BKAL 3023 PUBLIC

SECTOR ACCOUNTING
TOPIC 4: BUDGETING &
BUDGETARY CONTROL

Chapter Outline
Introduction
Legal Requirement
The objectives of budgeting
The Roles of budgeting

The functions of Budgeting

Components of budgeting
Types of Budgeting
Structure of Code of accounts for budget item
Budget Format
Budgeting process
Budgeting techniques/methods
Conclusion

INTRODUCTION
Basic Terminology
Budgeting - a plan showing how resources will be
acquired and used over a specified time interval
Budgetary Control Establishment of budgets relating
to the responsibilities of executives to the requirement
of a policy.
Budgeting technique Refer to the technique or
system in formulating the budget figures

Introduction .. cont
Definition of BUDGETING

Budgeting is the process of allocating scarce

resources to unlimited demands
An official document containing words and figures
that proposes expenditures for certain items and
purposes
Is a plan showing how resources will be acquired
and used over a specified time interval
an instrument for planning and management of
national economic resources to satisfy societys
needs
a comprehensive, numerical plan for the
allocation of resources to achieve corporate goals
and objectives (Tracy, 1996)

LEGAL REQUIREMENT
Budgeting need to be prepared every
year.
Article 99 & 100 of FC
Sec 15 FPA, 1957
Treasury Instruction (TI) no 29-51(The
procedure for preparation of budget)

THE OBJECTIVES OF BUDGET

To fulfill legal requirement
- Articles 99 & 100 FC
- Sec 15 FPA 1957
- TI no. 29-51
As a tools for planning, Control & Evaluation
-As an economic instrument
- As an accounting tool
6

THE ROLES OF BUDGETING

Planning Instruments
management is forced to look ahead, to set
targets, to anticipate problems and to give the
organization purpose and direction
Communicate Channel
A formal system is necessary to ensure that
each person is aware of what he or she is
supposed to be doing. Communication may be
top-down or two-way dialogue
7

The Roles of budget .. Cont..

Coordination Tools
The activities of different departments as subunits of the organization can be coordinate
through budget
System of control
The estimate figure can be used to control the
actual expenditure
Motivation Tools
Good budget should be enable the employees to
improve their performance
8

BUDGET FUNCTIONS
Fiscal policy instrument

Allocation function security, social, economic, administration etc.

Distribution function free education, free books, subsidies, etc.
Stabilization function zero inflation, reducing unemployment,
improve economic growth

Management instrument
-

Manage financial resources budget ensures objectives

are achieved as planned
- Control help management to control cost and use of
resources
- Performance measurement compare actual with budget
so that appropriate action can be taken to correct the
situation

BUDGET COMPONENTS
Components of budget consist of

Estimated Revenues
Estimated Expenditure

10

REVENUES
All the income received by the government
from various sources like tax, fees,
services, licenses and others except
money specifically for muslim people like
zakat and fitrah.

11

REVENUES .. cont
REVENUES for all the level of government can be
divided into four main category:

Tax revenues
Non-tax revenues
Non-revenue receipts
Revenues from Federal Territories (For FG
only)

12

Revenues .. Cont
Tax Revenues all the revenues collected
based on the law passed by the legislative.
Compulsory payment
Can be divided into direct and indirect
Eg. Corporate tax, individual tax for FG, Land
tax and entertainment duties for SG, and
assessment tax for LG.

13

Revenues .. cont
Non-tax revenues
Revenues collected from product or services provided
by the government
The public are required to pay when they used the
product or services
Those who are not used, they do not pay.
Eg. Licences (road tax, taxi permit, etc for FG)
- entertainment permit, for SG
- sales of form for LG
- Charges and penalty
14

Revenues cont
Non revenue Receipts
Collection made by the government but not
based on any acts or laws
Eg. Returned back expenditure, repayment,
grant and contribution

15

Revenues.. cont
Revenue from federal territory
All the revenues collected from the federal
territory of KL, Putrajaya and Labuan.
Can be divided into direct and indirect tax and
non tax revenue

16

EXPENDITURE
Total allocation required by all the
department, ministries and agencies to
run their operation for a year.
Divided into two categories:
Operational expenditure for the purpose of
operation.
Development expenditure for the purpose of
development of the nation
17

Expenditure.. cont
Operational expenditure (OE)
Nature of OE
Repeated and continuous every year
Consist of Charged expenditure and Supply
expenditure
Charged expenditure fixed and code with (T)
Supply expenditure need to get approval
from parliament before implement and code
with (B)
18

Expenditure.. Cont.
Charge Expenditure (CE)
All the expenditure charged directly to CF
Required by the Art. 98 FC
Not subject to the budget approval
Repeated expenditure
Eg. Royal families allowance, salary of Chief
justice, Auditor general remuneration, etc.

