TYPES OF BUDGETING TECHNIQUES

TOPIC 4
CHAPTER 7

Topic 4- Evolution of Budgeting System (ZA/SEPT/14)

 Introduction
2

 Reforms to promote public accountability and

improved government performance improved
includes:
i. budgeting systems reforms
ii. Improved financial compliance and quality
management
iii. Increase productivity and efficiency in
government operation
 Budgeting reforms are intended to transform public
budgeting systems from focus on input to focus on
output or outcomes for the purpose of improving
operational efficiency and promoting accountability
 Introduction
3

Budgeting techniques applicable in Malaysia;

1. Traditional Budgeting System (TBS) – prior 1969
2. Programme & Performance Budgeting System
(PPBS) -1969-1989
3. Modified Budgeting System (MBS) -1990-2012
4. Outcome Based Budgeting - 2013now
 Traditional Budgeting System (TBS)
4

 Used prior to 1969

 Also known as incremental budgeting or line item
budgeting
 Based entirely on line item expenditure or objects of
expenditure.

Total Allocation =
Last years spending level +
Current year budget+
Increase in cost of material &
labour due to inflation +
Costs for new project or programme
Code ABC Department Amount (RM) Total (RM)

11000 Salary and Wages 120,000

12000 Fixed allowance 60,000
13000 Overtime allowance 48,000
14000 Other financial benefits 36,000
15000 Statutory Contribution to Employees 20,000
10000 Emolument* 284,000

22000 Stationery & Office Supplies 12,000

26000 Transport of goods 8,500
20000 Services and Supplies* 20,500

32000 Renovation of Buildings 20,000

35000 Purchase of Computers 30,000
30000 Asset* 50,000

41000 Pension & Gratuities 7,000

46000 Scholarship 5,000
40000 Grant and Charged Expenditure* 12,000

51000 Return and Write- offs 1,000

52000 Other payments 1,500
50000 Other Expenditure* 2,500

Total Allocation 369,000

5
 Allocation Based on TBS

NP
Inc, inf
past

1961 1962 1963

Focuses on extrapolating past spending levels into the next year &
incrementing the level for inflation & new programmes or projects.

6
 Advantages of TBS
7

Simple budgeting technique can be easily

understand by the users which will facilitate users
in preparing budget.
Information presented can easily be incorporated
into the accounting system.
Budgeted & actual revenues & expenditure ensures
detailed comparisons to be made
 Disadvantages of TBS
8

 Data provided is useful primarily for the short term planning

only.
 TBS tend to complies with legal requirement rather than
providing useful information for management decision making.
 In the budget preparation process, government agencies tend to
focus on object of expenditure rather than on overall goals &
programmes of the organization
 Since budget is prepared in terms of objects of expenditure,
little information is known on the programmes & activities
carried out.
 The performance of the budget is measured only from the
financial aspect that is on actual expenditure incurred (based on
actual exp incurred not on the outcomes of programmes &
activities undertaken.
 Programme Performance
Budgeting System (PPBS)
9

Used by majority of developing countries in

the world.
The adoption was fostered by United Nation
(UN) – 1967 UN workshop in Denmark
Introduced in Malaysia in 1969 under
Treasury Circular 5/1968.
Helps management make better decisions on
the allocation of resources and achieve
government objectives.
 Why PPBS?
10

 Increasing complexity of modern life

 Increase on demands for government services
 Shortage of funds to meet the demand & the need to
determine priorities
 Design programmes & control budgets.
 Programme budgeting refer to a planning-oriented
approach & communication -oriented
 Component of Programme – functions, objectives,
activities & responsibility centers
 Component of Performance – appropriateness,
adequacy, effectiveness & efficiency of the
programmes
 Elements of PPBS
11

Identifying Objectives
Programme Planning & Structuring
Developing Performance Indicator
Performance Evaluation
 Identifying Objectives
12

