is, they will not change as the volume of work changes. For example, rent on
the kitchen location is a flat monthly amount, regardless of the number of meals served. If
the volume of meals goes up or down, rent will remain the same. For most organizations,
however, some costs are variable; they vary as the volume of goods or services provided
goes up or down. Meals will have to buy more food if it gets very busy. Or it can buy less
food if it gets slow.
A flexible budget takes the basic operating budget and adjusts it for the impact
of possible workload changes. Assume that payments from the city and purchases of
supplies (food) are the only items that vary with the number of meals served. Consider
a flexible budget for Meals, assuming that 35,000 or 45,000 meals are served next
month:
S
M
Meals for the Homeless
Flexible Operating Budget
I
for Next Month
T
Volume of Meals Provided
H
35,000
40,000
45,000
,
Revenues
Donations
City
Total Revenue
$105,000
52,500
$157,500
$105,000
A
60,000
$165,000
D
Expenses
Salaries
Supplies
Rent
Other
Total Expense
$ 46,000
87,500
12,000
6,000
$151,500
$ 46,000
M
100,000
12,000
6,000
$164,000
2
$ 46,000
112,500
12,000
6,000
$176,500
Surplus/(Deficit)
$
$
$ (4,000)
6,000
A
1,000
0
$105,000
67,500
$172,500
ISBN 1-323-02300-3
0
This flexible budget shows that if the number of 8
meals provided increases, a loss is
likely to occur. This information can serve as a warning to the managers at Meals. If they
T
start seeing demand and the number of meals served increase, they can anticipate the
likely financial shortfall without waiting until the end S
of the month or later to find out.
Actions can be taken to increase fund-raising efforts or to try to find ways to cut costs.
Decisions can be made regarding whether Meals can financially sustain a loss. If it cannot, managers may have to choose among cutting the cost of the food used per meal,
limiting the number of meals served, or finding other places to cut costs.
Flexible budgets focus on an output measure. Hospitals treat patients. Soup kitchens serve meals. Government agencies may build miles of roads or carry passengers in
public transit vehicles or educate students in schools. In each case, some measure of
volume is needed to prepare a flexible budget.
The key to preparing a flexible budget is determining which numbers in the budget
are likely to change and which are likely to remain the same. Will the costs that vary
change in direct proportion to volume changes, or will their change be more or less than
proportional? Management must work to understand revenue and cost structures enough
to be able to anticipate the changes caused by volume variations.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
84
Part II • Planning
Performance Budgeting
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Operating budgets are an attempt to plan the resources needed to accomplish desired
outcomes. The outcomes are the results that the organization hopes to achieve. However,
the process tends to focus more on the budgeted level of resources (the inputs) and
less on the various outcomes to be achieved. To the extent that outcomes are taken into
account, they are usually summarized by one limited measure, such as the number of
meals served. Performance budgeting is an approach designed to improve the budget
process by focusing more on what the organization hopes to accomplish.
A hospital’s goal is for its patients to get well. A soup kitchen’s goal is to reduce
levels of hunger and malnutrition. A parks department’s goal is to provide rest and recreation. However, these outcomes are extremely difficult to measure. Often organizations
are forced to rely on simpler output measures, such as the number of patient treatments,
meals served, or park users. More sophisticated performance measurement approaches
are discussed in Chapter 8.
S
Performance budgeting is a useful approach in situations that do not have a clear
relationship between resources andMoutcomes. The method calls upon the manager and
organization to define goals, plan the amount of resources needed to accomplish those
I
goals, and then assess how well the goals have been achieved. This may not result in
measurement of outcomes, but it isTa step in that direction.
Consider, for example, Millbridge’s
H Parks and Recreation Department. One of the
primary reasons Millbridge has the Parks and Recreation Department is to maintain the
town’s parks for the pleasure of its, residents. There are 10 parks in Millbridge. Dwight
Ives, town manager for Millbridge, was concerned that the town had no way to evaluate
the budget of the Parks and Recreation Department. How much money should it receive
A
to maintain the parks? There are baseball
diamonds to be groomed, tennis courts to be
cleaned and repaired, lawns to be
mowed,
and snow to be removed. Litter must be
D
picked up and trash cans emptied. Paths must be paved and trees pruned.
A typical operating budget forAa Parks and Recreation Department would show the
money available for salaries, supplies,
M equipment, and so on. It would tend to be a lineitem budget for a responsibility center. Such a budget focuses on inputs such as salaries
and supplies. If the town is looking to save money, there might be support for cutting
the spending of the Parks and Recreation
Department. Spending cuts often translate into
2
reductions in service. However, one could argue that the parks and recreation budget
0
could be cut by 10 percent, and all 10 parks would still be available for the citizens of
Millbridge. Therefore, there will be0no reduction in service.
That argument is unlikely to 8
be completely correct. If the budget is cut by 10 percent, then the reduced spending may well cause a decrease in the maintenance of each
park. Lawns may not be mowed as T
often. Paths may not be repaved when needed. There
will be difficulty in evaluating whatShas happened. Ten parks will still be maintained, but
not as well. Maintenance cost per park has decreased. However, that might not translate
into higher efficiency. It can translate into lower performance.
Clearly, a simple quantity or output measure, such as the number of parks maintained, does not tell the whole story. To improve the budgeting process, it is necessary
to get a better sense of the goals of a department or organization. What is it really trying to achieve, and how can achievement of that goal be measured? Public, health, and
not-for-profit organizations tend to have this problem more than most private, for-profit
industries. For a proprietary organization making a specific product, if the amount of inputs
can be reduced, keeping outcomes the same, it would be more productive. The problem,
however, is whether outcomes can be adequately measured in the public service sector to
see if they are the same. A key element is whether the organization can readily define what
it does. If it cannot, then it will have trouble planning how much it will do and, after the
fact, measuring how much has been done.
Chapter 3 • Additional Budgeting Concepts
85
If HOS reduces the number of clinical care hours per patient per day, does that
represent improved efficiency or decreased quality and quantity of patient care? The performance budgeting approach can help managers answer these questions by defining the
outcomes of a department in a way that allows measurement.
For the Millbridge Parks and Recreation Department, how could the goals be thought
of, rather than simply maintaining 10 parks? Millbridge could consider the following as
goals: the number of trash cans to be emptied, the number of miles of pathway to be
repaved, the number of acres of lawn to be mowed, or the level of satisfaction of park
users. In the government sector, it is common to use specific performance measures such
as these to keep pressure on agencies or departments to be productive. Rather than just
providing a budgeted spending level and requiring that parks be maintained, the agency
or department will be held accountable for achieving certain levels of performance based
on a number of different criteria.
The first step is to define objectives clearly. What is the organization trying to
accomplish? Are these the appropriate objectives? TheSobjectives are considered performance areas. Next, one must identify the operating budget. How much money has the
M
organization budgeted for the department or cost center? The percentage of operating budI be determined. The operating
get resources that will be devoted to each objective must
budget resources can then be allocated to the performance
T areas. Measures of performance
for each objective or performance area must be established. For each performance area, a
H
specific outcomes level should be budgeted. Then a performance
budget can be developed.
,
An example of performance budgeting for a hospital cardiac laboratory is
provided in Appendix 3-A. The key performance areas for the lab were determined to
be as follows: perform diagnostic catheterizations, perform
A interventions, improve quality of care, improve throughput (the time from the beginning of one procedure to the
D improve patient satisfaction,
beginning of the next), control the supply cost per patient,
improve physician satisfaction, and improve staff satisfaction.
The performance budget
A
developed in that example is shown in Table 3-2.
M
This budget provides a summary of each performance
area, the type of activity
required to achieve the desired results, the primary measure for each output or outcome,
the level of budgeted output or outcome for each performance area, the cost of resources
2
devoted to each area, and the average cost per unit for each output or outcome. See
Appendix 3-A for a discussion of the derivation of this0budget.