19

Expenditure.. Cont.
Supply expenditure (SE)
All expenditure need to operationally the
ministries, department or agencies.
Required by the Art. 100, 101, and 102 of FC
Subject to approval by the legislative before
being implemented

20

TYPES OF BUDGET
Deficit Budget
Surplus Budget
Balanced Budget

21

TYPES OF BUDGET .. cont

Deficit Budget
Government aims to spend more than its revenue earning.
Eg. Estimated Revenue
= RM134,815 m

Estimated Expenditure = RM157,496m

Deficit
( RM22,681m)
The deficit is expected to be covered by bonds/borrowing
The deficit budget is a source of govt. debts
Suitable for countries experiencing recession/depression (high
unemployment and low output)
Govt spend more on operating and development expenditure

22

TYPES OF BUDGET .. cont

Surplus Budget
Estimated expenditure is less than estimated
revenue
Suitable for countries which going to reduce
debts
Formulated during inflation
Reduce spending on operating and dev
expenditure (increase tax and reduce salary
scale)
23

TYPES OF BUDGET .. cont

Balance Budget
Estimated expenditure and estimated revenue
are equal
Suitable for country which wanted to reduce
inflation

24

STRUCTURE OF CODE OF
ACCOUNTS FOR BUDGET ITEM
Standard guideline provided by the
Treasury for all level of the government
department and agencies
Purpose to make sure all the agencies
used the same code and standardize for
revenues and expenditure
To fulfill the requirement of TI 41

25

STRUCTURE OF CODE OF
ACCOUNTS..CONT
Currently code of accounts need to follow
the FTC no. 5/2004
Provide 4 different level of expenditure
and revenues
List of code for 5 digits
For detailed discussion and explanation
please refer to the FTC no. 5/2004

26

STRUCTURE OF CODE OF
ACCOUNTS..CONT
CODE OF ACCOUNTS PROVIDED BY THE TREASURY
CIRCULAR NO 5/2004

GENERAL OBJECT CODE

DESCRIPTION

EXPENDITURE:
10000
20000
30000
40000
50000

EMOLUMENT
SERVICE & SUPPLY
FIXED ASSET
GRANT & FIXED CHARGES
OTHER EXPENDITURE

REVENUE:
60000
70000
80000
90000

TAX REVENUE
NON-TAX REVENUE
NON-REVENUE RECEIPT
REVENUE FROM FEDERAL
TERRITORY

27

BUDGET FORMAT
Operational Budget
Need to follow the format provided by the
treasury
(Refer to illustration)

28

BUDGET STATISTIC FOR FEDERAL

GOVERNMENT
Year

TR (M)

TE (M) OE
(M)

DE (M) D/S

2007

134,815

157,496

112,986 44,510

22,681(D)

2006

123,500

143,500

107,700 35,800

20,000 (D

2005

106,304

128,278

97,744

30,534

21,974 (D

2004

99,397

120,162

91,298

28,864

20,765 (D

2003

92,608

114,577

75,224

39,353

21,969 (D
29

BUDGET STATISTIC FOR FEDERAL

GOVERNMENT .. cont
Year

Tax (RM) Non Tax (RM)

Total (RM)

2007

95,794

39,021

134,815

2006

86,630

36,916

123,546

2005

80,594

25,710

106,304

2004

72,050

27,347

99,397

2003

64,891

27,717

92,608
30

BUDGETING PROCESS .. Agency Involved

Central Agency
Economic Planning Unit
Implementation Co-ordination Unit
Public Service Department

