Output Costing and Output

Budgeting
Part-1: Current Status and Action
Plan
Prof. Tarun Das

Output Budgeting Session-1 by Tarun Das 1

 Contents of this
presentation
A. Strategic Planning, Output Budgeting and
Performance Management Cycles
1. Current Status of Budgeting System and
Budget Planning in Mongolia
2. Current Situation of Output Costing and
Output Budgeting in Mongolia
3. Requirements for Moving to Output
Budgeting
4. Recommendations and Desired Action Plan

Output Budgeting Session-1 by Tarun Das 2

 1. The Public Sector Management
and Finance Act (PSMFA) (27 June
2002)
• As a part of wider governance reforms and to
modernize planning and budgeting systems,
govt of Mongolia enacted the PSMFA 2002.
• Complete implementation of the PSMFA as
regards Strategic Business Plans (SBPs) and
Performance-based budgeting requires the
following activities on the part of the
government:
1. To prepare comprehensive SBPs for each line
Ministry and all Agencies under it;
2. To prepare Output Costing and Output
Budgeting for each portfolio ministry;

Output Budgeting Session-1 by Tarun Das 3

 2. The Public Sector Management
and Finance Act (PSMFA) (27 June
2002)
3. To move towards accrual accounting in
addition to usual cash accounting;
4. To introduce and implement Performance-
Based Budgeting in all Agencies;
5. To formulate Methodology and system for
Assessment of Performance Agreement
6. To prepare Medium Term Fiscal framework
and Budget Forecast
7. To prepare Consolidated Financial
Statement for the general government in
conformity with the IMF GFSM 2001.

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 3. Progress until now
• Government initiated measures to implement
the PSMFA almost immediately since its
inception in June 2002.
• Good progress has been made as regards:
a) Introduction of Strategic Business Plans in major
line ministries;
b) Formulation of Medium Term Fiscal and
Budgetary Framework,
c) Preparation of consolidated financial statement
for general government,
d) Time bound execution of budget and
e) Improved fiscal reporting on cash basis with
some steps towards accrual accounting.

Output Budgeting Session-1 by Tarun Das 5

 4. Progress until now
• MOF is implementing two major capacity
building projects being financed by grants
and loans from the World Bank and the Asian
Development Project.
• Significant progress has been made as
regards:
a) Development of basic concepts,
b) Preparation of methodological papers,
guidelines and manuals
c) Strengthening the information technology
(IT) system and
d) Creating general awareness about usefulness
and necessity of modern techniques for
output budgeting and accrual accounting.

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 5. Unfinished Agenda
and Tasks Ahead
• Despite good progress, significant works
need to be done in the following
spheres:

• Output costing and output

budgeting,
• Accrual accounting and accrual
budgeting;
• Performance based budgeting.

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 6. Strategic Planning, Output Budgeting
and Performance Management Cycles

Strategic Planning-
Specify Goals,
Outcomes, Outputs,
Activities,
Resources

Output Budgeting and

Assessment and Improvement
- Compare actual results with
Targets and benchmarks
- Suggest measures for improvement
- Specify performance parameters
for next years budget
Performance Planning-
(a) Costing and budgeting of
Output on accrual basis
(b) Specify performance
Parameters- timeliness, relevance,
Value, clients’ response etc.

Execution and Performance

Evaluation- Track the cost,
Outputs and performance
parameters

Output Budgeting Session-1 by Tarun Das 8

 1. Current Status of
Budgeting Systems
and Budget Planning
in Mongolia

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 1.1 Current Budget Planning
• Articles 26.1 and 26.2 of the Public Sector
Management and Finance Act (PSMFA, 27 June
2002) of Mongolia mandate that “Strategic
Business Plan of a budgetary body shall form
the basis for preparation and approval of its
budget”.
• “The SBP shall contain strategic objectives of
the budgetary body for the forthcoming three
years and the outputs to be delivered during
the next financial year and specified by
category, quantity, quality and costs”.
• The PSMFA also mandates that “costs should
be based on accrual accounting”.

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 1.2 Current Budget Planning
1. Annual budgets are based on multi-year
Strategic Business Plans (SBPs) for the HQ and
the agencies under the line ministries.
2. For 2008, three pilot ministries viz. MOECS,
MOFA, MOSWL have introduced Program
Budgets linked to outputs and outcomes.
3. These budget formulations are in the right
direction. Program budget, as in many other
countries, is the first step towards output
budgeting and accrual accounting.
4. These ministries need to be congratulated and
complemented for their pioneering and
excellent works.

