Project Budgeting & Control

TRAINING ON PROJECT
BUDGETING & CONTROL

 Yonas Geleta
 Associate Consultant
 EMI
 April 2009
 INTRODUCTION
• YOUR NAME
• NAME OF YOUR ORGANIATION
• JOB TITLE
• YOUR QUALIFICATION
 Your expectations concerning
budget

• What to learn?
 Ground Rules
• What we SHOULD DO or SHOULD NOT
Do as a team?
 ASSIGNED RAPORTERS &
CLASS MANAGER
• RAPPORTERS
• CLASS MANAGER
 Objectives of the Training
 At the end of this training the participant:
• Understand the purposes of budget
• Define and understand different budget approach
• Identify advantages and disadvantages of each
budget approach
• Define and understand performance budgeting in
particular
• Understand project budget preparation & analysis
 Topics to be covered
• Budget & Budgeting
• Budget approaches
• Work plan and budget
• Identification of responsibility centers
• performance target
• Budget control
• Monitoring
• Reporting
• Evaluation
 Purpose of Budgeting
• Serving as essential tool for executive plan and
program management, legislative control and
accountability
• Provide information on public allocation of resources
• Planning to look to the future
• Control- actual result against the budget & taking
appropriate action
• Communication- formal communication channel in
the reporting hierarchy
 Cont…Purpose of Budgeting
• Co-ordination- allows the business to
coordinate all diverse actions towards a
common goal
• Evaluation- used to evaluate the financial
result of a part of the business and the
action of the manager
• Motivation- used as a target for managers to
aim for.
 Defining Budget
• Financial expression of policy
• It is comprehensive and coordinated plan,
expressed in financial terms for the operations and
resources of the institute for some specific period
in the future.
• A quantitative plan prepared for specific time
period
• A short tem operating plan, linked to the corporate
plan and will be used for detailed control.
 Cont… Defining Budget
• Planing & control point of view
– is an action plan for specific period of time
– covers all the facets of an organization
– contains target to be achieved both in physical
and financial terms
 Cont…Defining Budget
 From management point of view :-
 monetary expression of plan
 often used to denote financial budget
 Budget in planning sense is a total action plan
and not just a financial document
 Characteristics of budget
• Stated in monetary terms
• Covers period of one year
• Estimates cost of resources
• Management commitment
• Higher authority for review and approval
• Specific conditions for changing or transfer
• Comparing actual with approved budget
 Objectives of Budgeting
• To set standards to be achieved
• To coordinate activities of different
departments and work units
• To plan and control activities in the budget
period
• To give authority, responsibility and
accountability
• To allocate scares resources
 Functions of Budgeting
• Creating a linkage to the strategic
objectives & vision of the institute
• Predict performance
• Assist in allocating resources
• Control the ongoing performance
• Early warning of departure from plan
• Using past performance as a guide
 Approaches to budget
 Top Down budget
• It is also known as “authoritative” or “non-
participative”
• It is preferable where operational managers
main not have knowledge and experience to
set a budget ex. In small business
• In time of crisis may not be sufficient time
then impose target to ensure survival
 Cont…Approaches
 Bottom Up budget
• Also know as participative budgeting
• Budget prepared by junior managers would
be reviewed and challenged by senior
managers
 Advantages of participative
approach
 Increased motivation ( ownership budget)
 Contain better information, especially in a
fast-moving or diverse business
 Increase managers’ understanding and
commitment
 Better communication
 Senior managers can concentrate on strategy
 Disadvantages of participative
budgets
• Senior managers may resent loss of control
• Bad decisions from inexperienced managers
• Focus on divisional concern as managers lack
strategic perspective
• Budget preparation is slower and dispute can
arise
• Figures may be subject to bias (impress or set
easily achievable targets)
 Budgeting
• It covers the process of preparing the action
plan in sufficient detail for specific
operational period
• It is used as effective basis for monitoring
and control
 Budgeting Methods
 BRAINSTORMING