EXAMPLE
0
Once the performance budget has been devel8
oped, it is possible to perform a return on investment analysis
for each performance area.
The reason for such analysis is to assess whether it is worthwhile,
from a financial perspecT
tive, to allocate the budgeted amount of resources to each of the performance areas.
S
For example, suppose the supplies budget is $1,520,000.
Each 1 percent difference in
the cost of supplies will cost the hospital $15,200 (i.e., $1,520,000  1 percent  $15,200).
From Table 3-2, we see that the performance budget calls for spending $34,000 to keep
supply costs 3 percent below the industry average, or $11,333 for each 1 percent savings.
On a savings-to-cost basis, the return on investment calculation would be as follows:
RETURN ON INVESTMENT (ROI) ANALYSIS
ISBN 1-323-02300-3
Savings/Cost = $15,200/$11,333 = $1.34 savings per dollar spent
For every dollar the department spends to control supply costs, it saves $1.34 in the
cost of supplies. Since it is saving more than it is spending, it is appropriate to devote
$34,000 of resources to control supply costs.
This is a very limited form of cost-benefit analysis, a technique discussed in Chapter 5.
A further discussion of performance budgeting return on investment calculations is provided
in Appendix 3-A.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
86
Part II • Planning
Table 3-2 Performance Budget
Performance Area
Type of Activity
Output Measure
Budgeted Output
Total Cost
Average Cost
Perform diagnostic
catheterizations
Catheterizations
Number of caths
1,200
$777,000
$648/cath
Perform
interventions
Interventions
Number of
interventions
1,200
$890,000
$742 per
intervention
Improve quality
Change in specific
procedures
Number of
complications
10% reduction in
complication rate
$ 59,000
$5,900 per 1%
reduction
Improve
throughput
Develop new
coordination
procedures with OR
and MDs
Turnaround time
5% reduction in
turnaround time
$ 64,400
$12,880 per
1% reduction
in turnaround
time
Control supply
cost/patient
Work on vendor
contracts, work
with clinical staff
Supply dollars
per patient
Constrain increase
to 3% versus
expected industry
6% increase
$ 34,000
$11,333 per
1% below
industry
expectations
Improve patient
satisfaction
Improve staff
communication
with patients
Number of
complaints
Reduce number
from 60 to 40
$ 53,900
$2,695 per
eliminated
complaint
Improve physician
satisfaction
Redesign work
scheduling to meet
MD demands
Cases/MD
2% increase
per MD
$103,000
$51,500 per
1% increase
Improve staff
satisfaction
Allow longer breaks
and free
coffee/donuts
Turnover rate
Reduce turnover
by 50% from
4/year to 2/year
$ 18,700
$9,350 per staff
member retained
S
M
I
T
H
,
A
D
A
M
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
The performance budgeting concept can be helpful to most public service organizations. For example, what does the executive director of Meals for the Homeless do? The
2 be divided into performance areas for fund-raising,
budgeted costs for the director could
public relations, cost control, increased meal volume, managerial supervision, and long0
range planning. How can one measure these performance areas? One way to get started
0 occur. Perhaps Leanna Schwartz, executive director
is by focusing on the activities that will
of Meals, intends to make 25 personal
8 visits to philanthropists. And suppose that although
many philanthropists will turn her down, it is anticipated that a total of $500,000 will be
T the percentage of her effort that goes to this objecraised. The organization can determine
tive, the cost of her time for this, andSthe budgeted goal. This can be translated into a return
on investment analysis. In this way, even the many areas that have seemed to defy measurement can in fact be evaluated.
However, return on investment analysis must be used with care in public service
organizations. Many social outcomes involve what economists refer to as externalities—
benefits such as clean air, improved public health, or lower crime rates—that may not be
easily quantified or felt directly by the organization that generates them. As a result, externalities may not lend themselves easily to financial measurement. In addition, efforts like
fund-raising and grant development can take a substantial amount of time to bear fruit.
While Leanna Schwartz might meet with potential donors or funders today, she might not
expect to see tangible results for months or even years. When applying cost-benefit and
return on investment analyses in a public-benefit setting, these considerations must be
taken into account.
Chapter 3 • Additional Budgeting Concepts
87
ISBN 1-323-02300-3
Zero-Based Budgeting
Conceptually any expense budget should call for consumption of only those resources that
are needed to accomplish the organization’s goals. Excessive resource use is wasteful and
detracts from the organization’s financial stability and its ability to achieve its mission. In
reality, as organizations get larger, the budget process becomes complex. It is not unusual
for an organization to try to simplify its budgeting process by authorizing across-the-board
incremental increases in budgets from one year to the next. For example, Dwight Ives,
the town manager of Millbridge, might authorize a 4 percent increase for all departments
that are part of the town government. The 4 percent increase represents an increment
over the amount authorized for the previous year. This approach is therefore often called
incremental budgeting.
Although this may be easier than careful item-by-item, department-by-department
evaluation, it does not ensure that only the minimum resources necessary are used.
Further, it does not ensure that scarce resources are allocated to the highest priorities.
S
One department might have a very strong need for a 10 percent increase, while another
M
might not need any increase at all. As technology, unemployment
levels, and social needs
change, some departments have growing financial needs, while other departments could
I
get by with decreasing resources.
T in budgets carefully. That is,
Some organizations examine all requested increases
no across-the-board increase is automatically authorized.
H Every increase must be justified.
Although this is better than a flat equal percentage across the board, it assumes that the
previous year’s budget is an acceptable starting point. ,There is no critical examination of
the base, only of the increase. Zero-based budgeting (ZBB) is an approach that argues that
each year every item in every budget should be closely examined for the value it adds.
A
Any items that do not add value or do not add sufficient
value to justify their cost
should be eliminated from the budget. ZBB gets its name
from
the
fact that each departD
ment or program starts with a zero base of justified costs. All spending from zero on up
A
must be explained and justified. ZBB helps to keep budgets
from developing “fat.” No
expenditure is automatically accepted without some explanation
of why the organization
M
is better off with that expenditure.
The evaluation of every item in each budget is a very time-consuming process.
Rather than make such a large investment in budgeting,
2 some organizations use ZBB
only to evaluate new programs. As such, ZBB has become a leading program budgeting
0
technique. Some organizations use ZBB for their operating budgets but rotate agencies
0
or departments, with each receiving a thorough ZBB review
every three (or four or five)
years and incremental budgets in the intervening years.
8
Whether it is used to evaluate annual operating budgets, or budgets for new or
T
existing programs, ZBB focuses on alternatives. Information
is collected into a decision
package. This package provides the analysis of the program
or
department being evaluS
ated. It contains broad information about the program being evaluated, including why
the program has been proposed, the negative effects of not doing the program, and the
costs and benefits of the program. One of the key elements is a statement of alternatives.
ZBB requires evaluation of alternatives in a variety of ways. Different programs aimed
at the same goal should be compared. Different ways of performing each given program
should be compared. Different quality and quantities of each program should be compared.
For example, if Meals for the Homeless decides to start a new suburban program, it may
have to choose whether to use a fixed location (soup kitchen) or use a truck to deliver
meals. The truck alternative must consider different sized trucks. There must be consideration of not only whether to serve one, two, or three meals a day, but also the nutritional
value (and therefore cost) of the meals provided. By examining alternative approaches and
the costs and benefits of each approach, managers are placed in a better position to make
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
88
Part II • Planning
informed choices when allocating limited resources. Each alternative is ranked, with the
manager giving consideration to the costs and benefits of the differing approaches.
ZBB can also be used for decremental budgeting. Decremental refers to a reduction.
