BAYERO UNIVERSITY KANO

CONTINUE EDUCATION

ASSIGNMENT

COURSE CODE: ECO1204

COURSE TITLE: ECONOMY THEORY AND PRINCIPLE II

QUESTION:
Definition of budget analysis
Types of budget analysis
Allocation of budget analysis
By

KABIRU LAMI
SCE/19/BAD/00315

January, 2023.
INTRODUCTION

Governments may issue policy statements and policy papers, but it is in government budgets that
we see the most practical expression of policy decisions actually made. These decisions relate
both to the spending plans and priorities selected and, equally importantly, those not selected;
and they also relate to the plans to finance these plans and priorities from tax and other revenues
to be paid by citizens and businesses.

Each year, the government presents a statement of revenues and expenditures for the coming
financial year. The budget translates a government’s manifesto, policies and goals into decisions
on how to raise revenue, and how to use this money to meet the country’s competing needs. The
budget directly or indirectly affects the lives of all within a country, with the money government
spends being the government’s most powerful economic tool to meet the needs of the people,
especially those who are poor and marginalized.

BUDGET: A budget is a financial plan for a specified period, It is an estimate of expenses a

party will incur, usually broken out by category, for the purpose of providing a roadmap that the
party should follow.

Budgets can be for a person or for a business, the former type of budget can be as easy as
maintaining a daily tally of income and expenses.

ANALYSIS: Analysis is the process of breaking a complex topic or substance into smaller parts

in order to gain a better understanding of it. The technique has been applied in the study
of mathematics and logic since before Aristotle (384–322 B.C.), though analysis as a formal
concept is a relatively recent development.

Analysis is the process of considering something carefully or using statistical methods in order

to understand it or explain it.

Analysis is the scientific process of examining something in order to find out what it consists of.

They collect blood samples for analysis at a national laboratory. 
DEFINITION OF BUDGET ANALYSIS

A budget analysis refers to a thorough review of a company's budget. It allows you to maximize
the benefits associated with an effective budget. If you're in a management or finance role,
learning what a budget analysis is can help you understand where a company is making money,
where money is exiting the business and how to maximize profits.

Budget Analysis: involves examining and explaining the components of budget expenditure and
revenue. The use of budget indicators (ratios) can help to improve understanding of issues such
as the level of implementation of expenditure and revenue budgets or the structure of the budget.
In the public sector, the main objective of budget analysis is to control expenditures and predict

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future budget needs, thereby providing decision makers with the information they need to
prepare the budget for the next fiscal period.

A budget analysis is a strategy for evaluating a business' financial well-being. By scrutinizing the

budget, you can monitor how much money the business is bringing in and compare that amount
to how much money it's spending in a period of time. Performing a budget analysis can help
business leaders make important decisions about the company's expenses and revenue streams.
Many businesses perform budget analyses on a monthly basis, but you can analyze a company's
budget quarterly, annually or on another schedule of your own choice.

TYPES OF BUDGET ANALYSIS

There are four common types of budgets that companies use: (1) incremental, (2) activity-based,
(3) value proposition, and (4) zero-based. These four budgeting methods each have their own
advantages and disadvantages, which will be discussed in more detail in this guide.

1. Incremental budgeting

Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to
obtain the current year’s budget.  It is the most common type of budget because it is simple and
easy to understand.  Incremental budgeting is appropriate to use if the primary cost drivers do not
change from year to year.  However, there are some problems with using the method:

 It is likely to perpetuate inefficiencies. For example, if a manager knows that there is an

opportunity to grow his budget by 10% every year, he will simply take that opportunity to
attain a bigger budget, while not putting effort into seeking ways to cut costs or economize.
 It is likely to result in budgetary slack. For example, a manager might overstate the size of the
budget that the team actually needs so it appears that the team is always under budget.

2. Activity-based budgeting

Activity-based budgeting is a top-down type of budget that determines the amount of inputs

required to support the targets or outputs set by the company.  For example, a company sets an
output target of $100 million in revenues.  The company will need to first determine the
activities that need to be undertaken to meet the sales target, and then find out the costs of
carrying out these activities.

3. Value proposition budgeting

In value proposition budgeting, the budgeter considers the following questions:

 Why is this amount included in the budget?

 Does the item create value for customers, staff, or other stakeholders?
 Does the value of the item outweigh its cost? If not, then is there another reason why the
cost is justified?

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Value proposition budgeting is really a mindset about making sure that everything that is
included in the budget delivers value for the business. Value proposition budgeting aims to avoid
unnecessary expenditures – although it is not as precisely aimed at that goal as our final
budgeting option, zero-based budgeting.

4. Zero-based budgeting

As one of the most commonly used budgeting methods, zero-based budgeting starts with the
assumption that all department budgets are zero and must be rebuilt from scratch.  Managers
must be able to justify every single expense. No expenditures are automatically “okayed”. Zero-
based budgeting is very tight, aiming to avoid any and all expenditures that are not considered
absolutely essential to the company’s successful (profitable) operation. This kind of bottom-up
budgeting can be a highly effective way to “shake things up”.

The zero-based approach is good to use when there is an urgent need for cost containment, for
example, in a situation where a company is going through a financial restructuring or a major
economic or market downturn that requires it to reduce the budget dramatically.

What is a Budget Allocation?

A budget is a financial plan used to estimate revenues and expenditures for a specific period of
time. It is a management and planning tool, not just an accounting document. It assists in the
allocation of resources.

A budget allocation is the amount of funding designated to each expenditure line. It designates
the maximum amount of funding an organization is willing to spend on a given item or
program, and it is a limit that is not to be exceeded by the employee authorized to charge
expenses to a particular budget line.

REFERENCES

Anthony RN, Young D (2003) Management control in nonprofit organizations, 7th edn.
McGraw-Hill, Boston

Brusca MI, Condor V (2001) El análisis financiero en las administraciones locales. Span J
Financ Account 30(108);475–504

CFI’s Budgeting & Forecasting Course.

International Monetary Fund (2014) Government Finance Statistics Manual (GFSM) 2014.
International Monetary Fund, Washington, DC

Tommasi D (2013) The coverage and classification of the budget. In The international handbook
of public financial management. Palgrave Macmillan, UK