Line Item Budget Definition
Line Item Budget is the presentation of expenses in column format, wherein such expenses are grouped according to its category like Advertisement, Canteen Supplies, Transportation reimburment 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.
- Line item budget is mainly used by small businesses that don’t know about sophisticated accounting systemsAccounting SystemsAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm. as well as don’t have the infrastructure and budget to set up one. So they depend on this simple budget where several categories of Expenses are presented in a line. It doesn’t reflect revenue; they only show the expense.
- The primary purpose of Line Item is to help managers to control their expenses. The comparison between the past and present expense figures always acts as a sign of warning for the mangers. 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 as compared with the year earlier.
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.
So after studying this budget, the manager sees that the Budgeted expense for January was $68,500, and the Actual Expense is $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 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 below. The salary is in line. So no adjustment is required. Advertising cost has gone up, so it needs to be checked in the next month.
Canteen Expenses have gone up by a little 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.
- 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.
- Several past year columns can also be created to see whether the trend of expenses is upward sloping or downward sloping. If it is seen that for a particular category, the expenses are rising year on year, then it may be due to inflation in that specific category, and it should be balanced by reducing expenses in other categories.
- For the current year column, decide what should be the budget considering inflation and several other economic factorsEconomic FactorsEconomic factors are external, environmental factors that influence business performance, such as interest rates, inflation, unemployment, and economic growth, among others.. Decide the budget and fill the column with an approximate budget. Now after the month has passed, fill the real expense and see how much you deviated from the projected budget.
- Usually, it is a prepared month wise. It helps managers to curtail expenses in case monthly budgets are way out of line as compared to projections.
- 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 just 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 previous year data.
- If in any particular month, the expense has crossed a stipulated budget, then it acts as an alarm, and managers become attentive to control the budget for the following months.
- The line budget is fixed at the beginning of the year. So if due to circumstantial changes, the manager feels that the budget that is prepared is not a correct reflection of the estimated expenses, then also the manager can’t change the budget. It requires permission from higher authorities to make changes in the Line Item Budget.
- As it only concentrates on the expenses, so it gets difficult for managers to show the exact reason for which 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, but as there is no place to show the change in revenue, so salary expense increase is treated as over budget.
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.
This article has been a guide to Line Item Budget and its definition. Here we discuss characteristics, the purpose of the line-item budget along with an example, advantages, and disadvantages. You can learn more about finance from the following articles –