In such a use, decision packages become the source of information needed for reducing the
overall budget rather than for evaluating budgets from a zero base. For example, suppose that
due to a downturn in the economy and a rise in unemployment rates, Millbridge municipal
tax revenues are expected to fall. The town, in an effort to reduce expenditures and avoid a
deficit, can use the ZBB technique as an evaluative approach for making the budget cuts that
will have the least negative impact on the town and its residents.
Forecasting
Budgets are plans for the organization for a future period of time. Budgets are based on
estimates of expected revenues and expenses. Lee and Johnson note that
S
Little imagination is required to appreciate the importance of revenue estimating. If
M a balanced budget, as state and local governments
a government is required to have
are, then accurate revenue forecasts become critical. Estimates that are too high can
I
create major crises during the execution phase, at which time expenditures must be
T
cut in order not to exceed revenues.
Low estimates also cause problems, because
programs may be needlessly reduced
at
the beginning of the fiscal year.2
H
, important. Consider, for example, a school budEstimates of expenses are equally
get. The budget will depend on the number of students. Part of the school budget
is the cost to heat the school building. That cost will depend on the average temA of the school budget may depend on the average
perature throughout the winter. Part
price of textbooks. These are just D
a few of the many expense expectations in a school
budget. The future depends on many unknown factors and events. When managers
develop budgets, they must make A
predictions called forecasts. Forecasts are little more
than guesses about what the futureMwill be. However, there are statistical approaches to
forecasting that can improve accuracy of the predictions and give you a sense of how
variable the actual results may be.
The manager preparing a school
2 budget will forecast the number of students, the
average temperature, and the price of textbooks. The more accurate the forecast, the
0
easier it will be to manage the budget. If the winter is colder than expected, the school
system will have to spend more on0heating. Within the closely regulated budget systems
of governments, this may require spending
reductions in another area.
8
There are many approaches to making forecasts. Forecasts often are the result of a
combination of the output from anTanalytical model and the judgment of the forecaster.
Most forecasts are accomplished by
S using historical information and projecting that information into the future. There are a wide variety of approaches for doing this, ranging
from very simple to very complex. However, all of these approaches have the benefit of
being based on a firm, historical foundation. Predictions are even more difficult to make
in the absence of any experience or history. However, organizations in the public service
at times have to make such predictions.
Every time a new service or
program is suggested, the financial evaluation is performed without any history. How can
estimates be made in the absence of such data? To some extent, one can rely on engineering calculations. A determination can be made of exactly what resources should be
FORECASTING WITHOUT THE BENEFIT OF HISTORICAL DATA
Robert D. Lee Jr. and Ronald E. Johnson. Public Budgeting Systems, 6th ed. Gaithersburg, Md.: Aspen Publishers,
1998, p. 26.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
2
Chapter 3 • Additional Budgeting Concepts
89
required for each unit of the service provided. However, even such an objective analysis
cannot tell the organization how much of the service will be demanded. In such cases,
individual managers can use their own judgment. However, it is often better to base such
forecasts on the collective opinion of groups of individuals.
Two common techniques are designed specifically to help improve the accuracy
of estimates when no specific historical information is available: the nominal group and
Delphi techniques. In both approaches, a team or panel must be selected that consists of
individuals who are likely to have reasoned insights with respect to the item being forecast.
Industrial experience has shown that by arriving at a consensus among a team of experts,
subjective forecasts can be reasonably accurate. The experts do not have to be expert in the
specific project, but they should come from areas as closely related as possible.
The nominal group technique is one in which the group members are brought
together in a structured meeting. Each member writes down a forecast. Then all of the
written forecasts are presented to the group by a group leader without discussion. Once
all of the forecasts have been revealed, the reasoning behind
each one is discussed. After
S
the discussions, each member again makes a forecast in writing. Through a repetitive
M
process, eventually a group decision is made.
I
By using a group approach, a number of individuals
focus their attention on the
same problem. Each person has a somewhat differentTperspective that influences his or
her subjective forecast. Being exposed to competing forecasts and explanations of the
H
reasoning behind them can be extremely helpful in providing
the central planner with
insights that had not already been considered. The underlying
concept is that both the
,
additional ideas and the discussion of the ideas by all members of the group will result
in an improved forecast.
Obviously, the nominal group technique has weaknesses.
One problem involves
A
lack of information. If different individuals base their forecasts on different assumptions,
D problem involves politics and
it may be impossible to reach consensus. A more serious
personalities. As members of the group defend theirA
forecasts, extraneous issues having to do with whose idea it is may bias the group decision. Some individuals may be
reluctant to share their ideas in public for a variety M
of reasons. The Delphi technique
overcomes that weakness.
In the Delphi approach, the group never meets. All forecasts are presented in writ2
ing to a group leader, who provides summaries to all group members. After several
rounds, a decision is made based on the collective 0responses. The weakness of the
Delphi method is that it takes more time and is more cumbersome than the nominal
0
group method. Nevertheless, Delphi has several particular advantages. By avoiding a
8 Decisions are based more on
face-to-face meeting, the technique avoids confrontation.
logic than on personality or position.
T
These two methods recognize that individual managers cannot be expected to think
of everything. Different individuals, bringing differentSexpertise and different points of
view to the same problem, can create an outcome that is superior to that which any one
of them could create individually.
In cases where historical data do exist, forecasting is somewhat easier. Knowledge about the past is often an excellent starting point
for predicting the future. Forecasts based on historical data fall into the categories of
causal models and time-series models. The simplest approaches to forecasting are informal. For example, next year can be assumed to be just like the current year. More effort
and sophistication in the forecasting method can result in more accurate forecasts—but
simple models often provide the most reliable results.
In causal models, changes in one variable are used to predict changes in another.
For example, Meals for the Homeless can examine how much the amount of food it used
in past years changed as the number of meals served varied. Based on that relationship,
ISBN 1-323-02300-3
FORECASTS BASED ON HISTORICAL DATA
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
90
Part II • Planning
it can predict how much food will be needed in the coming year if it has an expectation
of the number of meals that will be served in the coming year. Changes in the number of
meals cause a change in the amount of food needed.
In time-series models, there is assumed to be a relationship between the item we
wish to forecast and the passage of time. For example, Meals may believe that the best
indicator of the number of meals to be served in the future is simply the underlying
trends that occur over time.
Consider property tax revenues. Will next year’s revenues be the same as this year’s?
That is unlikely. However, the manager has much of the information available to make
the forecast. Property tax revenues are the tax rate multiplied by the tax base. Over time,
there are additions of new or remodeled properties increasing the base, and property
values in general may rise or fall.
Over time, trends may exist that would make it unlikely that the value of a variable
will be the same next year as it was this year. Trends make forecasting more complicated.
The linear regression statistical technique
can be used to take a series of historical points
S
and provide a projection in such situations.
M
However, what if there is an intra-year seasonal pattern or a long-term cyclical patI are always busy and other times are always slow.
tern? Perhaps certain times of the year
Or perhaps the economy cycles through
years of economic expansion alternating with
T
recessions. Linear regression is inadequate when there are underlying nonlinear patterns.
H
A variety of more sophisticated statistical
time-series techniques, such as exponential
smoothing, can smooth out fluctuations
in
a
historical series.
,
In some cases, governments and other organizations will rely on sophisticated
econometric forecasting models. These causal models use multiple variables (e.g., multiple regression) or in some cases multiple
equations (solved simultaneously) to provide
A
improved forecasts. In multiple regression models, several independent variables are used
to create the forecast. In the case D
of multiple equations models, the predictor variables
need not be assumed to be independent
A of each other. This is perhaps more realistic.3
In the case of governments, and many other public sector organizations as well, it
M and other regional factors when making forecasts.
is critical to consider general economic
Many elements of a budget (e.g., sales tax receipts and income tax receipts) will vary with
the general economic conditions. Similarly, demographics can have a significant influence.
