Financial Management Diploma in Public Administration & Management Notes & Tutorial Questions Chapter 2: Overview of Fiscal Policy Planning

Transcription

1 Financial Management Diploma in Public Administration & Management Notes & Tutorial Questions Chapter 2: Overview of Fiscal Policy Planning Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 1

2 What is a Budget? A budget is a quantified plan of action for a forthcoming accounting period. A budget is a plan of what the organization is aiming to achieve and what is has set as a target whereas a forecast is an estimate of what is likely to occur in the future. A budget is a quantitative statement for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows. A budget facilitates planning. What is Government Budget? A Budget tells the public how the government intends to spend its money. The budgetary process is a planning tool and a tool of regulation and control. A government budget sets a legal limit for expenditures. It also creates the legal authorization for delegated officials to spend fund. Government budgeting is the critical exercise of allocating revenues and borrowed funds to attain the economic and social goals of the country. It also entails the management of government expenditures in such a way that will create the most economic impact from the production and delivery of goods and services while supporting a healthy fiscal position. Objectives of Budgeting The objectives of a budgetary planning and control system are as follows: To ensure the achievement of the organization s objectives. To establish system of control. To coordinates the activities To motivate employees to improve their performance. Why Government Budget is Important Government budgeting is important because it enables the government to plan and manage its financial resources to support the implementation of various programs and projects that best promote the development of the country. Through the budget, the government can prioritize and Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 2

3 put into action its plants, programs and policies within the constraints of its financial capability as dictated by economic conditions. Budget Cycle Preparing the Budget Evaluating the Budget Approving the Budget Executing the Budget Preparing the Budget The first step of the budget process is to actually generate the budget. Done right, this process starts with careful thought at the ground level as to what is needed and what new initiatives can be started. At the same time, leadership and vision from the top offers some guidance as to what the departments can expect. Once each department makes its spending decisions, their requests are sent to the decision makers for inclusion in, or exclusion from, the final document. Approving the Budget While the political budgeting process is a bit messy, one of its underlying principles is very meaningful for businesses. Budgets aren't approved on a yes or no basis. Instead, they're the subject Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 3

4 of further debate. While, at times, the political process can distort budgetary priorities, businesses don't have to fall prey to that problem. Executing the Budget Chief executives can, if they choose, impound funds to prevent money from being wastefully spent. On the other hand, departments can request reprogramming to give them additional funds if a need arises. Most of the time, though, the money gets spent in accordance with the budget. Evaluating the Budget While the audit and evaluation process was once focused on ensuring that money was being spent in accordance with the law and in a non-corrupt fashion, this phase of the budget has grown in scope. Now, auditing and evaluating also focuses on how effectively the money is being spent. It's not enough to see who used their money and who didn't. Types of Budget Government use various different types of budget. Revenue Budget The revenue budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure. Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies. In non-tax revenue, the government's sources are interest on loans and dividend on investments like fees, and other receipts for services that it renders. Revenue expenditure is the payment incurred for the normal day-to-day running of government departments and various services that it offers to its citizens. Operating Budget A detailed projection of all estimated income and expenses based on forecasted sales revenue during a given period (usually one year). It generally consists of several sub-budgets, the most Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 4

5 important one being the sales budget, which is prepared first. Since an operating budget is a shortterm budget, capital outlays are excluded because they are long-term costs. Capital Budget The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Often times, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Incremental Budgeting Prepared based on the current period s budget with some added amounts regarding inflation or planned increases in sales and costs. Incremental Budgeting Advantages Simple to prepare and understand. Consistent basis. Better co-ordination between budgets Incremental Budgeting Disadvantages Totally ignore the impact of changes. No incentive in development and innovation. Encourages spending up to the budget Zero Based Budgeting It starts each budget period from a base of zero, with no reference to the prior period. Zero Based Budgeting Advantages Efficient allocation of resources. Drives managers to find cost reduction methods. Identifies and eliminates wasteful activities Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 5

6 Zero Based Budgeting Disadvantages Very complex - Time and manpower consuming. Justifying every expense may not be feasible or practical Financial Accounting & Management Accounting Financial accounting systems ensure that the assets and liabilities of a business are properly accounted for, and provide information about profits and so on to shareholders and other interested parties. Management accounting systems provide information specifically for the use of managers within an organization. Introduction to Cost Behaviour Cost behaviour is the way in which costs are affected by changes in the volume of output. Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 6

7 The basic principle of cost behaviour is that as the level of activity rises, costs will usually rise. It will cost more to produce 2,000 unit of output than it will cost to produce 1,000 units. Cost Behaviour Pattern Fixed cost A fixed cost is a cost which tends to be unaffected by increases or decreases in the volume of output. Examples of fixed cost include: The salary of the MD (per month or per annum) The rent of a single factory building (per month or per annum) Straight line depreciation of a single machine (per month or per annum) Step cost A step cost is a cost which is fixed in nature but only within certain level of activity. Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 7

8 Examples of step cost include: Basic pay of employees is nowadays usually fixed, but as output rises, more employees are required. Variable cost A variable cost is a cost which tends to vary directly with the volume of output. The variable cost per unit is the same amount for each unit produced. Semi Variable cost A semi-variable/semi-fixed/mixed cost is a cost which contains both fixed and variable components and so is partly affected by changes in the level of activity. Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 8

9 Examples of these costs include the following: Electricity and gas bill FC = standing charges VC = charge per unit of electricity used Cost of running car FC = road tax, insurance VC = petrol, oil, repair Cost behaviour and cost per unit The following tables relates to different level of production of the zed. The variable cost of producing a zed is $5. Fixed costs are $5,000. What happen when activity level rise can be summarised as follows: The variable cost per unit remain constant. Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 9

10 The fixed cost per unit falls The total cost per unit falls Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 10

11 Practice Questions Question 1 Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 11

12 Question 2 Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 12

13 Question 3 Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 13

14 Question 4 Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 14

15 Question 5 Question 6 Question 7 Question 8 Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 15

16 Question 9 Question 10 Question 11 Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 16

17 Question 12 Variable cost for one unit of product is MVR 3. If company produced 300 units of product. Determine total VC. Question 13 Mahir company is established in Alifushi and they are specialized in producing Rihaakuru. In the month of June 2017 Mahir company produced 500 rihaakuru bottle and VC is MVR 150 per bottle and FC for that month is MVR 2,000. Calculate TC of Mahir company. Ibrahim Sameer Diploma in Public Administration & Management (FM CSTI) 17