Output Budgeting Session-1 by Tarun Das 11

 1.3 Program Budget for MOECS
A. Institutions
1) Pre-school Eucation Program
2) General Education Program
3) Vocational and Higher Education
Program
4) Culture and Art Program
5) Science and Technology Program

B. Broad Outcomes
1. Educational services for users,
2. Policy renovation activities, and
3. Administration and planning
Output Budgeting Session-1 by Tarun Das 12
 1.4 Number of Programs for
MOECS
Institutions Outcome-1 Outcome-2 Outcome-3

Pre-school 3 2 3
Gen. edu. 6 6 4
school
VETI 3 2 3
Higher edu. 3 2 3
Institution

Art & cult. 5 4 3

organizatio
n
Science 4 3 3
organizatio
Output Budgeting Session-1 by Tarun Das 13
n
 1.5 Program Budget for MOECS
(Mln MNT)
 Institutions 2006 2007 BE 2008 BE
A/C
Pre-Kindergarten 519 694 64,345
Kindergarten 29,178 39,778
General edu. 96,448 119,793 185,397
school
VETI 8,792 15,110 27,761
Higher edu. Inst. 24,634 0 39,492
Other edul orgns 21,293 36,072 33,392
Art & cult. orgns 11,289 15,646 23,483
Science orgns 6,680 7,706 12,817
Total 198,832 234,798 386,686
Output Budgeting Session-1 by Tarun Das 14
 1.6 Budget Allocation by
Institutions (in percentage to
total)

 I n s t i t u
Output Budgeting Session-1 by Tarun Das 15
 1.7 Increase over the Previous
Year (in percentage)

 Institu
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 1.8 Outcome 1.1.Kindergarten
services – Regular classroom day
budget
1. Expenditure for wage and other activities
=No.of children * Ave. rate of var. costs as
per govt resolution # 184, 2007.
2. Fixed costs
3. Child food costs as per govt reso. #167,
2006.
4. One time allowance or reward : (a) Exp.
for reward included in the variable costs;
(b) 6 month allowance in accordance with
the Law on Education 43.1.7; and (c)
Allowance for retiring teachers/staff as per
the Law on Education 43.1.5.

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1.9 Budget for kindergarten
services

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 1.10 Composition of MOECS Budget
2008 (In percent to total budget for the
program)
G o o d s  &  
  P r o g r a mW ma ge eS  so c i a l   I n s . T r a n s Cf ea rp s . EN xe pt  . l e nT do
S e r v ic e s
E d u c a t io n5 3 11 29 4 1 2 1 0
P r e .   S c h o5 o7 l 1 2 31 1 0 0 1 0
G e n .   e d u 5c 9a t i o n1 3 27 1 0 0 1 0
V o c .   e d u 3c 9a t i o n8 27 26 0 0 1 0
T e r t i a r y   e3 d3 u . 5 38 8 5 10 1 0
C u lt u r e   5 0 11 38 1 0 0 1 0
T o ta l 52 11 30 4 1 2 1 0
Output Budgeting Session-1 by Tarun Das 19
 1.11 Current Budget Planning
1. Similar budgets need to be prepared other line
ministries and all budgetary entities including the
agencies.
2. However, there is scope for improvement:
(a) There are too many outputs and programs and
sometimes duplication of activities.
(b) This makes monitoring difficult. We need to
prioritize programs and outputs.
(c) Allocations are driven by cash demands.
(d) There is need for accrual accounting.
(e) Need for setting benchmarks for unit costs for both
direct, indirect and capital costs.

Output Budgeting Session-1 by Tarun Das 20

 1.12 Actions for Improvement
3. Need to develop performance parameters for
evaluating the timeliness of preparation and
execution of programs and reporting of results;
4. Performance parameters for timeliness, relevance,
value, clients’ response etc. to delivery of public
goods and services
5. Need for specifying service delivery performance in
the budget process.
6. Developing systems for monitoring the cost,
outputs and performance parameters.
7. Compare actual results with Targets and
benchmarks and suggest measures for
improvement for the next year’s budget

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 1.13 Actions required
• Necessary to establish more output and
outcome oriented approach to budgeting.
• To specify a time schedule for delivery of
outcomes and outputs for the managers,
who would implement the programs.
• It will help to identify and monitor outputs
without bothering too much details of
inputs.
• Outcomes and outputs framework also
allows field managers to know their jobs
better.
• A focus on outputs simplifies the
projection of output costs.
• It avoids the need to focus heavily on
input requirements, which can be derived
from output targets.
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 1.14 Benefits of Output
Budgeting
• Output budgets are based on reliable estimates
of output costs.
• This requires a new chart of accounts.
• An attribution matrix to link resources to
activities, activities to outputs and outcomes.
• As usual there are negotiations between the
MOF and line ministries for budget allocation.
• But under output budgeting, negotiations are
transparent and based on expected outputs
rather than on arbitrary cuts and favors.
• Departmental budgets are also based on agreed
strategic plans and objectives, and not on wish
list of programs and projects.

