Question

Lists and explain the advantages and disadvantages of of Line Item Budget and Program/Performance Budget?

Answer 1

LINE ITEM BUDGET

A LINE ITEM BUDGET is a budget presentation that clusters proposed expenses by department or by the cost center.This method helps in showing which departments and cost centers are absorbing more entity's funds.

DISADVANTAGES

1.It does not demonstrate the return on investment:  A line item expense that grows over time may seem excessive and invite scrutiny when, in fact, a manager can justify the increase for the item by pointing to increased revenue or increased performance. On the other hand, if a company notices its expenses are increasing while revenue does not, this can indicate a real problem area.

2.Encourage inefficient micro-management:This type of budgeting does not completely  help the managers to keep a watch on the employee's actions closely and provide with frequent criticism of the employee's work rather than telling them what tasks need to be accomplished.

3.It is difficult to adjust a line item budget: a line item budget is not a fluid budget and can not be adjusted throughout the year.For example-If a manager notices that the line item is over budget ,he now, can not adjust or change the budget without the permission of the upper management.

ADVANTAGES

1. Easy to prepare and monitor:A line item budget is easy to prepare and can be monitored at regular interval of time period.

2. It creates valuable statistical information :It creates valuable statistical information that demonstrates trends and opportunities to save money.For example, retailers who have higher labor expenses during the winter holiday months can use data from line item budgets to find ways to cut labor costs in less busy times of the year.

3. Helps government : The line item budget helps the government to understand whether the income of the company or the firm is sufficient to cover its expenses.

PERFORMANCE BUDGETING

It is the system of planning ,evaluation and budgeting which emphasizes on the relationship between money budgeting and results expected which reflects the revenue and the expenditure of an organisation or a government.

DISADVANTAGES

1. It focuses more on quantitative evaluation rather than qualitative evaluation-As it does not focuses on qualitative evaluation ,it does not quantify the future social benefits .
2. Inaccurate estimation of benefits -It is difficult to accurately estimate benefits arising out of each activity as it is measured in quantitative terms only.
3. Inefficient-This type of budgeting is inefficient without a proper and a systematic accounting and reporting system.

ADVANTAGES

1. Performance budgeting is flexible :As we know that performance budgeting is flexible ,it helps the managers to achieve the desired results in the best manner.
2. Better allocation of funds-It helps in a better decision making for the allocation of funds and act as a tool for reviewing efficiency.It also focuses on longer time horizons by recognizing the relationship between strategic planning and resource allocation.
3. It is inclusive:It involves policymakers,managers,and often citizens in budget discussions through development of strategic plans ,identification of spending priorities and performance evaluation.it also integrates the process of planning ,programming and budgeting.