DOC

Chapter 8 Budget Theory

By Corey Rivera,2014-05-07 19:04
14 views 0
Chapter 8 Budget Theory

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

    TABLE OF CONTENTS - CHAPTER 8

    I. CHAPTER 8 BUDGET THEORY ........................................................... 2 II. OVERVIEW.......................................................................................... 2 III. BUDGET RELATED TERMS AND DEFINITIONS ..................................... 2 IV. THE BUDGET CYCLE ............................................................................ 4 A. Overview .............................................................................................. 4 B. Working With the Budget throughout the Budget Cycle .............................. 5 V. BUDGET PLANNING SCHEDULE AT CU-BOULDER ................................ 6 VI. METHODS OF BUDGETING .................................................................. 9 A. Incremental Budgeting ........................................................................... 9 B. Zero-Base Budgeting .............................................................................. 9 VII. BUDGETING PRACTICES BY FUND ...................................................... 9 A. Ledger .................................................................................................. 9 B. Developing and Recording the Budget for the New Fiscal Year .................. 10 C. Budget Management and Adjustment throughout the Fiscal Year .............. 12 D. Summary of Budgeting Practices by Fund ............................................... 14 VIII. BUDGET ADJUSTMENT TRANSACTIONS ............................................ 16 A. Process Flow ....................................................................................... 16 B. When to Use a Budget Journal Entry (BJE) ............................................. 18 B. When Not To Use A BJE ........................................................................ 18 C. Mechanics of Budget Revision ............................................................... 18 E. Budgeting Levels ................................................................................. 19

    1 BUDGET THEORY: CHAPTER 8 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

    CHAPTER 8 BUDGET THEORY

    The purpose of this chapter of The Guide is to explain the definition and purpose of

    budgets, describe the budget cycle, discuss budgeting concepts and practices by fund,

    and to identify and understand budget information on financial reports.

    I. OVERVIEW

    A budget is a financial plan that sets forth the resources necessary to meet a set of

    goals, (departmental, college, campus) for a certain period of time. The budget

    records, in monetary terms, realistic goals for programs, staffing, and operations. The

    revenue portion of the budget identifies the means for financing the plan, and the

    expense portion of the budget estimates the cost of the plan. Typically, the time

    period covered by the budget is a fiscal year. For the university, the fiscal year runs

    from July 1stth through June 30. When working with capital construction projects or sponsored projects, the time period covered by the budget spans the duration of the

    project rather than the fiscal year.

The Finance System provides the ability to budget revenues, expenses and transfers.

    In addition to establishing and managing an overall revenue and expense financial

    plan, budgets can also be used to manage salaried position numbers, hourly position

    numbers, and full-time equivalent (FTE).

    II. BUDGET RELATED TERMS AND DEFINITIONS

Account is a six-digit number used to identify specific revenue, revenue deduction,

    expense, and transfer items.

Base Budget is the original budget amounts recorded for a FOPPS at the beginning

    of the fiscal year. The term base budget is used primarily in the General Fund

    (Funds 10 and 11).

Budget is a plan of financial operation for a given period embodying an estimate of

    proposed expenditures and the proposed means of financing them. Used without any

    modifier, the term budget usually refers to a financial plan for a single fiscal year.

Budget Cycle describes a process of budget planning and control which includes the

    actions of developing a financial plan, comparing the financial plan to actual

    performance, and taking corrective action to bring substandard performance into line

    with the plan or adjusting the plan to reflect changing financial conditions.

    Budget Journal Entry (BJE) is an online process within the Finance System used for making budget adjustments to a FOPPS.

    2

    CHAPTER 8: BUDGET THEORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

Budget Ledgers: Two types of ledgers are found within the Finance System:

    Actuals and Budget. Budget is divided into four additional ledgers:

    ? B_INI_CONT

    ? B_INI_TEMP

    ? B_CUR_CONT

    ? B_CUR_TEMP

Budgets are recorded or adjusted by entering transactions into one of these Finance

    System budget ledgers.