Implementation Agency
Ministries
Department
Statutory Bodies
31

BUDGETING PROCESS
BUDGET CYCLE

9) General warrant issue to

accountant general

10) Allocation
warrant to
ministries/dept.
1) Treasury Circular

2) Preparation of budget
by Ministry/dept

8) Minister of Finance table

budget report in parliament

3) Approve & coordinate

Ministry/dept budget by
controlling officer

7) Treasury approve the

budget

6) Budget examination
meeting

5) Revise propose
budget by central
agency

4) Propose budget to
capital agency

32

The Budgeting Process .. cont

At the Ministrys/Federal level
At the Agency level
At the Ministry Level:
Since March each year, officers of Budget
Management Division of Treasury would
have held discussions with all governments
agencies to fix the expenditure allocation
ceiling for the following year for the recurrent
and development expenditures
33

The Budgeting Process .. cont

From July, Finance Minister has dialogue sessions
with every significant business and community
groups
Dialogues last for about 2 weeks and cover
consultations with professional bodies such as PEM,
ISIS, MIER, consumer and bankers associations,
chambers of commerce and voluntary groups.
Treasury officials closely follow the dialogues take
note of the criticisms of existing policies and study
proposals for new policies and tax changes

34

The Budgeting Process .. cont

These core agencies and statistics dept form the
Inter-Agency Planning Group. They are
government think-tank for the formulation of all
major economic planning policies.
For budget preparation IAPG, chaired by the
Treasury provides all data and analysis on the
economy and its prospective performance.
Treasury officials then study all these economic
and financial information and advise the budget
committee chaired by Finance Ministry

35

The Budgeting Process .. cont

This committee plans the budget strategy, the
budget policies and specific new tax proposals.
Around September, the Finance Minister, Bank
Negara Governor and their officials attend the
annual meeting of the World Bank and the IMF
in Washington.
This meeting is to get a good feel and feedback
on the current state and outlook of the world
economy.
36

The Budgeting Process .. cont

This economic intelligence is fed back to
the budget planners in the Treasury, who
would be drafting the ministers budget
speech.
Finally, the budget speech is presented life
on TV in Parliament.

37

BUDGET PREPARATION CYCLE AT MINISTRYS/FEDERAL

LEVEL
Nov-Dec
Budgeted debated and approved by parliament, given consent by YDPA & issuance of allocation warrant

Oct
Budget documents printed and presented in Parliament

Sept
MoF atten annual meeting of World Bank and IMF

July- Aug
Dialogue session between MoF and significant business and community group

May- July
Preliminary budget hearing and actual budget hearing
March-April
Budget examination process
March
Submission of budget byagencies
Jan
Circular sent by Secretary Gneral MoF to agencies
38

The Budgeting Process .. cont

At the Agency Level
Issue of Call Circular in January by Treasury by
giving:
- Guidelines
- Budget strategy
Submission of budget proposal by agencies on
certain dateline:
- March for operating
- April for development
39

The Budgeting Process .. cont

Examine budget proposal by BMD in April
Budget hearing preliminary and actual
(May-July)
Submission to the treasury/ministry of
finance
Approval by cabinet (august september)
Parliamentary approval begins
40

The Budgeting Process .. cont

Call Circular
Issued by the Treasury contains:
- Expenditure budget policy
- Process and procedure to be followed
- The format to be used
- Dates of submission of proposals

41

The Budgeting Process .. cont

Budget Hearing:
Preliminary Hearing:
Check budget proposals with policy directives
Chaired by Budget Review Officer with representatives
from EPU and PSD
Actual Budget Hearing:
To examine staff request by PSD
To ensure that annual budget proposals conform to the 5
yr development plan
Consider physical and financial performance for past years
Government financial position
NEP objectives

42

The Budgeting Process .. cont

Budget Staff Paper:
On completion of budget hearing the BRO shall
prepare a staff paper
Assessment on the proposals
Reasons for accepting/rejecting
Amount recommended for the new year with
justifications
Paper is sent to Minister of Finance for
approval
43

The Budgeting Process .. cont

Budget Speech:
Normally in September of October each
year
Speech consists of:
- Economic performance of current year
- Economic prospect of budget year
- Budget strategy
- Budget allocations
44

The Budgeting Process .. cont

Budget strategy:
Sustain economic growth
Contain inflation
Improve balance of payment
Enhance R&D and skill training
Foster caring society
Budget Allocations:
Contain the budget amount and breakdown of
expected income and expenditure
Appropriated for Operating and Development
Divided into various Vote Heads of expenditure
45

The Budgeting Process .. cont

Budget execution:
Or implementation of approved budget
Through Accountant General Office
All self accounting departments
Imprest Holders who are responsible for
the Imprest Accounts
And state treasurers
46