2
The closing down of a major employer and the emigration of former employees of that
0 on both revenues and expenses of a government.4
employer can have dramatic impacts
One would think that sophisticated statistical techniques would make forecasting a
0
fairly straightforward and well-defined science. In fact, it remains largely an art. Lee and
8
Johnson note that
T
Despite the availability of a wide range of indicators and extensive historical series,
S
forecasting remains a risky business.
It is common to find two or more major federal
organizations in substantial disagreement over expected economic trends…. Not
surprisingly, during major economic changes both businesses and government are
sometimes criticized for not having anticipated the degree of change or sometimes
even the direction of change.5
Before using a forecasting model, it is always beneficial to test it out. This can be
done by running the model parallel to the current forecasting approach to see if it does
better than existing techniques. Another way to verify the accuracy of a model is to use
Ibid., p. 87.
Ibid., p. 88.
5
Ibid., pp. 493–94.
4
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
3
Chapter 3 • Additional Budgeting Concepts
91
it to predict the past few most recent periods and see how accurately it would have
predicted what actually happened.
Even in periods of relative stability, with a model that seems to forecast well, the
judgment of the manager is critical in the forecasting process. Only the manager of a
specific responsibility center can be aware of the many reasons that history may not
be a good predictor of the future. For example, in the health sector, clinical technology
changes rapidly. Forecasting models are limited when discontinuous changes occur. A
new machine or technique can have a dramatic impact on the costs of procedures or
even the number of procedures performed, and therefore on revenues. One should never
rely totally on statistical techniques alone. Careful thought about the subject of the forecast, and managerial knowledge, intuition, and judgment are essential to the forecasting
process. Forecasting is discussed further in Appendix 3-B.
Using Budgeting Techniques
S
An organization would rarely use just one budgeting technique. It is not expected that a
manager will always choose to use flexible budgeting orMzero-based budgeting. Rather, the
specific situation determines the appropriate budget technique. The decision of whether
I
to build a new baseball stadium to prevent a team from leaving a city might best be evaluT to reduce the growing adminisated using a cost-benefit analysis (see Chapter 5). Efforts
trative costs of an organization might be dealt with using
H ZBB. Concerns about what will
happen to Meals for the Homeless if the demand for services increases might be addressed
,
using flexible budgeting. Thus, managers must use a combination
of techniques to address
the many resource allocation issues that they confront in their organizations.
A
D
Many of the issues discussed in this chapter and Chapter 2 relate generally to government
A
management as well as to health care and not-for-profit management. Governments,
however, have a number of unique budgeting concerns.
MGovernments tend to have much
ISBN 1-323-02300-3
ADDITIONAL GOVERNMENTAL BUDGETING ISSUES
less flexibility in structuring budgets than other organizations do. Government budgets
often have mandated forms and content. Government budgets are public and are often
2 of purposes. For example, the
used by individuals outside of the government for a variety
budget of a government may be used by lenders to decide
0 whether to make a loan to the
government or to determine what interest rate to charge.
0 is different is that governments
One of the reasons that governmental budgeting
have taxing authority. This creates an ability to generate
8 revenue that many organizations
do not have. At the same time, it places a greater responsibility on the organization to be
T
accountable to the public in its spending.
When the government decides on taxes, they are often
S based on achieving some policy objective. Taxes on cigarettes may be partly a method of raising revenue and partly a way
for the government to discourage cigarette smoking. The social policy role in governmental
budgeting has wide implications. Policy decisions will affect who or what to tax and at
what rate. Decisions to help those with less money may require tax increases for those with
more money. Policy decisions also affect transfers of revenue between governmental units.
For example, in an effort to provide more self-determination, Medicaid money can be given
from the federal government to state governments with few strings attached, allowing the
states to decide what health care services to provide to Medicaid beneficiaries. States in turn
may pass on block grants and authority to local governments.
This decentralization process, shifting money and authority to lower levels of
government, is referred to as devolution. It serves a policy of allowing each state and locality
greater control over spending. Devolution takes place on a selected basis. For example, the
federal government may decide that it wants to retain control over the health care treatment
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
92
Part II • Planning
of the elderly. Therefore, all Medicare decisions might be made at the federal rather than
local levels, even though Medicaid decisions are not made by the federal government.
Suppose that an approved budget turns out to be inaccurate due to poor forecasts,
and that it becomes apparent during the year that spending will exceed receipts. Service
cuts may be required to keep spending within legal limits. The government does this by
making a rescission. The term rescission refers to the fact that the authorization to spend
the money is rescinded. Service cuts are often immediately apparent to the public and
often receive unfavorable response.
One might think the solution is simply to increase taxes and revenues to ensure that
service cuts will not be required. However, if taxes are deemed to be unacceptably high,
people may find legal ways to avoid those taxes. These approaches may be detrimental
to the community. For example, suppose that Millbridge, in its effort to have the cleanest
streets in the nation, institutes a local sales tax to pay for it. The town managers expect
this tax to bring in extra revenue. However, to get around the sales tax, many buyers may
choose to shop in the towns surrounding
Millbridge that have no such sales taxes.
S
With fewer customers, local merchants go out of business. With rows of unoccupied
M
stores, urban decay begins. Unoccupied buildings are likely to attract rodents and squatI of the buildings may occur. With the unappealing
ters; fires and physical deterioration
look of the downtown area, people
T start to sell their houses and leave town. Property
values fall and property tax receipts decline. Faced with falling property tax revenues, the
property tax rate rises to cover lost H
money needed by the town. This tax increase accelerates the decline in property values, and the flight of homeowners to other communities.
Eventually, most government services are cut because there is not enough money to pay
for them. Millbridge soon earns the distinction of having the dirtiest streets in the country.
This extreme example of a downward
spiral is meant to show that the power to tax
A
is not absolute. Governments have limited resources, just as other organizations do. High
D undesirable. (Voters like to throw those who vote
taxes in themselves are often politically
for higher taxes out of office.) Furthermore,
they do not always generate higher revenues,
A
as the preceding example demonstrates. It requires a skillful balancing act to provide all
necessary services without creatingM
an excessively high tax structure.
Tying Managers’ Hands
2
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
The political and professional management sides of government should work together.
0
Unfortunately, the nature of laws enacted through the political process often ties the
hands of professional government0managers in the financial management process. For
example, both mandates and entitlements
create required spending patterns that must
8
be built into budgets. Managers must also deal with the fact that there are legal limits on
T
changes in budgets.
The federal and state governments
S often create mandates that require local governments to provide services at their own expense. A state may have a teachers’ pension
system. To keep the administration cost per participant low, the state may require that
all local school districts participate in the system. For some local governments, the pension may be more generous than they would otherwise negotiate with the local teachers’
union. However, if mandated by the state, they must participate and pay the higher costs.
Entitlements tend to create burdens on the federal and state budgets. These represent benefits that must be given to any individuals who meet eligibility criteria specified in the law creating the entitlement. For example, Medicare provides health care
for not only the elderly, but also the permanently disabled. If the number of disabled
individuals rises, total Medicare benefits will increase, and resources must be provided
to pay for those benefits, unless the law creating the entitlement is changed. Politicians
have found that eliminating or reducing some entitlements is extremely unpopular and
politically difficult to do.
Chapter 3 • Additional Budgeting Concepts
93
Governmental budgets have the force of law. Managers are generally restricted from
spending more than the total amount budgeted for their department. They also tend to
have a limited ability to move funds from one account to another within their department.
For example, it is often the case that money budgeted by governments for salaries cannot
legally be used for supplies. This reduces managers’ flexibility when dealing with unexpected events. On the other hand, it also prevents managers from using more funds than
intended, or using funds for a different purpose than their intended use.
