LU 5 TRADITIONAL BUDGETING SYSTEM

Definition The traditional budgeting system is a historical approach where

budgets are prepared based on the previous year's budget adjusted
for inflation, revenue forecasts, and changes in policy.
Characteristics Incremental: Budgets are typically adjusted incrementally from the
previous year's budget.
Annual: Budgets are prepared on an annual basis.
Line-item Detail: Focuses on line-item expenditures and revenues.

Advantages Simplicity: Easy to understand and implement.

Stability: Provides a stable financial plan.

Disadvantages Rigidity: Does not accommodate changes or shifting priorities

effectively.
Focus on Inputs: Emphasizes inputs rather than outcomes or
performance.

Assumptions 1. All activities making up last year's spending were essential to

achieve the ongoingobjectives
2. All activities must be continued during the coming years and
are more urgent than newly created programmes
3. All increases are because of the increase in costs of material
and labour due to inflation

PROGRAMME AND PERFORMANCE BUDGETING SYSTEM

Definition This system links budget allocations directly to the objectives and
outcomes of programs or activities
Characteristics Outcome-Oriented: Emphasizes achieving specific program
objectives.

Performance Measures: Uses performance indicators to assess

efficiency and effectiveness.

Budget by Objectives: Funds allocated based on desired outcomes

rather than historical expenditures.
Advantages Alignment: Aligns budget decisions with organizational goals.

Accountability: Enhances accountability through clear performance

metrics.

Complexity: Requires robust performance measurement and

Disadvantages reporting systems.

Subjectivity: Setting performance measures can be subjective and

challenging.
 MODIFIED BUDGETING SYSTEM
Definition A hybrid approach that combines elements of traditional and
programme/performance budgeting systems
Characteristics Flexible: Allows for adjustments based on both historical data and
performance outcomes.

Incremental with Conditions: Adjusts previous budgets with

conditions tied to performance targets.

Focus on Efficiency: Seeks to improve efficiency while maintaining

some stability.
Advantages Adaptability: More adaptable than traditional budgeting but retains
some stability.
Performance Focus: Encourages performance improvements while
maintaining budget controls.

Disadvantages Complexity: Can be more complex to implement and manage than

traditional budgeting alone.
Resource Intensive: Requires resources for monitoring and evaluating
performance.

OUTCOME-BASED BUDGETING
Definition A budgeting approach that focuses on the outcomes and results achieved
from the use of resources, rather than inputs or outputs.
Characteristics Outcome Emphasis: Budget decisions are based on achieving specific
outcomes or results.
Long-term Perspective: Considers long-term impacts and benefits.
Performance Evaluation: Uses rigorous performance evaluation to
allocate resources.
Advantages Efficiency: Promotes efficient resource allocation based on outcomes.
Effectiveness: Enhances effectiveness by focusing on achieving desired
results.

Disadvantages Measurement Challenges: Difficulties in measuring and attributing

outcomes to budget allocations.
Complexity: Requires advanced performance measurement and
evaluation systems.