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Week 3: Budgeting – Revenue

and Expense Estimates


Public Health Finance I
Lili Elkins-Thompson
Cost Estimations: Process and Basis
• Ultimate Process
▫ Determine what the agency intends to do
▫ Determine what resources it needs
▫ Estimate the price of those resources
▫ Multiply the price by the number of inputs to get
a total cost
• Basis of Estimations
▫ Much based on Historical Costs
▫ Utilize known increases in cost and other known
information
▫ May use estimated increases in sales/service
delivery
Personnel Costs
• Includes wages and other agreed upon
benefits
• Normally the largest single component in
government agency budget
• Estimation of Salaries
▫ = the number of workers in each pay category multiplied by the
payment per worker in that category
▫ A standard procedure uses personnel data on individuals in each
pay category, adjusted for anticipated movements to the next pay
step in the budget year
• Basis for Requests for New Personnel
▫ Greater expected workload
▫ A desire to improve the quality of service or on new programs
▫ Aim is to staff agency to appropriately enable it to deliver planned
services and achieve its objectives
Types of Personnel to be
considered
• Administrative and fiscal staff
• Supervisory Staff
• Direct Service Staff
• Clerical Staff
• Other Staff

• Consultants and Professional/Contract Services


Derivation of Pay Rates
• Law or tradition
• Civil service classification structures
• Pay grades for each position that provide salary ranges
• Salary ranges or an average hiring salary
• Estimations for commissions and bonuses
• From collective bargaining agreements
Non Wage and Salary Personnel Costs
• Must include Fringe Benefits as part of personnel costs
• May be calculated by formula (i.e. estimate 25% of
wages)
▫ These may be established by law or labor contract
▫ They may be established by historical practice
• Cost usually driven by
▫ Number of employees (insurance premiums)
▫ Dollars paid to employees (i.e. Pension or 401K payment)
Non Personnel Costs (OTPS)
• Five Estimation Techniques
▫ Volume x Unit Price (automobiles, PC’s)
▫ Workload x Average Cost (300 people x $20)
▫ Workforce Ratios (office supplies @ $30/person)
▫ Ratios to Another Object (3 alternators/15 trucks)
▫ Historical Costs/Adjustments to prior year costs (4% increase)

• All five estimation techniques may be used in budgeting


for one organizational budget
Cost Relationships - Behavior
• Fixed Costs
▫ Remain constant regardless of the variation in the volume of
activity
• Semi-Fixed Costs (also known as step costs)
▫ Fixed for a given level of activity but increases to a higher plateau
as activity increases
• Variable Costs
▫ Fluctuates according to the variation in the volume of activity
• Semi-Variable Costs
▫ Has both fixed and variable characteristics (the predominant
element is variable but it has some elements of fixed costs at
either the higher or lower range of activity.)
OTPS Categories
• Consumable Materials and Supplies
• Facilities
• Insurance
• Client Assistance
• Travel and Transportation
• Equipment Purchase or Rental
• Printing
• Communications
• Training/Conferences
• Membership Dues
• Subscriptions
• Miscellaneous Goods and Services
What to Do After Baselines are Created
• Surpluses
▫ What to invest in?
▫ Is the surplus recurring?
▫ How do you address one time surpluses?

• Deficit
▫ What do you cut?
▫ How do you address this with your staff?
Budget Execution
• Monthly Budget Updates

• Need for Managers to Know:


▫ Accountability
▫ What is controllable?
▫ How much flexibility do managers have?

• Find Problems Quickly