Use of the INITIAL budget ledgers, B_INI_CONT and B_INI_TEMP, is restricted

    to authorized staff from Accounting and Business Support (ABS) and/or Planning,

    Budget and Analysis (PBA). At the beginning of each fiscal year, PBA records the

    initial budget for FOPPS within the General, Auxiliary and Renewal/Replacement

    Funds using the appropriate INITIAL ledger.

The CURRENT budget ledgers are available to all Finance System users having the

    proper security authorization. The CURRENT ledgers are used throughout the fiscal

    year for making budget adjustments.

Cash Carry Forward, also known as the temporary rollforward, is the budget

    balance remaining before encumbrances in each General Fund FOPPS on June 30

    th.

    In most circumstances, the balance available amount is applied directly to the budget

    of the same FOPPS for the upcoming fiscal year. When prior-year actual

    expenditures are less than the budget, the cash carry forward is positive and adds to

    the overall budget within the FOPPS for the new fiscal year. When prior-year actual

    expenditures exceed the budget, the cash carry forward is negative and decreases the

    overall budget for the FOPPS in the new fiscal year. The cash carry forward is, in

    most cases, recorded in general budget 460000 (Operating Expenses) within the

    B_INI_TEMP ledger.

    Continuing and Temporary Budgets: Understanding the concept of continuing

    budget and temporary budget is essential to doing budget work, particularly in the

    General Fund.

    Continuing budget is a permanent resource allocation or budget adjustment that

    remains recorded in the respective FOPPS from one year to the next. On an annual

    basis, budgets recorded in the B_INI_CONT and B_CUR_CONT ledgers will roll

    forward from one fiscal year to the next. Typically, the use of continuing budgets is

    limited to the General Fund, projects in the Restricted Fund (Funds 30 and 31,

    administered by Sponsored Projects Accounting), and projects in the Plant Fund (71,

    normally administered by Facilities Management).

    A temporary budget stays in place only for the duration of the fiscal year in which

    it was recorded. Budgets entered into the B_INI_TEMP and B_CUR_ TEMP ledgers

    3

    BUDGET THEORY: CHAPTER 8 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

are reported only for the fiscal year in which they are entered. These temporary

    budget transactions are not included during the process of rolling budgets forward

    from one fiscal year to the next.

General Budget is a term used to denote the broadest level of budgeting by category

    of revenue, expense or transfer.

    Rollforward is the process whereby the budgets recorded in the B_INI_CONT and B_CUR_CONT ledgers for General Fund FOPPS are copied into the B_INI_CONT

    ledger for the respective FOPPS new fiscal year. The budget recorded in the

    B_INI_CONT ledger for the new fiscal year is called the Base Budget. Continuing

    budgets, as well as project-to-date actual activity, are carried forward to the new

    fiscal year for projects in Funds 30, 31, and 71.

    III. THE BUDGET CYCLE

A. Overview

    The budgeting process is a cycle comprised of two main phases: the planning

    phase and the control phase. The planning phase identifies the goals to be

    attained during the fiscal year, and the financial plan (budget) necessary to

    achieve them. The control phase focuses on actual performance towards

    achieving the plan. It involves implementation, monitoring and control functions.

    The control phase emphasizes a comparison between the budget and the actual

    revenue and expense activity as recorded in the financial system and displayed on

    the monthly statements. When actual revenue and expense varies from the plan

    articulated by the budget, the control phase will then include corrective action.

    Corrective action might involve adjusting the budget to reflect the actual

    financial activity, adjusting revenue projections and collections, or adjusting

    expenditures.

The following diagram shows the illustrates cycle.

    4

    CHAPTER 8: BUDGET THEORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

    BUDGET CYCLE

     Control Planning

     •Take corrective action Develop goals, objectives

     ?

     Monitoring Development

     •Compare budget Estimate cost of attaining

     to actual rev, exp each goal ? ? •Investigate variances Project revenues

    Implementation

     Record budget in

     Finance System General Ledger ?