To set out clearly the purpose for an organization

existence
Provide framework for a better & meaningful
planning
Also allow consideration on various alternatives
to achieve objectives
Allow management to avoid duplication of
functions between department.
Efficient management shall identify and
formulate objectives in a clear, precise and
concise manner
 Example
13

Ministry of Education- to educate Malaysian

through a national education system to make them
knowledgeable, responsible and capable of
enjoying a comfortable standard of living
Ministry of Health – to raise the health status of
Malaysians by providing promotive, preventive,
curative and rehabilitative health services.
 Programme Planning &
Structuring
14
 Programme is a set of activites that have a common objectives
 Programme planning involves selection of best alternatives in
terms of programmes for the purpose of achieving identified
objectives.
 Programme structuring refers to hierarchical listing of
programmes, activities & sub activities to achieve objectives.
 Ministry of Education- Higher Education, Primary
Education, Secondary education
 Medical Care services – general patient care services,
laboratory services, psychiatry services and medical admin
services.
 Example : table 7.2 og 124
 Developing Performance Indicator
15

The purpose: To evaluate physical & financial

performance of the programmes
Involves the identification of suitable units of
measurement to measure output of each activity &
programme in qualitative or quantitative terms.
Allow comparisons to be made between actual
output with targeted output & to find causes for
variance between the two,
 Developing Performance Indicator

 Example : Table 7.3 Annual target setting

Long-term Annual Targets Final

Objectives Y1 Y2 Y3 Y4 Y5 Out
put

Intake of 50,000 5,000 8,000 12, 15, 10, 50,000

students over 5 000 000 000
years period

16
 Performance Evaluation
17

Used to access the relevance ,results and impact of

programmes for each agency using performance
indicator which has been developed.
Involves process of making comparison between
actual output with targeted output for the same
period & to identify cause for variance.
Results from comparison will provide information
whether programmes have been planned
realistically and properly managed.
The most important element for the purpose of
modifying & revising plans.
 Comparison between the Planned and Actual
Output

100

80

60 Plan
40 Actual

20

Over Proper Conserve

18
 Performance Evaluation
19

Through performance evaluation the agency can

identify whether;
1. Objective are realistic and reasonable
2. Programmes have been selected properly and
it’s the best alternative to achieve objectives.
3. Programmes have been properly planned and
provided adequately with resources.
4. Programmes were effective to achieve
objectives.
 Modified Budgeting System (MBS)
20

Modification of PPBS - 1988 TC No. 11

Implemented in 1990 through issuance of TC No.8
Is a management system that focuses on the
relationship between input, output & impact
 Modified Budgeting System (MBS)
21

e.g. supply & svs, emoluments, Measures directly by referring to the

assets, grants, expenditures changes that can be traced directly to
the output of act/ program

Input Output Impact

3
perspectives
Efficiency Effectiveness

Measured in term of qlty, gty, i.e. product/services

timeliness & cost produced
 Modified Budgeting System (MBS)
22

Ministry of Transport – objectives

“to deliver qty services towards customers”

Input Output Impact

Program: services dept

+ activities Qlty svs – no. of complaint Target vs. actual
Speed svs – time taken

Through output & impact the performance of the program or

agency
can be measured to determine the efficiency & effectiveness
of the program whether the objective can be achieved
 3 Perspectives of Impact
23

Positive or negative changes on targeted activities.

Achievement level of actual objective (efficiency of
the activity)
Changes to overcome the problem (compare the
situation before and after)
Advantage- enables us to understand thoroughly the
logic of such activities.
 Implementation of MBS
24

Phase 1 – 3 ministries (1990)

Phase 2 – 7 ministries/ dept (1992)
Phase 3 – 7 ministries /dept (1993)
Phase 4 -17 ministries / dept (1994)
Phase 5 -17 ministries / dept (1995)
 Objectives of MBS
25

Improve allocation of resources to government

program
Improve effectiveness & efficiency of government
program
Strengthen mechanisms for the accountability of
Controlling officers and programme managers
 Element of MBS
26