In proprietary organizations, the owners have a personal financial interest in watching
over the actions of the organization’s managers. In public service organizations, the members of the public are the owners. However, the public’s ability to act as watchdogs over
government management is very limited. Therefore, controls are put in place to safeguard
the use of the public’s money. These tend to limit the flexibility of management. Some
would argue that they keep governments from being as responsive and efficient as possible and are wasteful. However, it is a price that is paid to prevent misappropriations and
potentially much greater waste.
S
M
I
As noted earlier, if revenues fall short, it may be necessary
to cut spending to avoid an
illegal budget deficit. Another alternative to risking theT
need for sudden painful spending
cuts is to establish budget reserves at the time the budget is created. These reserves are
H
sometimes called rainy day funds.
No matter how carefully one budgets, it is rare for, actual results to exactly match the
Budget Reserves
plan. It is not possible to know for sure when and how much cash will be received from
taxes. It is not possible to know if there will be unusually heavy snowfalls requiring unexpected overtime and salt use. Nor can one know exactlyAwhat equipment will break down
and how much the repairs will cost. It is sensible to have reserves for unexpected events.
D
When reserves are established, the government must decide how large they should
A if all of the reserve is not used.
be, who can authorize use of the reserve, and what happens
Presumably, if some reserves are left, the government as
Ma whole will have a surplus. That
money can be used toward balancing the next year’s budget, or it can be accumulated.
By accumulating reserves, the annual reserves can be smaller. For example, suppose that
Millbridge expects to spend $200,000 per year on snow 2
removal. In a really bad winter, this
could rise as high as $500,000. A winter that bad would only occur once in 10 years. One
0 against a really bad winter. An
solution is to have a reserve of $300,000 each year to protect
alternate solution would be to have a reserve of $30,000
0 each year and allow that reserve
to accumulate until it reaches a level of $300,000.
8
T
Very few organizations share their plans with the public.
SGovernments are fairly unique in
ISBN 1-323-02300-3
Communicating with the Public
that they must communicate budget information to the public. Although each budget document will be unique, there are some elements that are common to most government budgets
reported to the public: a budget message from the manager or chief executive, a table of
contents, summary tables of revenues and expenditures, and other supporting information.6
The presentation of the information, use of graphics and exhibits, and other general elements should be aimed at informing the public about the government’s plans for
the collection and expenditure of resources. The budget should present the goals and
objectives of the government as well as information about how it expects to measure its
performance. Performance budgets can be particularly useful in this respect. The budget
document should be readable and should avoid complexity whenever possible.
6
Robert L. Bland and Irene Rubin. Budgeting: A Guide for Local Government. Washington, D.C.: International
City/County Management Association, 1997, p. 54.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
94
Part II • Planning
Summary
This chapter builds on the basic budgeting concepts
of Chapter 2. Budgets may be organized to provide
information in many different ways. They can be
line-item budgets, focusing on the amounts spent on
various types of resources, such as labor or supplies.
Or they can be organized to present the budget for
responsibility centers, programs, or functions. Often
there is a combination of approaches used within the
same budget. Most responsibility center, program,
or functional budgets will generally show line-item
information.
Note that often the organization will present
information about the same total spending in different formats. For example, Meals for the Homeless
can show its total spending divided by responsibility
centers such as the kitchen, delivery, serving, fundraising, and administration departments. The same
total spending can also be divided up and reported in
terms of the meals, counseling, and support services
functions of the organization.
The budgeting process at some organizations is
highly centralized. Other organizations take less of a
top-down approach, giving managers throughout the
organization more say in the development of budgets
for their responsibility centers. There are advantages
and disadvantages to both top-down and bottomup budgeting. As a result, most organizations use an
approach that incorporates both direction from above
and detailed input from below.
A number of specialized budgeting techniques
can be very helpful for managers: flexible budgeting,
Key Terms from This Chapter
0
0
8
T
decentralized budgeting. See bottom-up budget.
S
decision package. The information related to and
analysis of a program or department being evaluated
in a zero-based budgeting review.
decremental budgeting. Refers to a budget
reduction.
devolution. The decentralization process of shifting
money and authority to lower levels of government.
entitlements. Benefits that must be given to any
individuals who meet eligibility criteria specified in
the law creating the entitlement to the benefit.
fixed costs. Costs that do not change in total as
volume changes.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
allocation. The process of taking costs from one
area or cost objective and allocating them to others.
bottom-up budget. Budget prepared by responsibility center managers, who inform the top management of their spending plans.
budget reserves. Amounts in a budget that are to
be used for unanticipated expenses.
causal models. Forecasting approach based on the
relationship between two or more variables. Changes
in one or more variables, called independent variables, are used as predictors of the likely change in
another variable, called the dependent variable.
centralized budgeting. See top-down budgeting.
performance budgeting, zero-based budgeting, and
forecasting are some of the more prominent techniques. Flexible budgeting is an approach that provides budgets at different volume levels. This helps
managers plan actions that will be necessary if actual
volume exceeds or falls short of expectations. Performance budgeting is an approach that helps organize
budget information so that managers can see the cost
of achieving different outcomes, instead of focusing
primarily on inputs. Zero-based budgeting is a technique that requires budget justification of all costs in
a budget, rather than just justification of the increase
S costs from one budget year to the next. Forecasting
in
focuses
on how managers make predictions of expenM
ses, revenues, and other items in the budget.
I Government managers have some special budgeting
concerns. These result from the structure
T
provided to protect the public’s resources and hold
H
governments accountable. Governments tend to have
,
much
less flexibility in developing budgets than other
organizations do. Their budgets often have mandated
forms and content, and must be disclosed to the
A
public.
It is much more difficult to change spending
from
the
authorized amount in total or to use funds
D
intended for one purpose for another. Often deciA of how much to spend are out of the control
sions
of
M managers because of mandates or entitlements.
Nevertheless, government managers must actively
work on developing and managing the budget to
ensure
that the public receives the services it needs
2
when it needs them, to the extent possible.
Chapter 3 • Additional Budgeting Concepts
flexible budget. An operating budget for varying
workload levels.
flexible budgeting. Process of developing a budget based on different workload levels.
forecast. Prediction of some future value such as
unemployment claims, police arrests, or the number
of children enrolled in the school system.
functional. Referring to the primary functions of
the organization, such as providing meals, counseling, fund-raising, and administrative activities.
incremental budgeting. A budget approach in
which the approved budget consists of the amount
spent the prior year, plus an additional amount.
inputs. Resources used for producing the organiza- S
tion’s output. Examples include labor and supplies.
M
line-item expense. Specific individual types of
I
expenses such as labor or materials.
mandates. Federal or state laws that require state T
or local governments to provide services, often at
H
their own expense.
outcomes. The results that the organization is try- ,
ing to achieve.
output. The number of units of service provided.
A
For example, the number of meals served.
overhead. Indirect costs; costs other than direct
D
labor and supplies.
A
performance budget. Plan that relates the various
objectives of a cost center with the planned costs of M
accomplishing those activities.
program budget. A plan for a specific portion of
2
the organization’s operations, such as a type of service
0
offered or a special project.
ISBN 1-323-02300-3
0
8
Questions for Discussion
T
3-1. Are there any limits on government taxation or spending?
Explain.
S
3-2. Distinguish among line-item, responsibility center, and
program budgets.
3-3. The Museum of New Art traditionally offers a new
exhibit each month, in addition to its permanent collection. Mary Moser, the new museum director, has
found that the number of exhibits must be reduced
because of financial constraints. The museum has
always used a line-item budget, but Mary has asked
for a program budget for each of the proposed
exhibits for the coming year. Explain the difference
between the line-item and program budget, and why
Mary wants the latter.