B. Working With the Budget throughout the Budget Cycle

    In your role as the departmental finance person, you are likely to be involved in

    each and every step of the budget cycle.

    1. Planning and Development

    The budget must be well conceived and based upon combination of historical

    data and future financial projections. During this step of the budget cycle,

    employees who handle the day-to-day finances for a department are often

    asked to provide information to management about past revenues, expenses

    and transfers, and anticipated revenues, expenses and transfers.

    2. Implementation

    It is essential to verify that the budgets recorded in the Finance System at the

    beginning of each fiscal year are correct. Contact your area accountant if you

    find errors or if you have questions.

    3. Monitoring

    a) Revenue and Expense Statement Detail

    For FOPPS in all funds, the Revenue and Expense Statement Detail

    report must be reconciled on a monthly basis.

    1. Source documents for transactions must be compared to the

    revenue, expense and transfer transactions on the statement.

    2. Errors must be researched and corrected in a timely fashion.

    5

    BUDGET THEORY: CHAPTER 8 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

    b) Revenue and Expense Statement Summary

    The Revenue and Expense Statement Summary report must be reviewed

    monthly to determine whether or not an organization is in control of its

    operations.

    1. For FOPPS in Funds 10 and 11, the budget in the FOPPS must

    be compared to the actual expenditures.

    2. For FOPPS in Funds 20, 26, 28, 29, 71, 72, 73 and 78, the

    budget in the FOPPS must be compared to both the actual

    revenues and the actual expenditures.

    3. For FOPPS in Funds 30 and 31, the budget in the FOPPS must

    be compared to the actual expenditures. When doing budget-to-

    actual comparisons for FOPPS in these two funds, remember that

    the time period covered by the statement is generally the duration

    of the project and not the fiscal year.

    c) Balance Sheet Summary and Balance Sheet Detail

    For FOPPS in Funds 20, 26, 28, 29, 71, 72, 73 and 78, the Balance

    Sheet Summary and Balance Sheet Detail reports must be reconciled and

    reviewed each month to ensure that both the cash and fund balance

    account balances are favorable.

    Note: More instructive and detailed information about working with

    monthly reports is available in The Guide Chapter 16, Monthly

    Statements.

    4. Control

    Departmental management must be informed when the “budget to actual”

    comparison indicates a significant deviation, or when the balance sheet

    indicates an unfavorable balance, so that appropriate corrective actions can

    be initiated.

    With the inception of the new online Reporting Tool, reports will be made

    available to all who possess a fiscal role on a FOPPSno longer just one

    paper copy sent to departments. However, if you notice a problem or a

    potential problem developing in budget, it’s best to err on the side of caution

    and inform management rather than assume they noticed it during their

    review. This makes for good interactive teamwork in the department.

    IV. BUDGET PLANNING SCHEDULE AT CU-BOULDER

    The Boulder campus employs two budget processes: one for the General Fund and

    one for cash funds (cash funds include Funds 20, 26, 28, 29, 71, 72, 73, and 78).

    Each of these budget processes span an entire year. In addition, each process involves

    a number of steps that are repeated on an annual basis at approximately the same

    time each year. The following exhibits, located on the next two pages, provide tables

    6

    CHAPTER 8: BUDGET THEORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

    describing the important elements of the budget planning schedule for the General

    Fund and for cash funds.

    ..

     Budget Planning, Development and Implementation Calendar

    Responsible Month Task Party at UCB JUL ? Implement the budget for the new fiscal year PBA

    ? Book adjustments approved during the campus budget process PBA

    ? Audit the budget for the new fiscal year and make corrections PBA & Dept

    ? Set up standard journal entries for the new fiscal year ABS & Dept AUG ? Prepare the final budget re-write for the previous fiscal year PBA

    ? Record vacancy savings PBA

    ? State issues initial classified staff salary survey for new fiscal year SEP OCT ? Complete Quarter 1 budget vs. actual variance analysis and • Dept does this

    projections for its FOPPS.