The Budgeting Process .. cont

Budget Implementation
General Allocation Warrant:
Upon approval of the budget by parliament for
the Federal, the Finance Minister will issue a
General Allocation Warrant to the Accountant
General Office
This warrant serves as an authority for the AG
office to utilise the Consolidated Funds
required for expenditure
The Warrant shall lapse and cease to have
any effect at the close of one calendar month
following the financial year (Sect. 13(6)
Financial Procedure Act 1957)
47

The Budgeting Process .. cont

Budget Implementation .. cont
Allocation Warrant:
The AG office will subsequent issue circular in
the form of Allocation Warrant to all Controlling
Officers in various government agencies
The circular serves as the authority for the
Controlling Officer to utilise the allocation
provided for payment of the approved
expenditure
48

The Budgeting Process .. cont

Budget Control
Votebook: (Detailed discussion refer to pgs 99-111 text
book).
In order to control expenditure incurred, various
agencies are responsible the allocation, and to
account for the to keep its own agencies are
responsible to keep its own record called the Vote
Book
Vote Book is kept to conform with the requirements of
the Treasury Instruction no. 95 and the procedure set
out in Treasury Circular no. 8 1987
Vote Book is a financial record kept by various
government agencies for the purposes of:
- Control and ensure that expenditure and liabilities do
not exceed the approved allocations
- Provide a source of information in preparing reports on
expenditure, liabilities and balance of allocations
49

The Budgeting Process .. cont

Budget Control .. Cont
Accountant General Office:
A division of the Treasury, under the directive of the
Secretary General of the Treasury
Objectives:
- Prepare annual financial statements of the Federal/States
with respect to every financial year as required under
Article 99 of the Federal Constitution
- Establish a proper system of the Public Accounts which
conforms with the requirements of the Financial
Procedure Act 1957
- Establish appropriate accounting system aimed at
providing meaningful information for batter planning and
decision making
50

The Budgeting Process .. cont

- Budget Control .. cont
- Provide management with Financial

Management Information System for

performance and achievement control and
evaluation
- To enforce and administer the Unclaimed
Monies Act 1965
- To plan and assist recruitment strategies of
accounting officers in the government service
51

BUDGET PREPARATION CYCLE AT AGENCY LEVEL

The Ministry will credit provisions to the agency accounts every three months
Direction to follow the treasury circular
Preparation of budget input from various departments
Preparation of budget draft by budget implementation committee
Submission of Budget proposal to the treasury and relevant Ministry
Treasury examined and approved the budget
Budget being presented in the parliament
Warrant will be sent to relevant Ministry and Agency
52

Agencies Responsible for

Budget
Agencies Responsible for Budget:
Federal Treasury
- Budget Management Division
- Headed by a Budget Director
- 2 Deputy Directors
- 6 Senior Assistant Directors

53

Objectives of Budget Division,

Treasury
To examine and analyse agencies plans and
programs
To allocate financial resources for the
implementation of such plans and programs
in the most effective and efficient manner
To conform to national objectives through
the preparation of annual budget for
approval by parliament
54

Classification of Government
Agencies by sectors
General Administration
Security
Social and welfare services
Economy
Other sectors
Contigency
55

Budget Statistic
Estimated Expenditure based on Sector (2007)
Sector

Operations (M) Development (M) Total (M)

General
administrative

10,253

2,648

12,904

Economy

9,645
39,997
14,665
38,423
112,986

20,827
14,218
6,817
2,000
46,510

30,472
54,215
21,482
38,423
2,000
159,496

Social
Security
Other Sector
Contigency
Total

56

Responsibility of Controlling
Officer on Budget
Examine budget of all agencies under his
control
Consolidate the budgets for all agencies
under his control
Ensure that budget allocations are spent
efficiently and effectively

57

BUDGETING SYSTEM/
TECHNIQUES
Spesific for Operational Budget
- Line-item Budgeting System (LIBS)
- Programmed and Performance
Budgeting System (PPBS)
- Modified Budgeting System (MBS)
- Zero based Budgeting System
58