 What kind of budgeting technique are you

currently using?
 What kind of performance measurement
method is in place in your organization?
 Is there any costing method in your firm?
 Cont...Budgeting Methods
 Line-Item-Budgeting
 Activity-Based-Budgeting/Performance
Budgeting
 Program Budgeting
 Zero-Based budgeting
 Line Item budgeting
• A line-item budget lists, in vertical columns, each
of the organization revenue sources and
expenditure classification
• under line-item budgeting, budget offices know
what inputs are being purchased
• There is no clear indication of what activities,
purposes, or objectives -- or ultimately outputs or
outcomes -- are being purchased, or how
government policies translate into spending
 The line-item/object-of-
expenditure budget
• It is control oriented (main objective is to
control expenditure)
• Traditional government budget
• Two ways of appropriation i.e.
 Lump-sum or one-line basis
 Detailed specific line-item
• Used in almost every national and local
governments
 Cont…Line-item/object-of-
expenditure
• Focuses on accounting aspects of
government operation
• government accounting system linked with
the budget accounts
• Object codes for expenditure are usually
four-digit numbers
 Advantages of object-of-
expenditure/line-item
• Accountability
• Useful information available for personnel
management
• Facilitation of understanding of this mode
of classification
 Cont… Advantages
• It is comparatively easy to prepare and
doesn’t require sophisticated financial skills
• Straightforward, simple to administer and
readily understood by the officials, and
employees.
• The simplicity of the system makes it easier
for the board or city council and administrator
to monitor revenues and expenditures,
Limitations of line-item budget
• The issue of economy, efficiency and
effectiveness often remain buried in the object
detail- no sufficient basis for measuring
performance
• It does not address the complex mix required by
contemporary financial management like
leadership, shared responsibility, operational
directives & controls, planning, programming
and performance evaluation
 Cont… Limitations
• Limited management insights for planning &
evaluation purposes. The “big picture” - in terms
of objectives, policy alternatives and cost-benefit
evaluation is buried in massive details.
• Budget holders are limited in their ability to
respond to both unforeseen risks and
opportunities
• It promotes an incremental methodology of
financial decision making
 Cont…Limitations
• The list of the system provides no method of
determining the amount of a particular product or
service produced by a given level of spending
• The broad expenditure categories used in a line-
item budget make it difficult to set service
priorities because there is no way to calculate the
quantity or quality of product or services that
would result from various expenditure levels.
 Example of Line-item Budget for Water and Sewerage Service in the City