3-4. Distinguish between a top-down and bottom-up budget
process.
95
program services. The programs of the organization that provide services to its clients—for example,
a heart surgery program or a meals on wheels
program. Any program may consume resources from
a number of different line-items or responsibility
centers.
rainy day funds. See budget reserves.
rescission. A rescinding or reversal of the authorization to spend the money.
responsibility centers. Organizational subdivisions
that a specific person is responsible for supervising.
supporting activities. Those activities an organization carries out in order to allow it to provide its
program services.
time-series model. Forecasting approach that uses
past trends and seasonal patterns for a variable to
predict the future values of that variable.
top-down budget. Budget prepared in a central
fashion by the organization’s top management.
Responsibility center managers are told the budgeted
amount and are expected to achieve the budgeted
result.
variable cost. Costs that vary in total as volume
changes.
workload. The volume of goods or services that
the organization or a subdivision of the organization
provides.
zero-based budgeting (ZBB). Budgeting approach
that requires an examination and justification of all
costs rather than just the incremental costs and that
requires examination of alternatives rather than just
one approach.
3-5. The advantage of a centralized approach to budgeting
is that staff has more involvement in setting organizational priorities. True or false?7
3-6. In the past year, a major factory closed in Parsons City.
Following the closure, a number of residents moved
from the town. Property values are falling, and the
mayor believes that a tax cut is necessary to avoid further exodus. He believes that the high unemployment
rate will place a substantially increased demand for
some public services. On the other hand, the declining population may reduce demand for other services.
What budget approach would make the most sense for
the city for the coming year? Why?
7
This question and questions 3-10 and 3-12 were written by Dwight
Denison.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
96
Part II • Planning
3-7. What are the two main categories of functional budgets? Why do you think this might be a useful way
to budget?
3-8. Distinguish between a mandate and an entitlement.
3-9. What is performance budgeting? What does it try to
accomplish? How does the method work?
3-10. Performance budgeting is concerned more with reducing costs than monitoring outcomes. True or false?
3-11. Describe zero-based budgeting.
3-12. Which of the following is not true about zero-based
budgeting?
a. generally more costly to prepare
b. reevaluates all program activities every year
Problems
3-15.
3-16.
3-17.
3-18.
S
M
I
T
H
,
A
D
A
M
2
0
0
8
T
S
for the coming fiscal year as well as a flexible budget
based on a 5 percent increase in the number of dogs
taken into MR’s shelter during the year. She has given
you the following guidelines.
Number of dogs rescued and placed by MR: 800
Average length of stay for a dog in the shelter: 12 days
Daily cost of feeding one dog: $1.10
Number of veterinary visits per dog on average: 1.2
Cost per veterinary visit: $45
Cost of spay/neuter and transportation per dog
rescued: $60
Cost of the kennel and related equipment: $400,000
Useful life of the kennel and related equipment:
20 years
MR uses straight-line depreciation
Salvage value of the kennel and related equipment: $0
MR has three full-time employees. An executive
director, who earns $40,000 per year, an evaluator/
trainer, who earns $30,000 per year, and a kennel
manager, who earns $25,000. Fringe benefits are equal
to 25 percent of each employee’s annual salary.
MR expects to place all of the dogs that it takes into
the program by the last day of the fiscal year. It charges
an adoption fee of $225 per dog. Experience has shown
that 15 percent of the people elect to make an additional
donation to MR at the time of adoption. Historically,
these extra donations have averaged $175. In addition,
MR has an active fund-raising program and expects to
raise $40,000 in donations during the fiscal year.
3-24. Stratton County Community College is adding a band
program that will be open to college students and also
to the community. The music department chair has
asked you to prepare a special-purpose budget for the
program for the next two semesters. Prepare the budget for the full academic year using an accrual basis
using the following information:
The band will derive revenue from three sources.
Students enrolled in band classes will pay $425 per
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
3-19. Select from the following to answer questions 1 and 2.
a. zero-based
b. formula
c. incremental
d. accrual
e. capital
f. flexible
1. If your boss, the town’s chief financial officer, told
you that the town expected tax revenues to be
22 percent lower than last year and asked you
to prepare decision packages to justify all of the
town’s discretionary programs, you would use
a(n) _______________ budget.
2. To test the sensitivity of your operating expenses
to changes in the number of campers coming to
Camp Summertime Fun this summer, you would
use a(n) _______________ budget.
3-20. Give an example of a line-item or an object of expense.
3-21. Select from the following to answer questions 1
through 4.
a. zero-based
b. formula
c. incremental
d. accrual
e. capital
f. flexible
1. If your boss told you to test this year’s budget for
the impact of changes in expected client volume
on your budgeted revenue and expenses, you
would use a(n) _______________ budget.
2. _______________ budgets focus on proposed investments in valuable, long-lived resources.
3. Decision packages are normally associated with
a(n) _______________ budget.
4. Operating budgets are normally done on a(n)
_______________ basis.
3-22. Performance budgets focus on _______________
rather than solely on outputs.
3-23. The executive director of Mutt Rescue (MR) animal
shelter has asked you to prepare an annual budget
3-13.
3-14.
c. most commonly used budget method
d. reduces “slack” in budgets
What is a flexible budget?
Many managers simply average historical data to
get a forecast of future results. Is that approach
adequate?
What is the principal advantage of curvilinear
forecasting?
A carefully done computerized analysis should be
sufficient for most forecasts. True or false? Why?
What are two forecasting techniques that can be used
if no historical data are available?
What do functional financial statements do?
ISBN 1-323-02300-3
Chapter 3 • Additional Budgeting Concepts
97
3-27. The Georgeville city government provides a wide
semester. The college has two semesters each year.
variety of services to the community. Among them is
Community members will pay $50 per semester to
the protection provided by the police force. In order
play in the band, but will not receive course credit.
to provide that force it spends $3 million on salaries,
The only other revenue will come from the sale of
$200,000 on vehicle costs, and $300,000 on supplies.
tickets to the six concerts that the band intends to
The police force expects to have 7,000 measurable
give each academic year.
actions, consisting of 1,000 arrests, 4,000 traffic citations,
The faculty expects to have 35 students enrolled
and 2,000 responses to emergency calls. It has noted that
in band classes each semester, and also expects
the average cost for each one of these actions is $429
another 20 people from the community to play in
if you simply divide the $3,000,000 department cost by
the band each semester. Based on discussions with
the 7,000 specific individual actions. Some have argued
other universities, Stratton expects its concerts to
that it is not cost-effective to give out traffic tickets, since
attract 300 people on average and expects to charge
the $429 cost per ticket exceeds the fine collected. The
$2.50 per ticket.
Georgeville Police Department is considering adopting
To run the band program, Stratton will have to
a performance budget. The performance areas would
hire a graduate assistant at a cost of $15,000 per acabe arrests, citations, and emergency responses.
demic year (two semesters). It will also have to rent S
It believes that activities related to making arrests
an average of 10 brass and 15 woodwind instruments
consume 30 percent of salaries and 40 percent of supper semester. Brass instrument rentals will averageM
plies. Traffic citations consume 30 percent of salaries
$90 per semester per instrument and woodwinds will
I
and 10 percent of supplies. Emergency response takes
cost $50 per instrument per semester.
up 15 percent of salaries and 25 percent of supplies.
The band will rent rehearsal space from the local T
Additionally, it performs many other activities that colhigh school at a cost of $250 per night. The band
lectively take up 25 percent of salaries and 25 percent
will meet one night each week for 15 weeks in each H
of supplies. It also estimates that their vehicles are used
semester.