DEVELOPMENT OF BUDGETING
Technique
Prior to 1969 Traditional/line items Budget System
(TBS) was used
Due to numerous weaknesses of the TBS, a new
technique, Program Performance Budgeting System
(PPBS) was introduced in 1969 following the issue of
Treasury Circular no. 5-1968
After 20 yrs of using PPBS, a study was conducted to
overcome certain weaknesses of PPBS
In 1990, govt. introduced a new system, a
modification of the PPBS

59

DEVELOPMENT OF BUDGETING
Technique.. Cont..
A new Modified Budget System (MBS)
was introduced as pilot project in
Ministries of Health, Public Works and
Welfare
Since 1996, the whole govt. has been
using the system

60

Line Item BUDGETING

SYSTEM (LIBS)
Takes the last yrs spending and existing
budget as the basis for next yrs budget
Analyse the addition to the base for
increase in cost of labour and materials
To add for costs of new projects and
programs
Also known as Incremental budgeting
system
61

Line Item BUDGETING SYSTEM

(LIBS) Cont..

Assumptions in LIBS
All activities making up last yrs spending:
- Were essential to achieve the ongoing objectives
- Activities must be configured during the coming yr and
are more urgent than newly created programs
- Are now being performed well and in most costeffective manner
- Will continue to be cost-effective and necessary in the
coming yr
- All increases are due to labour and material inflations

62

Line Item BUDGETING SYSTEM

(LIBS) Cont..
Weaknesses of LIBS
Vagueness of objectives.
Limited analysis to alternatives.
Partial costing of programs
Inadequate consideration of future yr implications of
present decisions
Short review and decision period
Emphasis on expenditure control instead of
performance
Gap between planning, budgeting and control
Focus on RM expense based on the previous year.
Does not suggest any new method of doing things
63

Program and Performance

Budgeting System (PPBS)
Started in late 1950s in the US by the US
Secretary of Defense, Robert McNamara
Have been used by many developed
nations
Is a system to help management make
better decisions on the allocation of
resources among alternative ways to attain
govt. objectives

64

Needs for PPBS

Increasing complexity of modern life
Demands of public for govt. services has
increased
Shortage of funds to meet the demands
Need to determine priorities, design
programs and control budgets

65

Program and Performance Budgeting

System (PPBS) Cont..

Components of Programs and Performance:

Program includes:
- Functions
- Objectives
- Activities
- Responsibility centre
Performance includes:
- Appropriateness
- Adequacy
- Effectiveness
- efficiency

66

Program and Performance Budgeting

System (PPBS) Cont..
Critical Features of PPBS:
Determination of objectives as specific
as possible
Determination of programs and activities to
achieve the objectives
Measurement of performance in-term of
benefits or effectiveness
Evaluation of Program

67

Program and Performance Budgeting

System (PPBS) Cont..
Elements of PPBS:
Identifying Objectives:
Identifying objectives is fundamental to PPBS approach
Simply it means setting out in clear terms the purposes
for which an organisation (govt. agency) exists

68

Program and Performance Budgeting

System (PPBS) Cont..
Identifying Objectives: example:
Objectives of Ministry of Health is to raise
health status of Malaysians by providing
promotive, preventive, curative and
reliabilitative health services
Objective of Ministry of Education is to
educate Malaysians through a national
education system to make them
knowledgeable and responsible capable of
enjoying a comfortable standard of living
69

Program and Performance Budgeting

System (PPBS) Cont..
Identifying Objectives
Identification of objectives forms the framework
towards a better and meaningful planning
Also encourage considering of other alternatives
in achieving the objectives
Enables management to avoid duplications of
functions of the various organisations within the
dept.
An efficient management is one which is able to
identify and formulate objectives in a clear,
precise and concise manner
70

Program and Performance Budgeting

System (PPBS) Cont..
Program Planning:
Program planning involves the selection of best
feasible alternative for the purposes of achieving
identified objectives and reflecting it in terms of
programs
A program is a set of activities which have
common objectives
Program Structuring:
Refers to the hierarchical listing programs,
activities and sub-activities which contribute to
the achievement of objectives
71

Program and Performance

Budgeting System (PPBS) Cont..
Program Planning: Example of programs (under
Ministry of Health):
- Medical care service
- Dental service
- Manpower planning and training
- Pharmacies and supplies
- Research and administration etc
Example of activities (under Medical Care
Service Program)
- General patient care
- Psychiatry service
- Leprosy service
72
- Medical administration and service