     • PBA & ABS do

     this for each

     fund at the

    campus level. NOV ? Governor submits statewide budget request to JBC PBA

    ? CCHE develops its allocation formula for the upcoming fiscal year PBA

    ? CDC holds hearings on capital projects

    (Sometimes these have a cash-funded component).

    ? CEC calendar is set PBA, Chancellor DEC JAN ? Complete Quarter 2 budget vs. actual variance analysis and • Dept does this

    projections for its FOPPS.

    • PBA & ABS do

    this for each

    fund at the

    campus level. FEB MAR ? Prepare budget re-write for the Board of Regents PBA

    ? JBC revenue figure setting

    APR ? Complete Quarter 3 budget vs. actual variance analysis Dept, ABS, PBA

    ? Freeze current-year continuing budgets in the General Fund PBA

    ? Prepare materials for the Board of Regents Budget Retreat PBA, Depts

    ? Long bill introduction and debate

    ? Capital projects introduced in bill form

    MAY ? Do General Fund cash carry-forward projections and estimates of PBA & VC areas

    transfers to Plant (Renewal & Replacement) Fund

    ? Governor signs long bill JUN ? Issue fiscal year end closing instructions ABS, PBA

    ..

    7

    BUDGET THEORY: CHAPTER 8 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

    (Funds 20, 26, 28, 29, 71, 72, 73, and 78)

    Budget Planning, Development and Implementation Calendar

    Responsible Month Task Party at UCB JUL ? Implement, record the budget for the new fiscal year in Finance PBA

    System

    ? Audit the budget for the new fiscal year and make corrections PBA & Dept

    ? Set up standard journal entries for the new fiscal year ABS & Dept AUG ? State issues initial classified staff salary survey for new fiscal year SEP OCT ? Complete Quarter 1 budget vs. actual variance analysis and • Dept does this

    projections for its FOPPS.

     • ABS & PBA do

     this for each

     fund at the

    campus level. NOV ? CDC holds hearings on capital projects PBA

    (Sometimes these have a cash-funded component). DEC JAN ? Complete Quarter 2 budget vs. actual variance analysis and • Dept does this

    projections for its FOPPS.

    • ABS & PBA do

    this for each

    fund at the

    campus level. FEB ? Distribute Auxiliary Fund and Renewal and Replacement Fund PBA & VC

    budget development materials for the upcoming fiscal year Assistants MAR ? Announce GAR and GIR rates for the upcoming fiscal year PBA APR ? Complete Quarter 3 budget vs. actual variance analysis Dept, ABS, PBA

    ? Hold Auxiliary/Renewal & Replacement Fund budget workshops PBA

    ? Prepare bond fund reports PBA, ABS, Depts

    ? Capital projects introduced in bill form MAY JUN ? Deadline to submit Auxiliary/Renewal & Replacement budgets for PBA

    upcoming fiscal year

    ? Audit, upload Auxiliary/Renewal & Replacement budgets PBA

    ? Issue fiscal year end closing instructions ABS, PBA

    8

    CHAPTER 8: BUDGET THEORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

    V. METHODS OF BUDGETING

    In general, the Boulder Campus uses two methods of budget development:

    incremental budgeting and zero-base budgeting. The incremental method is most

    often used in the General Fund, whereas zero-base budgeting (ZBB) employs a

    “bottom-up” approach. It involves a re-evaluation of all programs, a review of their

    associated revenues and expenses, and a projection of how much it will cost to run

    each program during the upcoming fiscal year. Many of the larger campus auxiliary

    operations utilize the ZBB approach.

A. Incremental Budgeting

    The incremental budgeting process begins with last year’s continuing budget

    figures as the base budget. These numbers are then adjusted to reflect inflation,

    growth, changing conditions and other information gathered from financial

    forecasts for the upcoming fiscal year. The advantage to using the incremental

    method of budgeting is that the work is greatly simplified, since this approach

    starts with a budget that is already in place. The disadvantage to incremental

    budgeting is that the inefficiencies and inadequacies of the prior year’s budget

    are automatically built into the budget for the upcoming fiscal year.