,
25 percent for arrests, 30 percent for citations, and
The department will also pay $100 to clean
5 percent for emergency responses. How much money
the hall after each concert and $50 per concert for
is budgeted for each arrest, citation, and emergency
student ushers. It will also spend $200 on promoA
response? Regardless of your answer, assume that the
tion for each concert and $75 per concert for insurcost per traffic citation exceeds the average fine colance. Ticket and program costs will average $.75 D
lected. Should the police cease issuing citations? Why?
per attendee.
Finally, the department needs to buy a tuba at a A 3-28. Eger Township is preparing its budget for the fiscal year
ending March 31, 2014. The township has a Management
cost of $4,000, a baritone saxophone for $2,500, and M
Department, a Public Works Department, a Recreation
a full set of percussion instruments at a cost of $7,500.
Department, and a Public Safety Department. The proIt figures that the instruments will only last five years
posed budget calls for spending money on the items
and will not be able to be sold for anything after five
2
listed in Exhibit 3-1 on the next page. Based on the
years. The department will also need to buy 30 sets
information in that exhibit,
of band music pages at an average cost of $150 per 0
a. Prepare a line-item budget for the township.
set. The music pages often get lost, so the department
Group all types of supplies together as one
wants to treat the sets as an expense in the year they 0
line-item.
are acquired.
8
b. Prepare a responsibility center budget for the
3-25. Refer to Problem 2-29 in Chapter 2. Assuming that
township, just showing departmental totals.
the mix of visitors does not change, provide a bud- T
c. Prepare a budget that shows both line-tem and
get assuming admissions are 10 percent lower and 10
S
responsibility center information. Group all
percent higher than expected.
types of supplies together as one line-item for
3-26. The Free Health Care Center (FH) charges each
each responsibility center.
patient $5.50 (not quite free after all, but pretty close).
3-29. Eger Township has a Management Department that proDue to rising costs, the center has been forced to
vides support to other departments. The Public Works
consider raising this charge to $6.00 or $6.50. If the
Department has three functions: garbage collection,
price goes up, fewer people will come to the censnow removal, and road repair. The Recreation Departter for care. At a price of $6 only 18,000 patients are
ment has three functions: park maintenance, concerts,
expected, and at a price of $6.50 there will likely be
and athletics (including tennis courts, golf course, and
only 16,000 patient visits. Prepare a flexible budget
swimming pool). The Public Safety Department has two
for the FH at prices of $5.50, $6.00, and $6.50. The
functions: police protection and fire protection. The
variable cost per patient is $4, and the fixed costs
proposed budget calls for spending money on the items
of operating the center are $32,000. They currently
listed in Exhibit 3-1. Based on the information in that
expect to have about 20,000 patient visits. What do
exhibit, prepare a functional, line-item budget for the
you recommend the clinic do? Why?
township. Show each type of supply item separately.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
98
Part II • Planning
Exhibit 3-1 Eger Township Budget Data
Line-Item Type
Department
Function
Salaries
Management
Management
Amount
$1,248,720.00
Supplies: Office
Management
Management
23,984.23
Rent
Management
Management
128,349.00
Gas & Electric
Management
Management
32,550.00
Telephone
Management
Management
14,201.00
Fringe Benefits
Management
Management
262,231.20
Interest
Management
Management
42,410.00
Depreciation Exp.
Management
Management
Salaries
Public Works
Garbage
241,089.00
Supplies: Office
Public WorksS
Garbage
1,832.00
Gas & Electric
Public Works
Garbage
2,385.00
Garbage
1,832.00
14,200.00
Supplies: Salt
M
Public Works
Public WorksI
Public WorksT
Public WorksH
Public Works
,
Public Works
Snow
36,748.00
Gas & Electric
Public Works
Snow
18,236.00
Telephone
Public WorksA
Snow
1,272.77
Fringe Benefits
Public WorksD
Snow
17,794.56
Depreciation Exp.
Public Works
20,128.00
Public Works
Road Repair
61,632.00
Supplies: Office
A
Public WorksM
Snow
Salaries
Road Repair
3,163.00
Supplies: Blacktop
Public Works
Road Repair
42,979.00
Telephone
Fringe Benefits
Depreciation Exp.
Salaries
Supplies: Office
Garbage
50,628.69
Garbage
40,000.00
Snow
84,736.00
Snow
831.59
Gas & Electric
Public Works2
Road Repair
2,016.34
Telephone
Public Works
1,025.37
Fringe Benefits
0
Public Works0
Recreation 8
Recreation T
Recreation
S
Road Repair
Public Works
Recreation
Telephone
Recreation
Parks
617.00
Fringe Benefits
Recreation
Parks
6,626.55
Depreciation Exp.
Recreation
Parks
Salaries
Recreation
Concerts
Supplies: Office
Recreation
Concerts
624.00
Supplies: Concerts
Recreation
Concerts
2,941.00
Depreciation Exp.
Salaries
Supplies: Office
Supplies: Parks
Gas & Electric
Road Repair
12,942.72
Road Repair
28,944.00
Parks
31,555.00
Parks
427.00
Parks
4,278.00
Parks
524.00
8,293.00
14,315.00
Recreation
Concerts
262.00
Telephone
Recreation
Concerts
619.00
Fringe Benefits
Recreation
Concerts
3,006.15
Depreciation Exp.
Recreation
Concerts
2,744.00
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Gas & Electric
Chapter 3 • Additional Budgeting Concepts
99
Exhibit 3-1 Continued
Line-Item Type
Department
Function
Amount
Salaries
Recreation
Athletics
Supplies: Office
Recreation
Athletics
3,890.00
Supplies: Athletic Facilities
Recreation
Athletics
27,443.00
61,201.00
Gas & Electric
Recreation
Athletics
8,079.34
Telephone
Recreation
Athletics
3,178.38
Fringe Benefits
Recreation
Athletics
12,852.21
Depreciation Exp.
Recreation
Athletics
118,742.00
Salaries
Public Safety
Police
310,432.00
Supplies: Office
Public Safety
Police
7,957.00
Supplies: Uniform Allowance
Public Safety
S
Police
2,856.00
Gas & Electric
Public Safety
Police
3,890.00
Police
4,755.00
Police
65,190.72
Police
52,888.00
Supplies: Fire Truck
M
Public Safety
I
Public Safety
Public Safety
T
Public Safety
H
Public Safety
,
Public Safety
Fire
22,856.00
Gas & Electric
Public Safety
Fire
3,890.00
Telephone
Public Safety
A
Fire
4,755.00
Fringe Benefits
Public Safety
D
Fire
31,662.02
Depreciation Exp.
Public Safety
Fire
Telephone
Fringe Benefits
Depreciation Exp.
Salaries
Supplies: Office
Total
A
M
Fire
150,771.50
Fire
4,426.00
152,888.00
$3,568,296.34
Note: Many of the above line-items, such as salaries, are summaries of detailed information listing individual
employees and their salaries.
This exhibit is available as an Excel worksheet file at: www.pearsonhighered.com/finkler. Open the folder for
Student Resources. Then open the folder for Excel Templates. Then open the Excel file for Exhibit 3-1. Use of that
file will aid in solving Problems 3-28 to 3-31.
3-30.
2
0
The State Department of Labor is working on its revenue 0
budget for the year ending June 30, 2015. The State uses 8
a system of account numbers to simplify its bookkeeping processes. The system uses four digits to the left and T
four digits to the right of the decimal point. The basic
S
structure for an account would appear as: 0000.0000.
The first digit in the number (on the extreme left)
represents whether the account is describing an asset
(resource owned by the state), a liability (obligation
owed by the state), revenue, or expense. The code
would be:
ISBN 1-323-02300-3
1
2
3
4
Asset
Liability
Revenue
Expense
The second and third digits signify the department.
