3-1 Chapter 3 Issues of Budgeting and Control Questions for Review and Discussion 1. Capital budgets are closely tied to operating budgets in that governments and other not-for-profits must include current year capital expenditures in their operating budgets. In addition, if they issue debt to finance capital projects, they generally must service it out of operating funds. Further, once they complete the projects, they must maintain and repair them out of operating funds. 2. A flexible budget may be more important to business-type than to government-type activities because business-type activities are driven by the market and can be expected to vary more widely with changes in customer demand. The level of government-type activities, by contrast, is often established by the budget. 3. The main virtue of an object classification budget is that it facilitates control, specifying in detail how every dollar will be spent. However, by focusing on and controlling individual expenditures, it may ignore the relationship between costs and organizational objectives. It may thereby discourage effective planning and evaluation. Performance budgets require the specification of costs and outcomes and therefore encourage managers to consider the benefits or sacrifices that will result from a change in spending. In short, in performance budgeting, the emphasis is on what the entity accomplishes rather than on how it accomplishes it. 4. Only a cash-basis budget, not an accrual basis budget, permits a government to properly plan its cash receipts and disbursements. Governments must pay for goods and services in cash when their bills come due. The timing of payments is not necessarily concurrent with the economic impact of...