B. Zero-Base Budgeting

    Zero-Base budgeting (ZBB) employs a “bottom-up” approach. This method

    starts with a base budget of zero and calculates the costs of running each

    program from scratch. On an annual basis, each cost associated with running a

    program must be justified before it can be included in the budget. The advantage

    of the ZBB method resides in the extensive review it gives each program. While

    the ZBB approach can uncover operating inefficiencies and identify weaker

    programs, it also can highlight those programs that are most vital to the

    organization. The effort and time requirements of ZBB are its principal

    disadvantages.

    VI. BUDGETING PRACTICES BY FUND

    A. Ledger

    The use of a continuing budget or temporary budget depends upon the fund

    being budgeted. The following describes the use of continuing and temporary

    budget ledgers by fund.

    1. General Fund (Funds 10, 11)

    General Fund FOPPS use both continuing and temporary budgets.

    Continuing budgets and budget transactions are those that will be carried

    forward to the next fiscal year. Temporary budgets and budget transactions

    will not be carried forward to the next fiscal year. In the General Fund, the

    B_INI_CONT ledger is used to record the base budget for each fiscal year,

    and the B_INI_TEMP ledger is used to record the annual cash carry forward.

    9

    BUDGET THEORY: CHAPTER 8 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

    BUDGET THEORY

    Only PBA uses these two ledgers. The B_CUR_CONT or B_CUR_TEMP

    ledgers are used to record subsequent budget changes and adjustments.

2. Auxiliary/Self-funded Fund (Funds 20, 26, 28, 29)

    The FOPPS in this fund use temporary budget ledgers only. The

    B_INI_TEMP ledger is used to record the beginning fiscal year budget for

    each FOPPS. The B_CUR_TEMP ledger is used to record subsequent

    budget adjustments.

3. Grant and Contract Fund (Funds 30, 31)

    FOPPS in this fund are budgeted through the Sponsored Program

    Information System (SPINS) administered by SPA. Sponsored project

    budgets are established for the duration of the project, which often encompass

    more than one fiscal year. Therefore, continuing budget ledgers typically are

    used in Funds 30 and 31.

    4. Gift Fund (Fund 34)

    Budgeting FOPPS in this fund is currently optional. If budgets are recorded

    in a Fund 34 FOPPS, the temporary ledger is used. Budgets in Fund 34 will

    become mandatory in the near future; an official date has not yet been set.

5. Plant Fund (Funds 71, 72, 73, 78)

    Construction activities, which occur in Fund 71, use the continuing budget

    ledgers. Construction FOPPS are primarily budgeted by Facilities

    Management. Renewal and replacement FOPPS, Funds 72 and 78, use the

    temporary budget ledgers. The B_INI_TEMP ledger is used to record the

    beginning fiscal year budget in the Renewal and Replacement FOPPS. The

    B_CUR_TEMP ledger is used to record subsequent budget adjustments in

    these FOPPS. Budgets in Fund 73, Retirement of Indebtedness, are optional.

    If a budget is recorded in a Fund 73 FOPPS, it is usually temporary.

    B. Developing and Recording the Budget for the New

    Fiscal Year

    The Office of Planning, Budget and Analysis records initial fiscal year budgets

    for FOPPS in the General Fund, Auxiliary Fund, and Plant Fund (Renewal and

    stReplacement FOPPS). These budgets are made available to the user after July 1

    and appear on the Finance System month-end statements for July. Sponsored

    Projecting Accounting (SPA) maintains the budgets for grant and contract

    FOPPS. These budgets are available to the user from the inception of a project

    through the project’s end-date. Once budgeting in the Gift Fund becomes

    mandatory, this fund will be incorporated into the process by PBA.

1. General Fund

    Towards the end of each fiscal year, PBA takes a “snapshot” of every

    continuing budget recorded in each General Fund FOPPS and “rolls” the

    10

    CHAPTER 8: BUDGET THEORY 11/09

Report this document

For any questions or suggestions please email
cust-service@docsford.com