DEPARTMENT: Water Production & Distribution Department

Expenditure Previous Fiscal Year Current Fiscal Year Next Fiscal Year 1998-
Classification 1996-97: Actual 1997-98: Budgeted 99: Request
Personal Services $ $ $
Supplies $ $ $
Contractual
$ $ $
Services
Capital Outlays $ $ $
Chemical Cost $ $ $
TOTALS $ $ $
Measures taken to overcome the
limitations of object-of-
expenditure budget
 The following alternative budget
formats/approaches have been developed:-
• Activity-Based Budgeting/Performance
Budgeting
• Program Budgeting approach
• Zero-base budgeting approach
 Activity-Based Budget (ABB)
• ABB is a method of budgeting based on an
activity framework and utilizing cost driver
data in the budget-setting
• It is an alternative method which may
produce more accurate budgets and enable
greater control of overhead expenditure
 ABB Terms
 Activity: a unit of work that has identifiable starting and
ending points, that consumes resources (inputs) and
produces measurable out puts.
 Task: work assigned or carried out as part of duties
 Process: a series of activities that are linked to perform
a specific objective
 Cost Driver: a factor that causes a change in the
performance of an activity and, in doing so, affects the
resources required by the activity
 Cost Pool: An activity that consume resources & for
which overhead costs are identified & allocated. For
each cost pool, there should be a cost driver
 Advantages of ABB
• More accurate
• Understand how budgets are actually consumed
• It provides much better insight into what drives indirect
costs
• ABB recognizes that indirect costs are not all related to
production or project output
• Indirect costs can be controlled by managing cost drivers
• It provides useful basis for monitoring & controlling
indirect costs
 Disadvantages of ABB
• A considerable amount of time and effort
might be needed to establish an ABB
system. Ex. To identify key activities &
cost drivers
• Difficulty to identify clear individual
responsibilities for activities but
responsibility centers are responsible for the
performance of their budget center.
Steps to prepare budget adopting
Activity-Based approach
 Step 1. Identify cost pool & cost drivers
 Step 2. Calculate a budgeted cost driver rate
based on budgeted cost and budgeted activity
 Step 3. Produce a budget for each department
or product or project by multiplying the
budgeted cost driver rate by the expected
usage( budgeted activity cost driver)
 Assumption underlying ABB
• Budget is set for an activity
• An Activity consumes resources
• The consumption of resources drives cost
• Products or output of a project incur costs because
of the activities
• These activities are not necessarily related to volume
of products that are produced
• DL hours & machine hours are not the drivers of
costs in modern business
 Performance budgeting
• Budget is becoming an important tool to
promote government accountability and
effectiveness, rather than simply as a means
to allocate resources and control
expenditure
• PB has been introduced in late 1940s.
• Budgets are based on agreed upon results
not incremental trends
Common elements and emphasis
of Performance Budget
• Relationship between inputs and outputs
• Measurement criteria in quantity
• Relationships between program funding levels and
outcomes
• The development of goals and objectives
• Its use to measure performance
• Focus on results
• It is flexible
• Has long term perspective
 Approaches to Develop
Performance Budgeting
• Top-down-up process
 Senior level managers:-
 set program goals and objectives
 outline level of resources allocated
 identify outcome measures
 Lower level managers:-
develop and validate goals, objectives, resource
levels and outcome measures
 Steps to implement Performance
Budgeting
Develop goals and objectives by planners and
officials
Determine resource levels and outcome measures
Communicate clearly to the lowest level
managers, bureaus and agencies heads
Agencies and bureaus should develop goals,
objectives and performance measures to support
higher level government goals and objectives
 Cont…Steps to implement
Review of the goal, objectives and
performance measures of the agencies
Communicate the tuned goals, objectives and
performance measures to all agency/bureau
offices and each worker
Develop annual budget and target to be
achieved at the end of budget year
Periodic performance review and evaluation
EMI,Alemayehu Yirsaw, october,2007
 Steps to Illustrate Effective
Integration of budget and
performance
Define every activity conducted by
organizational unit/staff within a
program/strategic objective
Each activity is measured in units
List out resource requirements for each
activity
 Cont…Integration of budget &
performance
Measure each resource in terms of
monetary value
Every Birr of operating cost is charged
against a specific activity
Link every activity to a single output
Develop a unit cost for each activity
 Benefits of Performance
budgeting
• Continuous learning from the ongoing budgeting
process
• Availability of improved information for better
decision
• Enables agency’s manager to deploy their
resources effectively and efficiently
• Redefines the standards to measure performance
• Integration between resources deployed and
performance achieved
 Cont.., Benefit
• Helps agency/bureau heads to justify their
budgets
• serves as foundation for a comprehensive
performance management
• Establish a starting point for monitoring
organizational effectiveness
 Challenges of Performance
budgeting
• Defining activities for each program
• Identifying and tracing the cost of each activity
• Mapping budget justification to the annual
performance plan
• Determining and selecting performance targets to
each program
• Changing appropriation or budget structures
• Heads and employees may be resistance to change
 How to prepare PB?
Each work unit should :
Identify activities( direct and indirect)
Identify resources to carryout activities
Examine the resource inputs and how they
relate to outcomes
Design and develop appropriate information
system
Take timely action and corrective measures
 Implementation Steps

• Step One: Gain consensus and

commitment from key players
two basic approaches
The “top-down”
The “bottom-up”
 Implementation Steps
• Step Two: Develop an implementation plan
and timetable .

Smoothen transition by addressing:

potential roadblocks

Establishing clear expectations and responsibilities

 To keep efforts on track.

 Implementation Steps

• Step Three: Provide training.

Briefing sessions or workshops

Development of budget instructions
and guidelines
Ongoing technical assistance and
training
 Implementation Steps

• Step Four: Review/develop strategic

plans

PB can serve as a link between

what a strategic plan says and what
next year’s budget does
 Implementation Steps
• Step Five: Develop the budget and allocate
resources.

 Elements to be considered in developing performance budgets:

 Activity-Based Costing/Unit Cost Budgeting

 Zero Base Budget with Performance Incentives

 Program-Based Performance Budgeting.

