Methods of Budgeting

Methods of Budgeting
1. Incremental Budgeting
- The process is mainly concerned with the incremental (or marginal) adjustments
to the current budgeted allowance. In that respect it is rather similar to the NI
block funding: any changes are up or down from the existing funding for particular
activities.
2. Zero-based Budgeting
- Zero-based budgeting – unlike the incremental approach – starts from the basis
that no budget lines should be carried forward from one period to the next simply
because they occurred previously. Instead, everything that is included in the
budget must be considered and justified.
- The process requires specification of minimum levels of service provision, the
current level, and an ‘incremental’ level – either between the minimum and the
current or an improvement over the current level. Options for delivering at each
level can then be evaluated and a justification put forward along with the request
for resources.
3. Alternative Budgeting Techniques

a. Priority-Based Budgeting
o It focuses on corporate priorities and allocates growth and savings in
budgets accordingly. It is based on a thorough on-going review of
departmental services. According to CIPFA, the review requires a
statement of:
1. the objectives/purpose of the service;
2. targets/standards the service is trying to achieve, and;
3. various thresholds at which the service could operate.
o Based on analysis of these statements, elements of spending by each

business unit could be classed as essential/highly desirable/beneficial and
this information would be presented to decision makers.
b. Decision Conferencing
o This approach is computer-software aided. It allows participants in
decision-making conferences to identify key service areas and the
resources committed. Costs and benefits of levels of activity are given
scores and plotted on a graph – these can be varied to allow the
implications for service delivery to be evaluated. While it can be an
effective tool, CIPFA suggests that the focus is largely at service level and
is more difficult to apply across services. Also, it is time consuming and
expertise with the associated software is required across organizations.
c. Planning Programming Budgeting

o This system is primarily associated with corporate management and
identifies alternative policies, the implications of their adoption and
provides for their control. The key difference from traditional approaches
is that it relates cost estimates to programs using a cross-cutting method
rather than attributing costs on a traditional departmental basis.
d. Performance-Based Budgeting
o The main aim of this approach is to connect performance information with
the allocation and management of resources. Performance-based
budgets need to contain information on the following elements:
1. inputs (measured in monetary terms);
2. outputs (units of output);
3. efficiency/productivity data (cost per activity);
4. effectiveness information (level of goal achievement).
o Similar to zero-based budgeting, the performance-based approach should

begin at a policy level with the organization developing goals and explicit
policy objectives. Managers then must develop relevant performance
measures which will track the achievement of these objectives.
e. Participatory Budgeting
o Participatory budgeting is based on the following principles:
1. citizens’ groups have as much power as possible in the
decision-making process.
2. representation must be fair and equitable.
3. appropriate training is given to participatory groups. This may
require a dedicated council team.
4. there is some commonality/theme in the type of budget/grant
being allocated e.g.
o regeneration;
o neighbourhood development;
o project based;
o so that decision making can be made by reference to some benchmark or

standard.
o the process is linked directly to the council’s budget-making process.
o it is generally targeted at ‘hard to reach’ groups not otherwise involved in
decision-making processes – thus making the biggest gains.
f. Resource-Restricted Budgeting
o Resource-restricted budgets are similar to cash-limited budgets. Limits are
applied to particular resources (i.e. staff or equipment) and works rather like
the incremental approach but in reverse.
o It begins with the supply aspects (for example the number of staff that is
available to meet future needs) and it is assumed fundamentally that these
are fixed. From this point it works backwards to the required incremental
change.
4. Budgeting in Uncertain Conditions

a. Rolling Budgets
o A rolling budget can be defined as “a budget constantly updated by
adding a further period, e.g. a month or quarter and removing the earliest
period.”
b. Contingency Budgeting
o Contingency budgeting is useful for new organizations where detailed
budgeting is difficult because there is no past experience to draw upon.
The absence of reliable detail is compensated for by a contingency
budget to cover as many areas as required.
5. Adjusting the Budget

a. Fixed/Flexible Budgeting
o A flexible budget, however, is designed to be changed in line with
variations of the level of activity. At the preparation stage, variable and
semi-variable costs are identified, changing the budget as activity levels
change. Typically, this type of budget is used in manufacturing industries
where there may be changes to the planned levels of production; this
results in changes to the necessary budgets for raw materials or
components, for instance.
b. Activity-Based Budgeting
o Activity-based budgeting is an approach developed from activity-based
costing used in the private sector. Rather than assuming that overheads
are related to volumes of production or service, the technique attempts to
identify what drives costs by linking overheads to activities. This provides
more robust information for budget preparation as planned changes in
production or service can be connected to changes in costs.
c. November Price-Base Budgeting

o This approach was used by local authorities up to the early 1990s, but
has mostly now been superseded by cash-limited budgets. The
November price base approach takes the current year’s budget and
increases it in line with the known pay awards at 31 October of that year,
affecting the following financial year, along with the organization’s own
best estimates of price changes up to that date including, where
appropriate, local price movements. Known increases in taxation e.g.
employers’ national insurance contributions are also included.
o This budgetary model does not incorporate assumptions about likely

inflation or pay increases which are not known on 31 October in the base
service budgets. Instead, a provision for inflation and unconfirmed pay
awards is held back as a contingency and released to services budgets
during the course of the financial year as and when pay awards or
inflationary pressures become known.
o The detailed steps are illustrated below:

 calculate increase in price levels from last year’s base budget date up
to the current base budget date;
 estimate effects of further price increases to the end of the budget
period in overall terms;
 provide contingency for this amount and retain it centrally.
d. Cash-Limited Budgeting
o Under this approach. Budget holders are required to plan their activities to
ensure that their net expenditure does not exceed a pre-set cash limit. It relies
on assumptions about inflation and pay awards, for instance, which are not
known at the time the base budget estimates are made.

Methods of Budgeting

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Methods of Budgeting

3. Alternative Budgeting Techniques

o Based on analysis of these statements, elements of spending by each

c. Planning Programming Budgeting

o Similar to zero-based budgeting, the performance-based approach should

o so that decision making can be made by reference to some benchmark or

4. Budgeting in Uncertain Conditions

5. Adjusting the Budget

c. November Price-Base Budgeting

o This budgetary model does not incorporate assumptions about likely

o The detailed steps are illustrated below:

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