Line Item Budget Definition

Line Item Budget is the presentation of expenses in column format, wherein such expenses are
grouped according to their category like Advertisement, Canteen Supplies, Transportation
reimbursement, etc., and provide the time series comparison of year-wise performance. It helps
the help managers to estimate whether the budget for the current year is in line with the previous
year’s budget or more.

Table of contents

 Line Item Budget Definition

o Purpose
o Example of Line Item Budget
o Characteristics
o Advantages
o Disadvantages
o Conclusion
o Recommended Articles

Purpose

 Line item budget is mainly used by small businesses that don’t know about sophisticated
accounting systems and don’t have the infrastructure and budget to set up one. It doesn’t
reflect revenue; they only show the expense. So they depend on this simple budget where
several categories of Expenses are presented in a line.
 The primary purpose of Line Item is to help managers control their expenses. If in any
month, the expense crosses as compared to the previous month, then the manager
becomes alert and controls the expense to match the overall yearly budget compared to
the previous one. The comparison between the past and present expense figures always
signs a warning for the managers.
 You are free to use this image on your website, templates, etc., Please provide us with an
attribution link

Example of Line Item Budget

Mr. X is the budget specialist for a small business that operates in New York. He has
prepared the Line budget for January 2020 and is planning necessary steps that should be
taken to not deviate from the yearly planned budget.

Solution

So after studying this budget, the manager sees that the Budgeted expense for January was
$68,500, and the Actual Expense was $74,000. So the organization has spent more than what
was estimated.

Now the manager will check individual expense categories minutely to see where precisely the
budget has crossed the estimate and will take necessary measures to prevent that from happening
in the next month.
Office supplies need to be checked; as office supplies have crossed the budget, it means more
supplies were ordered this month, and it should also be enough for the next month, so the
ordering of office supplies for the next month should be below. The salary is in line. So no
adjustment is required. Advertising cost has gone up, so it needs to be checked next month.

Canteen Expenses have increased by a small amount, and it is difficult to check as you can’t ask
employees to eat less, but you can request them to stop wasting food. So awareness needs to be
taught.

Characteristics

 Line Item Budget is a columnar representation of expenses. Several categories of

expenses are represented column-wise, and each category can be compared with the
previous year in a single row.
 Suppose it is seen that for a particular category, the expenses are rising year on year. In
that case, it may be due to inflation in that specific category, and it should be balanced by
reducing expenses in other categories. Several past year columns can also be created to
see whether the trend of expenses is upward sloping or downward sloping.
 For the current year column, decide what should be the budget considering inflation and
several other economic factors. Decide the budget and fill the column with an
approximate budget. After the month has passed, fill in the real expense and see how
much you deviated from the projected budget.
 Usually, it is prepared month-wise. It helps managers curtail expenses in case monthly
budgets are way out of line compared to projections.

Advantages

 Creation and understanding of Line Item Budget are straightforward. You don’t require
accounting knowledge to understand which item will be debit or credit. You need to fill
the actual and projected expenses in tabular format. The difference can be seen in the
naked eye and can be compared easily with the previous year’s data.
 If the expense has crossed a stipulated budget in any particular month, it acts as an
alarm, and managers become attentive to control the budget for the following months.

Disadvantages

 The line budget is fixed at the beginning of the year. It requires permission from higher
authorities to make changes in the Line Item Budget. So if the manager feels that the
prepared budget is not a correct reflection of the estimated expenses due to precise
changes, then the manager can’t change the budget.
 As it only concentrates on the expenses, it gets difficult for managers to show the exact
reason the budget has crossed the estimation. It could be that the salary payable has
increased due to the appointment of new employees, which has increased revenue. Still,
as there is no place to show the change in revenue, salary expense increase is treated as
over budget.
Conclusion

Line Item Budget is straightforward to prepare and maintain. Small businesses that don’t have
sophisticated account knowledge can take the help of this budget to check their monthly
expenses. Being over the budget doesn’t necessarily mean that cost has shot up; it could be that
revenue has increased due to the extra cost. So this thing should be kept in mind whenever you
make a decision based on Line Item Budget.