Expenditure Target
Programme Agreement & Exception Report
A Cycle of Programme Evaluation
A More Generalized Approach to Expenditure
Control
MODIFICATION OF PPBS INTO MBS
27

Identfying
Objectives Expenditure Target

Programme
Planning & Programme Agreement
Structuring & Exception Report

Developing
Performance A Cycle of Programme
Indicator Evaluation

Performance A More Generalized

Evaluation Approach to
Expenditure Control
 Expenditure Target
28

Treasury’s estimate of base level of resources

required by government agencies to conduct existing
programmes in the same manner as previous year
Allow usage of previous year ET as base for next
year’s ET
Amount is fixed by Treasury at the beginning of
Budgetary process
The amount cannot exceeded when agencies
proposed its expenditure.
Treasury can reviewed the ET if there are changes in
the government policy before the total allocation for
each agency is finalised
 Expenditure Target
29

Preparation of estimates For Operating

Expenditure
Preparation for Estimates for Development
Expenditure
 Performance Agreement & Exception Report
30

PA – contract between manager & subordinate

managers to certain authority has been delegated.
PA at Federal Level – Accountability obtain by
Treasury from controlling officers to disclose
programme output & impact.
PA at Agency Level – Accountability obtain by top
management from lower level management who
are required to submit periodic & progress report
on exception basis.
 Performance Agreement & Exception Report
31

ER- used to identify performance indicators that

do not agree with agreed target.
ER – must also include explanation on the extent
& reasons for inconsistent performance & remedial
actions

Upper Level Of Mgt

Authority Delegated Accountability through
through Programme Exception Report
Agreement

Lower Level Of Mgt

 Benefits Performance Agreement &
Exception Report
32

Improve accountability at all level of management.

Emerging programme can be identify earlier
Highlights areas on strength & weaknesses
Evaluation is made to allow preventable measures
to be taken

Figure 7.6 pg 133 format

 A Cycle of Programme Evaluation
33

A systematic examination/ analysis of

programme effectiveness, efficiency, relevancy
and economy
Four aspect
1. Appropriateness- measures to what extent is the objective
of the activity fulfilling the client’s needs
2. Effectiveness- measured to what extent have the objective
of the activity been achieved
3. Economy-measures to what extent can the cost of the inputs
4. Efficiency-measures to what extent are the resources of the
activity utilized optimally to produce the required outputs
 A Cycle of Programme Evaluation
34

Performance Evaluation- tool for management and

decision making and provide the basis for annual
adjustments to ET.
‘Value for Money’- overall social economic benefits
of an activity are evaluated in relation to the cost.
Under PPBS- all programmes evaluated once a year
 Under MBS – only selected programmes will be
evaluated in any one year to ensure in depth
evaluations – and later to be evaluated after 5 years
unless urgent evaluation required.
Results will act as the basis for annual adjustment
of ET
 A More Generalized Approach to
Expenditure Control
35

 Based on 2 main elements:

1. Devolution of Authority – provision of greater
flexibility or authority to managers particularly
line management level in deciding on how to
deploy given amount of resources
2. Accountability to Match Authority – stricter
control on allocated resources whereby
supplementary allocations rarely provided.
Breaches of aggregate control are dealt with
swiftly & effectively.
 A More Generalized Approach to
Expenditure Control
36

‘Let Managers Manage’

 The CO devolve as much authority as possible to
the lower level managers to control and manage
resources.
 The nature & extent to which managers are to be
held accountable must match the authority
delegated to them.