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 1.15 Benefits of Output
Budgeting
• The outputs and outcomes framework
provides a robust basis for block funding
& consistent basis for multi-year funding.
• Block budget allocations can be
designed around output groups to
provide greater flexibility to the agencies
and greater certainty and transparency
for MOF.
• For example, there could be block grants
to the MOECS for constructing new
hostels for students, and a separate
block grant for scholarship payments.

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 2. Current Situation of
Output Costing and
Output Budgeting
in Mongolia

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 2.1 Current Status of Output
Budgeting
• Presently the HQ of a Ministry (except the three
pilot ministries viz. MOECS, MOSWL and
MOFA) adopts a methodology which can be
described as “Output-based” or more accurately
“activity-based inputs costing and inputs
budgeting”.
• The methodology consists of costing of inputs (in
terms of personnel, goods and services, and
overheads) required to sustain the activities for
producing the desired outputs.
• Although outputs are indicated in the SBP,
budgeting is done on the basis for inputs.

Output Budgeting Session-1 by Tarun Das 26

 2.2 Purpose of Output
Budgeting
• On the contrary, under output budgeting the
cost and budget estimates are provided
separately for each output.
• Basic purpose of output budgeting, as required
under the PSMFA (2002), is that given the
budgeted cost, one is interested in the
achievement of output and outcome (and not
in costs for labor, goods and other services).
• Once we monitor output costs, the input costs
are automatically monitored.
• But if we simply monitor input costs, we would
not know what happened to the output levels.

Output Budgeting Session-1 by Tarun Das 27

 2.3 Actions for Output
Budgeting
• To develop an effective and comprehensive
costing system for output based budgeting.
• To gather detailed information and constant
recording of actual expenses against activities.
• To establish computer based system for
output costing linked to the chart of accounts.
• It requires a substantial investment to buy
high-speed computers and software packages.
• It also requires recruitment of committed and
qualified accounting and auditing staff to
ensure regular updating and accuracy of
records on a concurrent basis.

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 2.4 Phased Implementation
• Initially, introduce a simpler costing system
and then move to full activity based costing .
• Initially, costing and budgeting may be done
on cash basis, and costing on accrual basis
may not be considered until the movement to
accrual accounting and accrual budgeting
system has been fully tested and completed.
• In the initial phase, it is better to exclude
major capital expenditure from the output
costs, but at the second phase it is desirable to
include all capital costs and depreciation as a
part of total cost.

Output Budgeting Session-1 by Tarun Das 29

 2.5 Output budgeting needs
identification of the following items:
• Outcomes, outputs and activities,
• Direct and indirect costs,
• Main cost drivers,
• Attribution matrix for attributing
resource costs to activity costs, activity
costs to output costs and contribution
to outcomes
• A new chart of accounts that links
expenses to activities, outputs and
outcomes,
• Agreement on the costing framework.

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3. Requirements for
Moving to Output
Budgeting

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 3.1 Establish an integrated planning,
costing, budgeting, reporting
framework
• Preparation of Strategic Business Plans with
specification of outputs and outcomes;
• Specification of performance indicators for
measurement of quality, quantity and cost of
outputs and outcomes;
• Specification of appropriate indicators for
monitoring the contribution of outputs to their
desired outcomes;
• Performance indicators should be clear,
relevant, economic, adequate & monitorable.
• Preparation of Performance Assessment Rating
Tool (PART).
• Evaluation of the performance parameters of
the previous SBP.

Output Budgeting Session-1 by Tarun Das 32

 3.2 Establish a comprehensive costing
framework linking resources to
activities, and activities to outputs
and outcomes.
1. Design and implement a new chart of accounts, with
codes for activities, outputs and outcomes, and an
attribution matrix for recording all direct and indirect
costs to the appropriate items or to the General
Ledger.
2. This could be achieved in a phased manner.
3. Initially there may be reporting of direct costs plus
broad allocation of indirect costs.
4. Latter, a more precise costing framework may be
established through a new chart of accounts and
accurate measurement of actual costs for all activities
leading to outputs.

