Costing Individual Assignment Mpac518
Costing Individual Assignment Mpac518
Costing Individual Assignment Mpac518
INDIVIDUAL ASSIGNMENT
a) Discuss the particular difficulties encountered when budgeting in public sector
organizations compared with budgeting in private organisations, drawing
comparisons between the two types of organisations. (9 marks)
The budgeting process is an essential component of management control system as it
provides a system of planning, coordination and control for management. It is often
an arduous process, however and often strikes dread in the hearts of those involved in
the budget preparation.
The public sector which comprises of central government, local government and
government agencies and independent commissions’ budgeting process can be more
difficult since the objectives of the organization are more difficult to define in a
quantifiable way than objectives of a private company. The main objectives for
private sector companies is profit maximization. It can be noted that the meeting of
this private sector objective of profit maximization can be set out in the budget by
aiming for a rise in sales percentage and subsequent cost cutting measures. On the
other hand, if a public sector organisation is municipality school, then the objectives
will be largely qualitative as opposed to quantitative for increasing literacy rate within
a community. This is difficult to precisely define in quantifiable terms hence difficult
to define.
Furthermore, just as the objectives are difficult to define quantifiably, so too are the
organisation’s outputs. In a private company, output can be measured in terms of sales
revenue attained by the company. It can be noted that there is a direct relationship
between the expenditure that needs to be incurred and the desired goal of increased
revenue. On the other hand, it is difficult to define a quantifiable relationship between
inputs and output in the case of a public entity like a hospital. In public sector, it is
easier to compare the relationship between how much cash is available for a particular
are and how much cash is actually needed. Budgeting therefore naturally focuses on
inputs alone rather than the relationship between inputs and outputs.
In conclusion, public sector organisations are always under pressure to show that they
are offering good value for money. It therefore follows that public sector
organisations should ensure that they offer services in an economical, efficient and
effective manner and should take this goal into consideration when preparing budgets.
This requirement implies that public sector entities should achieve desired results with
minimum resources thereby making the budgeting process more difficult compared to
private sector.
b) Explain the terms ‘incremental budgeting’ and ‘zero based budgeting’ (4 marks)
Incremental budgeting is a term used to describe the process whereby a budget is
prepared using previous period’s budget or actual performance as a base, with
incremental amounts being added for the new budget period (Dury, 2012). This means
that the existing operations and the current budgeted allowance for existing activities
are taken as a starting point for preparing next annual budget.
Zero based budgeting on the other hand is defined by (Dury, 2012) as a budgeting
process which starts from a base zero, with no reference being made to prior period’s
budget performance. Instead, under Zero based budgeting, very activity is considered
on its own merits and costs and benefits of performing the activity in different ways
are drawn up. Under this method, every department is reviewed comprehensively,
with all expenditure requiring approval rather than just the incremental expenditure
requiring approval.
d) Discuss the view that ‘there is no longer a place for incremental budgeting in any
organization, particularly public sector ones; highlighting any drawbacks of zero
based budgeting that need to be done. (8 marks)
The view that there is no longer a place for incremental budgeting in any organisation
can rather be described as a far extreme view. Incremental budgeting is known for
encouraging weak and wasteful spending, hence the comment that it is particularly
unsuitable for public sector organisations, where cash cutbacks are being made
(Ibrahim, 2018).
It could be argued that Zero based budgeting is more suitable for public sector than
for private sector organisations (Ibrahim, 2018, pp. 3-5). This is because, firstly, it is
far easier to put activities into decision packages in organisations which undertake set
definable activities. Local government, for example, have set activities including the
provision of housing, schools and local transport. Secondly, it is far more suited to
costs that are discretionary in nature or for support activities. Such costs can be found
mostly in not for profit organisations or the public sector, or in the service department
of commercial operations.
Since Zero based budgeting requires all costs to be justified, it would appear
inappropriate to use it for the entire budgeting process in a commercial organisation.
It makes no sense to use such a long-winded process for costs where no discretion can
be exercised anyway. Incremental budgeting is, by its nature, quick and easy to do
and easily understood. These factors should not be ignored. In conclusion, whilst Zero
based budgeting is more suited to public sector organisations, and is more likely to
make cost savings in hard times such as these, its drawbacks should not be
overlooked.
References
Dury, C., 2012. Management and Cost Accounting. 8th ed. Hampshire: Cengage Learning.