Several examples for the State are as follows:
01 Legislature
02 Governor’s Office
03 Judiciary
04 Agriculture
05 Transportation
12 Labor
The fourth digit represents the subdivisions within
each department. For the Department of Labor,
these are:
1
2
3
Economic Planning and Development
Economic Assistance and Security
Manpower and Employment Services
The first two digits to the right of the decimal point
represent specific line-item revenue sources and
expense codes:
01
02
11
12
13
Direct State Appropriations
Grants-in-Aid
Salaries and Wages
Materials and Supplies
Maintenance
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
100 Part II • Planning
The third and fourth digits to the right of the decimal point represent programs. For the Department of
Labor, the programs are:
01
02
03
04
05
06
3122.0104
Administration and Support Services
Unemployment Insurance
State Disability Insurance
Vocational Rehabilitation Services
Workplace Standards
Employment Services
3122.0104
For example, account 3122.0104 represents revenue for the Department of Labor intended for the
Economic Assistance and Security subdivision of
the department. The revenue comes directly from
state appropriations and is intended for use in the
Vocational Rehabilitation Services program. This can
be seen as follows:
3122.0104 The 3 in the first digit on the far left
indicates that this is a revenue account.
3122.0104 The 12 in the next two digits indicates that the account is related to the
Department of Labor.
3122.0104 The 2 in the next digit indicates that
the account is related to the Economic
Assistance and Security subdivision of
the department.
S
M
I
T
H
,
The 01 in the first two digits to the
right of the decimal point indicates
that the source of the revenue is direct
state appropriations.
Finally, the 04 in the last two digits
indicates that this money is earmarked
for the Vocational Rehabilitation
Services program.
Using this account code system, and the information in Exhibit 3-2, prepare the following budget
reports for the year ending June 30, 2015:
a. Prepare a line-item revenue budget for the
Department of Labor. Note that the only two
line-items are Direct State Appropriations and
Grants-in-Aid.
b. Prepare a responsibility center revenue budget for the Department of Labor showing just
the three main subdivision totals without lineitem information.
c. Prepare a responsibility center revenue budget for the Department of Labor showing the
three main subdivisions and line-items.
d. Prepare a functional revenue budget with
line-item information for the Department of
Labor. Treat each of the programs as a separate function of the Department.
A
Exhibit 3-2 State DepartmentDof Labor Budget Information
A
Account Code
Budget Amount
M
3 1 2 1 . 0 1 0 1
$ 143,063
3
1
2
1
.
0
1
0
2
3
1
2
1
.
0
1
0
3
634,623
3
1
2
1
.
0
1
0
4
3
1
2
1
.
0
1
0
5
3
1
2
1
.
0
1
0
6
3
1
2
2
.
0
1
0
1
3
1
2
2
.
0
1
0
2
3
1
2
2
.
0
1
0
3
3
1
2
2
.
0
1
0
4
3
1
2
2
.
0
1
0
5
453,337
3
1
2
2
.
0
1
0
6
357,982
3
1
2
3
.
0
1
0
1
813,416
3
1
2
3
.
0
1
0
2
334,587
3
1
2
3
.
0
1
0
3
2,457,845
3
1
2
3
.
0
1
0
4
353,467
3
1
2
3
.
0
1
0
5
1,118,238
3
1
2
3
.
0
1
0
6
530,213
3
1
2
1
.
0
2
0
1
45,488
3
1
2
1
.
0
2
0
2
543,543
2
0
0
8
T
S
334,444
734,683
6,743,323
4,565,344
346,678
2,456,787
234,111
123,378
ISBN 1-323-02300-3
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
Chapter 3 • Additional Budgeting Concepts 101
Exhibit 3-2 Continued
Account Code
Budget Amount
3
1
2
1
.
0
2
0
3
564,577
3
1
2
1
.
0
2
0
4
745,764
3
1
2
1
.
0
2
0
5
363,466
3
1
2
1
.
0
2
0
6
553,888
3
1
2
2
.
0
2
0
1
546,346
3
1
2
2
.
0
2
0
2
2,122,547
3
1
2
2
.
0
2
0
3
276,453
3
1
2
2
.
0
2
0
4
8,634,678
3
1
2
2
.
0
2
0
5
8,745,666
3
1
2
2
.
0
2
0
6
353,353
3
1
2
3
.
0
2
0
1
513,254
3
1
2
3
.
0
2
0
3
1
2
3
.
0
2
0
3
1
2
3
.
0
2
0
3
1
2
3
.
0
2
0
3
1
2
3
.
0
2
0
Total
S
M
2
3I
4T
5H
6
,
1,342,424
462,342
342,342
325,623
476,476
$49,693,749
This exhibit is available as an Excel worksheet file at: www.pearsonhighered.
com/finkler. Open the folder for Student Resources. Then open the folder for
Excel Templates. Then open the Excel file for Exhibit 3-2.
Use of that file will aid in solving Problem 3-32.
3-31.
A
D
A
(Appendix 3-B) The Billings Multi-Specialty Physician
Group Practice is trying to forecast the number of M
ISBN 1-323-02300-3
patient visits it will have for the coming year. It has data
from the previous three years to use for the forecast.
a. Create a graph of the historical data that 2
demonstrates whether the volume contains a 0
trend, a seasonal component, or both.
b. Develop a forecast for the next four quarters. 0
Use whatever approach is appropriate given
8
the pattern identified in the data.
Year
Q
Patient Visits
1
1
2
3
4
20,000
23,000
27,000
20,000
2
1
2
3
4
21,000
25,000
29,000
20,000
3
1
2
3
4
19,000
24,000
26,000
21,000
T
S
3-32. Senior Ride Access (SRA) provides a van service
for senior citizens. SRA receives a $100,000 grant
each year from a local foundation for the aged. SRA
expects to spend $2,500 each year to pay for copying and supplies to operate the service. Insurance
will cost the SRA $1,750 per year for each of the
two vans that it operates. SRA employs a supervisor, earning $34,000 a year to run the van service.
There are also six part-time coordinators who organize the routing of the vans and provide outreach
to the senior community. Each coordinator works an
average of 17 hours per week for 50 weeks in the
year. Coordinators earn $10 per hour. All drivers are
volunteers. The costs associated with carrying each
passenger are $0.50 per mile. The average ride for
each passenger is 5 miles. Seniors are asked to donate $1.00 for each ride, but only 85 percent of the
riders are able to afford the donation.
Prepare an operating budget for the upcoming
year, assuming 5,000 seniors use the van service during the year. In the past, there have been fluctuations
in ridership so SRA would also like to see what would
happen should there be a 10 percent increase or
decrease in the number of rides.
3-33. You are the manager of the Corn is Not Just for
Ethanol (CNJE) relief organization, which works with
a coalition of countries to help provide corn, wheat,
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
102 Part II • Planning
to feed up to 20,000 people per day. Cooks do not
receive benefits.
You use trucks to deliver food and cooking fuel
to the remote feeding sites. You estimate it takes one
truck to service every 500 people you feed each month.
It costs $2,600 to pay for the fuel, drivers, and maintenance to operate one truck for one month. Depreciation
for nontrucking equipment adds $18,000 to expenses.
Direct costs for food are $4.00 per person per
day. The coalition of countries has agreed to pay CNJE
$4.17 per day for each person you feed. For budgeting
purposes, assume there are 30 days in a month. Finally,
the World Nutrition Society has pledged $50,000 per
month to support the CNJE effort for the coming year.
and other food staples to countries where food is in
short supply. CNJE’s board has asked you to prepare
a monthly operating budget based on feeding 15,000
people per day, as well as a flexible budget based on
a 30 percent increase in the number of people you
will have to feed each day.
Your operation has three full-time employees: a
manager who earns $48,000 per year, a security chief,
earning $36,000 per year, and a field manager, who
earns $24,000 per year. CNJE spends an additional…