** Figure 7.7 pg135: Budgetary process of MBS

 Benefits of MBS

Central Budget Level

 Improve identification of priority budget expenditure in
budget submission
 Shifting the focus of budget expenditure from’cutting
expenditure to identifying the best mix of resources.
 Reduce paperwork in the preparation of budget submission
ands and the conduct of budget examination
 Allow more time to discuss new policy proposals and its
modification
 To provide BMD with better information on programme
performance and enable it to more effectively hold
departments accountable for programme performance

37
 Benefits of MBS
38

Departmental Headquarters Level

 Increase the department’s opportunity to use strategic
planning as the basis for budget preparation
 Enable more top-down approach to budgeting
 Enable controlling officer to play a more active role in
budgeting and to use it as a management device
 Improve communication of top management priorities
to lower level managers and staff
 Allow finance divisions in HQ to become more involved
in matters of programme policy and programme
evaluation and less in matters of line item control
 Benefits of MBS

Line- management Level

 To improve motivation among line managers through increasing
awareness and understanding of top management priorities
through programme agreement
 Greater flexibility in the deployment of resources within the
aggregate constraints
 To enable budget preparation at the line management level to
take place at the same time as the preparation of work plans
 Enable the financial plans regarding input, output and impact to
be used as management tools
 To enable better integration of decision-making of financial and
programme policy

39
 Drawback of MBS
40

Lack of trained staff

Lack of top and lower level management
commitment
Argument for devolution

)
 Outcome Based Budgeting-
Introduction
The planning for outcome begins with the National Plan
where the Economic Planning Unit developed the National
Result Framework (NRF) under the 10th Malaysia Plan.
NRF is based on five National Strategic Thrusts covering 24
Key Result Area (KRA), 24 National Outcomes and 30
National Programmes.
Outcome Based Budgeting (OBB) is a continuous process
under Outcome Based Approach (OBA) with the objectives to
achieve the results determined under NRF.
OBA is the planning framework used by the Economic
Planning Unit of the Prime Minister’s Department to plan
the outcome at national level.
 Outcome Based Budgeting-
Introduction
The Ministry of Finance issued Treasury Circular No. 2 Year
2012 to introduce and give guidelines regarding the policy and
implementation of OBB.
Five selected ministries used OBB as test-bedded in year 2012
and will be rolled out across all ministries starting from the
year 2013 onwards.
Many of the fundamental philosophies of MBS are used in OBB.
It uses the strengths of MBS, with added value from other
international best practices adapted to Malaysian use.
The key enhancements of OBB from MBS are program
approach, focusing on outcomes, addressing issues of horizontal
and vertical integration at all levels of implementation,
improved monitoring and evaluation framework, and better
reporting formats.
 Outcome Based Budgeting-
Introduction
OBB is a strategic management tool designed to improve
resource management and public sector accountability.
It is a tool to allocate resources effectively and efficiently in
order to achieve specific target.
It explains why the money is being spent by using statements
of missions, goals and objectives.
It differs from traditional approaches because it focuses on
what the money buys and the outcome of the purchase.
This is in line with government’s emphasis on outcomes
rather than output and will enable policymakers to determine
what activities are cost-effective in accomplishing their final
outcome.
 Objectives of OBB

Provide structural mechanism to translate policy

and concept of National Transformation
Programme (NTP) to outcome and results.
Empowering Controlling Officer to manage
resources under their control.
Increase accountability at all levels through
strengthening of governance framework.
Ensure government will achieve the concept of
value for money for budget expenditure
management.
 8 Principles of Designing OBB

Planning and constructing of budget is based on

Programme Based Approach
 Roles and responsibility of Ministry of Finance, Economic
Planning Unit and Public Service Department in examining
ministry’s budget
 Ministry’s programmes aligned to the National Results
Framework (NRF)
 Medium-term perspectives in planning and budgeting
 Strengthen performance management
 Empowering Controlling Officer. 
Incentives for results achievements  
Continuous development of ability
 Implementation Structure of OBB

Main committees:
National OBB Steering Committee (NOSC)
Central Performance Management Committee (CPMC)
Programme Rationalisation Committee (PRC)
Ministry OBB Implementation Committee (MOIC)

Subcommittees:
Programme Performance Management Committee (PPMC)
Activity Performance Management Committee (APMC)
Strategic Process of Implementing OBB
 Strategic Process of Implementing
OBB
Under OBB, each program can be executed by
multiple ministries while each ministry will be
responsible for a component of program.