Program and Performance Budgeting

System (PPBS) Cont..
Developing Performance Indicator:
to evaluate financial and physical performance
Involves identification and selection of suitable units of
measurement which reflects the output of each activity
and program in either qualitative or quantitative terms
Also involves making comparisons between actual output
for a given period with the planned or targeted output and
identifying the causes for any variance between the two
Results will provide information as to whether programs
have been realistically planned and properly managed

73

Program and Performance Budgeting

System (PPBS) Cont..
Performance Evaluation:
Assess the relevance, results and impact of programs of
the agencies
An important element for purposes of revising or modifying
plans and involves the asking and answering of general
questions:
- Are the objectives of the programs realistic and
reasonable?
- Has the programs been properly selected?
- Is it the best alternative for achieving the objectives?
- Is it adequate in scope to solve the problems identified?
- Has the programs been properly planned in term of time
and adequately provided with the necessary resources?
74

Program and Performance Budgeting

System (PPBS) Cont..
- Has it been efficiently managed and executed?
- Has the program been effective in relation to the

objectives?

Advantages of PPBS over LIBS:

PPBS makes budget as an instrument of
expressing govt. policies through each of its
programs
More useful document to taxpayers and MPs
since major emphasis is on programs, activities,
work to be completed and costs
75

Program and Performance Budgeting

System (PPBS) Cont..
Provide better information to parliament on effectiveness
and management of ministry/dept./agency
Require govt. administrations and managers to think and
plan in term of program objectives and the most efficient
and economical way of attaining them
Introduces the valuable element of long range planning on
operating and development expenditures
Improve coordination between economic planning and
financial planning
Systematic and continuing method of evaluating
performance
Facilitate setting budget priorities between competing
programs
76

Program and Performance Budgeting

System (PPBS) Cont..
Weaknesses in Implementing PPBS:
Goals and objectives not clear
Budget as an allocation tool not as
management tool
Performance achievement is not
significant
Lack of planning
77

MODIFIED BUDGET SYSTEM (MBS)

Modification of PPBS
To overcome certain weaknesses of PPBS
especially program evaluation stage which could
not be implemented in full
Its introduction was first announced by govt.
through Treasury Circular no. 11, 1988
Treasury Circular no. 8, 1990 announced
implementation of MBS pilot project by 3 govt.
ministries
78

MODIFIED BUDGET SYSTEM (MBS)

Cont..
-

MBS is based on 2 fundamental management principles

as follows:
Managers nearest to where outputs are produced should
be given as much authority/flexibility as possible
Line managers should be more motivated to produce
better output
More responsive fewer delays in decision making and
implementation
authority must match with accountability simply giving
authority without accountability will result in abuses

79

MODIFIED BUDGET SYSTEM (MBS)

Cont..
Objectives:
Improve allocation of resources to
ministries and programs by streamlining
and rationalising the decision process
Bring about more efficient management of
govt. programs through better
management practices
Facilitate accountability
80

INPUT

OUTPUT

EFFICIENCY

IMPACT

EFFECTIVENESS

PROGRAMMES

81

MODIFIED BUDGET SYSTEM

(MBS) .. cont
Main elements of the MBS
Expenditure target (ET)
Program agreement (PA)
Exception reports (ER)
Cycle of program evaluation (PE)
A more generalised approach to
expenditure control
82

MODIFIED BUDGET SYSTEM (MBS)

Cont..

Expenditure Target:
Represents Treasury estimate of the base level of
resources a ministry/dept./agency requires to conduct
programs as in the previous years.
Total allocation of funds based on:
- Expenditure target for existing policy
- Adjustments for salary increments, inflation and exchange
rate
- Plus allocation for approved new policies
- Less one offs (unavoidable and non annual expenses)
- Less efficiency dividend (efficiency implementation related
to learning effect and implementation of improved
methods)
83

MODIFIED BUDGET SYSTEM (MBS)

Cont..
Calculation of ET
ET for Next year (2012) equal to:
Existing policy for previous year (2011)
Plus: New policy for previous year (2011)
Minus: New policy which not implemented for
previous year (2010)
Plus: 2% of emolument incremental from current
year (2010)

84

MODIFIED BUDGET SYSTEM (MBS)

Cont..
Existing policy
All the program and activities that are being
implemented in current year have been approved by
the treasury except for one-off

New policy
All the new program and activities which approved by
the treasury including the extension, expansion and
continuation of existing policies.
Examples of NP : Establishment of new unit
New activities, etc.