 VISION

• To be the center of excellence in management development

MISSION

• To build managerial capacity of civil service & other organizations

through need based & result oriented training, consultancy & research
intervention

STRATEGY OF THE INSTITUTE

• To build EMI’s capacity to meet its mission

Strategy of the research directorate

To develop the capacity of the institute in research

Goal of the Research Directoriate

To provide training on Research methodology

Activiti es
Identification of need
Preparation of TOR
Selection of trainer
Approving the completeness of the training design
Conduct training
Evaluation
Activity- Identification on need

Cost of Activity
Salaries of work unit personnel XXX
Other direct costs XXX
Equipment XXX
Allocated Administrative costs XXX
Other cost factors XXX
Total budgeted cost of activity XXXX

Cost driver of this activity is man-hour i.e

Expected hourly rate = Monthly Gross earning/Monthly man hour

Example:

If the research director :

expected to spent 10 hours on this activity & his
basic salary $ 3000
; allowance 500,
pension contribution (6%) $180
other fringe benefits $120

Monthly man hour on the job by the research directoriate 142 hours

Expected hourly rate = (3000+500+180+120)/142

= 26.76 BIRR
Budgeted Salary of the personnel for the activity =10hrs* Br 26.76= 267.60

OUTPUT

• Identified need

• Compare the cost of the activity with the budget and act accordingly
 In your department or organization:
 Identify an activity
 Assign cost driver for an activity
 what challenges do you face in identifying
activities and the corresponding cost driver
 Program Budgeting
• A program classification is often thought as
a first step in introducing performance
orientation into the budget process
 Cont…Program budget
• Program budgeting is not simply about
changing the way a budget is presented, but
about changing the way policy officials, the
public and government staff think of the
government, how they plan, manage and
budget.
 Cont…Program Budgeting
• Each line ministry and agency needs to
engage in the process of developing a
program structure for their budget.
• Line ministry management and staff---not
consultants---must undertake the work.
• This also implies that a country should not
simply import a program classification from
another country and try to adopt it.
 Cont… Program budgeting
• Direct costs need to be allocated to
programs.
• To be of full use, a program needs to
connect the inputs with the objectives of
spending, which cannot be done if
significant portions of spending are not
related to the programs.
 Cont…program Budgeting
• This does not mean one must adopt full
accrual accounting or activity-based
costing. But it does mean having some
ability to allocate costs to programs on a
reasonable basis so that the full costs of
each program are reflected with the
program.
 2. Example of Program Budget for Water & Sewerage
Services in the City

DEPARTMENT: Water Production & Distribution Departme nt

PROGRAM : Rehabilitation of Reservoirs

Expenditure Previous Fiscal Year Current Fiscal Year Next Fiscal Year 1998-
Classification 1996-97: Actual 1997-98: Budgeted 99: Request
Personal Services $ $ $
Supplies $ $ $
Contractual
$ $ $
Services
Capital Outlays $ $ $
Chemical Cost $ $ $
TOTA LS $ $ $
 Zero Base Budgeting
• Zero-based budgeting is a system that
requires all departments to defend their
programs and justify their continuation each
year, as though the activities to which the
budget relates were undertaken for the first
time.
 It is useful for
• Service departments such as stores,
maintenance, marketing, finance and, etc.
• Public sector organization such as local
authorities.
 Questions to be raised by
managers involved in ZBB
• Is the activity essential? What would
happen if it ceased?
• Is the provision of the activity at the correct
level?
• Are there other alternatives for achieving
the same effect?
Four stages in implementation of
ZBB
• Managers should specify, for the
responsibility centers, those activities that
can be individually evaluated.
• Each of the individual activities is described
in a decision package. The package should
state the costs and revenues expected from
the given activity and evaluated and ranked
against other packages.
 Cont… Four stages
• Each decision package evaluated and
ranked usually using cost/benefit analysis
• The resources are then allocated to the
various packages
Advantage of Zero-based budget
• The most positive feature of zero-based
budgeting is that it requires a thorough
evaluation of all programs on a continuing
basis and encourages proper funding for
priority programs at the expense of less
useful programs.
 Cont…Advantages
• Inefficient or obsolete operations can be
identified and discontinued.
• Wasteful expenditure is avoided.
• Managers are forced to consider alternative
methods of achieving their objectives.
• ZBB leads to increased staff involvement at
all levels that leads to better communication
and motivation
 Cont…Advantages
• Attention is focused on output in relation to
value for money
• Resources should be allocated efficiently
and economically
• knowledge and understanding of the cost
behaviour patterns of the organization will
be enhanced
 Cont…Advantages
• Attention is focused on output in relation to
value for money
• Resources should be allocated efficiently
and economically
• knowledge and understanding of the cost
behaviour patterns of the organization will
be enhanced
 Drawback of Zero-based
budgeting
• The major drawback to zero-based
budgeting is that it is extremely time-
consuming, costly and requires a level of
staff expertise that is not often available in
small organizations.
 Cont…Drawbacks
• Heavy paper work involved and has
become known as “Xerox-based budgeting”
• It may emphasis short term benefits to the
determent of long term benefits.
• There is a need for management skills that
may not be present in the organization
 Cont..Drawbacks
• Managers, staff and unions may feel
threatened.
• The ranking of packages may be subjective
where the benefits are of qualitative nature
• It is difficult to compare and rank
completely different types of activity
 DEPARTMENT: Water Production & Distribution Department
PROGRAM: Rehabilitation of Reservoirs