Agreement on which ministry is responsible for

the program component, the activities needed for
that component, and resources needed for these
activities are achieved through Program
Agreement
Top-Down Approach for Budget Planning and Bottom-
Up Approach for Budget Preparation
 Allocation of Budget for
Programmes and Activities under OBB

LEVEL BUDGET ILLUSTRATION

National VISION 2020: DEVELOPED NATION

STATUS

National RM200
100% Literacy Eradication of 80% Reduction
Programmes million
Rate Poverty in crime
RM30 million RM120 million RM50 million

Ministry 20% Increase Elimination of 10% increase

Outcomes in farm hard core in agro tourism
RM120
income poverty
million
RM30 million RM80 million 10 million
Ministry of Ministry of Rural Ministry of
Agriculture Development Tourism

Ministry Consolidation Training of Upgrading

RM30
Programmes of farm Farmers infrastructure
million
facilities
RM15 million RM10 million RM5 million

Activities RM10 Training

million Trainers Farm inputs
materials
RM1 million RM4 million
RM5 million

Operating Expenditure
Development Expenditure
Source: Ministry of Finance (www.treasury.gov.my)
 Performance Monitoring and Evaluation
Framework
51

Process
Input Output
Operation
Resources Direct
or work Outcome Impact
used by product &
process The final
programm services
where Effect & outcomes
e/activities produced
input is result from as the
to generate from
uitilised to programme results of
output & activities
produce output program
achieve under
specific
outcome program
output
 Monitoring & Evaluation
52

Emphasis on the Method of

following issues; evaluation;
1. Appropriateness 1. Formative
2.Effectiveness 2.Summative
3.Efficiency
4.Economy
 Reporting of Results
53

Quarterly and Annual Ministry’s Performance

Report
Quarterly and Annual Projected Cash Flow
MOIC Report
Quarterly and Annual Monitoring of OBB
Programme or Activities Report
Formative Assessment of OBB Programme or
Activities Report
Summative Assessment of OBB Programme or
Activities Report

)
 Responsibility of Central Agencies under OBB

Economic Planning Unit

Prepare policy and strategy framework
 
Ministry of Finance
Coordinate, evaluate and approved Ministry’s budget
proposal to be presented in Parliament 

Public Service Department

Look at the improvement of human resource
management aspect  

Implementation Coordination Unit

Coordinate, monitor and evaluate performance of
projects development
 55

Malaysian Administrative Modernisation and

Management Planning Unit
Act as driving force and consultancy expert
 

National Audit Department

Perform audit on identified Ministry’s Programmes or
Activities from time to time

Accountant General Department

Continue to develop, manage, control and improve the
government accounting system
 

Topic 4- Evolution of Budgeting System

(ZA/Jan/08)
Strategic Template (Performance Agreement ) of
OBB
56

Purposes Strategic Template

To show clearly Ministry Executive

alignment and relation Summary

between MRF & NRF Programme Performance
To identify other Management Framework
programmes that Activity Performance
coincides Management Framework
To give holistic view on
integrated budget
preparation
 Benefits of OBB
57

 Set clear priorities at national, ministry and activity level

 Integration the De and OE will provide a holistic view of

nationa priorities

 Remove duplication and better manage

 Provides a framework for eliminating overlapping

programmes

 Provides a basis for better integration of M& E systems

 58

Better focus on results especially on outcomes

Allow online budget preparation and submission

Provide availability of audit trail

Enables to facilitate any ad hoc requests

Allow analytical on budget utilisation and results

Topic 4- Evolution of Budgeting System

(ZA/Jan/08)
 Challenges of OBB
59

Requires commitment from the top level

management of ministries and agencies
Quality of information in the results framework
need to be improved
The government need to review the existing
structure of programmes and activities to adapt to
OBB
The structure of OBB requires more work and
more commitment from the officer. Thus workload
may be more