Exercise 2. Budgets in Public Sector Organizations

A public sector organization is creating budgets to assess the performance of all its departments. One of those departments is dealing with elderly citizens' well-being and is named 'Social-Assistance (SA)'. SA is composed of employees who take care of senior 'customers' in their households to help them with their daily needs.

A monthly cost control report is produced and sent both to the SA department manager and to the Director who is responsible for all the departments. The budgeting system is still under development. The Director created it without discussing with the SA department manager about budgeted amounts, and the use of the monthly cost control report.

In the table below the first month's cost control report for the SA department is presented.

Budget Actual

Visits 10.000 euro 12.000 euro

Departments expenses:

Supervisory Salary 2.000 e 2.125 e

Wages(Permanent Employee) 2.700 e 2.400 e

Wages (Temporary Employees 1.500 e 2.500 e

Office equipment depreciation 500 e 750 e

Repairs to Equipment 200 e 20 e

Travel Expenses 1.500 e 1.800 e

Consumables 4.000 e 6.000 e

Administration and telephone 1.000 e 1.200 e

Allocated administrative costs 2.000 e 3.000 e

15400 euro 19795 euro

The workforce is composed of the manager and the permanent employees, supported by qualified temporary employees, which are hired on a weekly basis to manage possible fluctuations in the workload. Employees use their own means of transport and their travel expenses are reimbursed by the SA department. There is a central administration overhead charge over all departments. Consumables comprise supplies that are used by the employees to assist customers. Administration and telephone are incurred to communicate with the employees who usually work remotely.

Based on the negative results of the variance analysis of the report, the Director wrote to the SA department manager that the SA department should reduce its costs and operate within the funds allocated. Moreover, the Director stated that a negative variance above 5% of the budget on any item would not be accepted in the future. Finally, the Director demanded a thorough account of the negative results of the report.

Required:

a) Present an explanation of the responsibility accounting and budgeting system implemented at the SA department. Your answer should include a discussion around the social implications of the way the budget was created and operated in this setting.

b) Discuss the possible budget devices that could be implemented by public sector organisations in general, and by the SA department in particular, to improve the budgeting system. You should also present the advantages and disadvantages of the budget devices you present.