Instructions: Complete this decision package on the assumption of three different

levels: continuation of the current funding level; a 10-percent reduction; and a 25-
percent reduction.
Continuation of the Current Assuming a 10% Assuming a 25%
Program Costs
Level of Funding Reduction in Funding Reduction in Funding
Personal
$ $ $
Services
Supplies $ $ $
Contractual
$ $ $
Services
Capital Outlays $ $ $
TOTALS $ $ $
 Work plan & Budget
• Work plan is a management tool that serves to
organize the implementation of a project on an
efficient and coordinated basis
• It should identify project activities and related
sub activities
• Indicates the inter-relationships between various
activities
• Schedules starting time, finishing time and
expected duration
 Cont…Work plan & Budget
• The schedule indicates when specific inputs are
needed or expected to be delivered for each activity
• Project document is a base for preparation of work
plan
• Financial budget is prepared from physical plan or
work plan
• The resource requirement is converted in to
financial terms based on physical resource and time
at which fund would be needed
 Cont…Work plan & Budget
• Linking activities identified in the work
plan with resource requirement and
financial budget may denote resource
consumption by activity and facilitates
monitoring and budget control.
 Identification of responsibility
centers
• Responsibility center is segment or part of an organization
accountable for implementation of part of action plan
• identification of responsibility center depends on
organizational chart.
• In terms of decisions they made responsibility centers can
be classified as:-
– Cost center
– Revenue center
– Profit Center
– Investment Center
 Performance Target
• Target could be set not only organizational level
but also responsibility centers and individuals.
• Targets imply specific achievements to be aimed
at.
• Targets serve as benchmark against which the
actual performance and outcome are compared
• Target can be both financial and physical.
• Targets should be set with mutual agreement with
top management supervisor of responsibility
center.
 Budget Control
• Budget Control is a management tool used to plan,
execute and control operations and activities
aimed to achieve the target set.
• Budgetary control should aim at economic use of
resource, efficiency and effectiveness to meet the
intended objectives.
• Budget control begins from inception i.e.
preparation of budget & action plan to evaluation
and taking corrective actions
Monitoring, Reporting & Evaluation
• Monitoring could regular or irregular or continuous.
• Monitoring from budget point of is comparison of actual
performance with corresponding plan or budget.
• Monitoring is facilitated by an effective system of
reporting.
• Other method of monitoring include field visits, inspection
& discussions.
• Variance analysis for financial (budgetary) and non
financial performance of a project is commonly used.
• Variance analysis approach is historical backward looking
method that does not adequately indicate performance.
 Components of good reporting
system
• Use of uniform terminology
• Uniform format, comparable to the budget
• Standard method of computation
• Relevant, Reliable, Accurate & timely
• Review based on reports
• Corrective actions
 Types of report
• Regular report
• Exceptional (variance ) reports
• Trend reports
• Spot sampling reports