Output Budgeting Session-1 by Tarun Das 33

 4: Recommendations and
Desired Action Plan

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 4.1 Budget Planning
• MOF should develop a new budget framework
based on outcomes, outputs, activities, inputs and
performance parameters to measure quantity,
quality and timeliness of outputs and outcomes.
• A Strategic Business Plan should be prepared
indicating priorities for the budget year and three
forward years
• Once in three years, a Medium Term Budget may
be prepared indicating expenditure for the
previous year, and forward estimates for the
budget year and three forward years using the
budget outcomes and outputs framework.

Output Budgeting Session-1 by Tarun Das 35

 4.2 Budget Planning
• Budgets for agencies must indicate
responsibilities of each unit/ manager for
executing outputs and outcomes.
• A new budget preparation and approval cycle
should be established that allows explicit
consideration of reliable information on financial
and non-financial performance during at least first
three quarters.
• A new chart of accounts should be established
that links revenues and expenses to activities,
outputs and outcomes.
• The role of Accounting and Audit Divisions in
recording, maintaining and reporting financial
accounts and the systems coordination should be
strengthened.

Output Budgeting Session-1 by Tarun Das 36

 4.3 Budget Planning
• There will be greater responsibility and
accountability for operations managers
to ensure efficient and effective use of
resources.
• It can be achieved by specifying
performance parameters on outputs
and outcomes at the operational level,
and more accurate costing information
for each activity and output.
• MOF should provide estimates for
budgetary allocations for all portfolio
ministries for the budget year and three
forward estimates as early as possible,
• so that line ministries can prepare
comprehensive strategic plans in time.
Output Budgeting Session-1 by Tarun Das 37
 4.4 Output Costing and
Budgeting
Need to move to an output and outcome budgeting
•
and planning framework.
• The new framework should include a system for
monitoring and reporting cost information on a timely
and accurate basis.
• Ideally the system should be fully computer based to
improve speed and efficiency.
• A new costing system should be developed within an
outcome and output framework, and an attribution
matrix for linking activities and resources.
• Costs will include both direct and indirect costs, but
at the first phase, major capital costs (i.e.
depreciation and capital charges) may be excluded
from calculations.

Output Budgeting Session-1 by Tarun Das 38

 4.5 Output Costing and
Budgeting
• Specification of outputs should include
definition of quantity and quality so that
unit costs can be measured.
• There should be specific staff responsible
for maintaining and analyzing cost data as
part of their duties.
• This should be a priority area to be
monitored by internal audit.
• Cost information should be a major
element of reporting on outputs.
• When accurate cost data is produced on a
uniform basis for a number of years or for
alternative providers, agencies should
consider providing benchmarks for costing
goods and services.

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 4.6 New Accounting Heads and
Codes
• Develop a new chart of accounts to facilitate
output budgeting and accrual accounting.
• Purchase of a standard software package for
Financial Management Information System
(FMIS) may help to automate processes for
entry, checking, verification and
authorization of transactions.
• Selection of a new FMIS also provides the
checklist of standards required for
accounting platforms.
• Some changes to existing procedures and
standards may be required to be made if
there is a move to a new FMIS and accrual
accounting and reporting.

Output Budgeting Session-1 by Tarun Das 40

 4.7 Financial and Performance
Reporting
• Outputs and outcomes need to be defined and
specified clearly.
• Performance indicators need to be developed for
monitoring outputs and outcomes.
• Senior management should support the move and
participate in design and specification of the
outputs and outcomes.
• Reporting to senior managers should be
streamlined to reduce the amount of details.
• Emphasis should be placed on improving accuracy
and timeliness of information.
• Procedures continue to be applied for ensuring
consistency of reporting across agencies and line
ministries.

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 4.8 Asset Management
• Asset management as part of the
move to multi-year budgeting, accrual
accounting and reporting.
• Asset register should be maintained,
retained and expanded to record initial
value, current value, depreciation and
cost attribution of each asset.
• The cost of assets (comprising
depreciation and capital charges) for
each output should be identified and
attributed accordingly.
• Managers should be aware of the role
of cost of assets as part of their total
production costs.

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 4.9 Internal Audit
• Internal audit and accounting systems need to
be aligned for output costing, output budgeting
and accrual accounting.
• There should be a system of continual capacity
building and proper succession plan.
• Ministry of Finance may prepare regulations and
procedures on the role and functions of various
audit authorities.
• There should be close alignment between the
accounting and auditing staff to address issues
relating to performance and systems integrity
(IT auditing) in addition to standard financial
and compliance audits.

Output Budgeting Session-1 by Tarun Das 43

 Thank you
Have a Good Day

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