85

MODIFIED BUDGET SYSTEM (MBS)

Cont..
Calculation of ET
See the detailed example of Q 9 page 120 text
book Syed Soffian et al. 2011.

86

MBS
PERFORMANCE MANAGEMENT

Programme
Monitoring through
performance
measurement and
managed through
PROGRAMME
AGREEMENT

PROGRAMME
EVALUATION
(Fundamental Review of an
activitys performance over
the long term
Exception Reports

87

MODIFIED BUDGET SYSTEM (MBS)

Cont..
PROGRAMME AGREEMENT
- Contract between manager & subordinate to

whom certain authority has been delegated

- The manager requires the subordinate to be
accountable through submission of
progress periodic reports
- Provides information on agreed target for
the inputs, outputs & impacts
88

MODIFIED BUDGET SYSTEM (MBS)

Cont..

EXCEPTION REPORTS (ER)

Subordinate manager keeps the
authority informed of progress against a
programme agreement
ER identify indicators for which
performance is inconsistent with the
target
Reasons for the inconsistent
performance
Remedial actions to prevent such
recurrence
89

MODIFIED BUDGET SYSTEM (MBS)

Cont..

Benefits from Program Agreement and Exception

Reports:
Improved accountability at all levels of management
through:
- Compliance with rules and regulations
- Efficiency and effectiveness of programs
Emerging problems can be identified earlier
Exceptions reports provides information to the boss of
areas where problems may be developing
Highlight areas of relative strengths and weaknesses to
enable management make better decisions
Allows senior managers to focus on priority and problem
areas
Reduces potential for information overload
90

MODIFIED BUDGET SYSTEM (MBS)

Cont..

Benefits of MBS:
At the Central Budget Level:
- Improved identification of priority expenditures during
budget submission
- Shift focus of budget examinations from one of cutting
expenditures (poker game) to one of identify the best
mix of resources within a constraint based on past and
targeted program performance
- Reduce paperwork in submissions and examinations
- Allow more time for discussion of new policy proposals
and policy change proposals
- Provide Treasury with information on program
performance
91

MODIFIED BUDGET SYSTEM (MBS)

Cont..
At the Departmental Headquarters Level:
- Enable a more top-down (strategic)
approach to budgeting
- Controlling officer can use budgets as a
management device
- Improved communication of top
managements priorities to lower level
managers and staff
92

MODIFIED BUDGET SYSTEM (MBS)

Cont..
At the Line Management Level:
- Improve motivation among line managers
through:
- increase awareness and understanding of
top management priorities (through program
agreement to which they are held
accountable)
- greater flexibility in the deployment of
resources within aggregate constraints
93

UPPER LEVEL OF MANAGEMENT

POWER
DELEGATED BY
PROGRAMME
AGREEMENT

ACCOUNTABILITY
THROUGH
EXCEPTIONS
REPORT

LOWER LEVEL OF MANAGEMENT

94

BUDGETING PROCESS IN MBS

EXPENDITURE
TARGET BEING
INFORMED

ISSUED
PROGRAMME
AGREEMENT

EXISTING
POLICY BEING
PREPARED
STRATEGIC
PLANNING

PROPOSED NEW
POLICIES, ONEOFF AND SAVINGS

FINAL
ALLOCATION
OF BUDGET

PROGRAMME
AGREEMENT
BEING DISCUSSED
BUDGET
COMMITTEE

PREPARATION &
EXAMINE OF NEW
POLICIES, ONE-OFF
AND SAVING

LOWER LEVEL OF
BUDGET

SUBMIT
LATEST
PROGRAMME
AGREEMENT
95

ZERO-BASED BUDGETING SYSTEM

(ZBBS)
-

All managers analyse their operations in terms of:

Objectives
Alternatives
Performance measurement
Incremental costs/benefits
Start from zero
Suitable to organisations with financial crisis
Requires managers to decide which activities/functions
should be performed
Match resources with activities
96

ZERO-BASED BUDGETING SYSTEM

(ZBBS) Cont..

ZBBS Process:
Develop planning assumptions
Identify decision units groups of similar
activities
Analyse each decision unit in term of
objectives and current operations
Preview and reallocate resources
Prepare detailed budget
Evaluate performance financial and nonfinancial

97

THE END

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