Budget Devices

Line-Item Budgets

Line-item budgets refer to budgets that authorize the manager to spend only up to the specified amount on each line item.

For example, consider Table XI.

Table XI | Line-Item Budget Example
Line ItemAmount
Salaries$185,000
Office supplies12,000
Office equipment3,000
Postage1,900
Maintenance350
Utilities1,200
Rent900
Total$204,350

In this budget, the manager is authorized to spend $12,000 on office supplies for the year.

If the supplies can be purchased for $11,000, the manager with a line-item budget is prohibited from spending the $1,000 savings on any other category (such as additional office equipment).

The manager cannot spend savings from one line item on another line item without prior approval; therefore, the manager has less incentive Opens in new window to look for savings.

Moreover, if next year’s line item is reduced by the amount of the savings, managers have even less incentive to search for savings.

Line-item budgets impose more control on managers.

Managers responsible for line-item budgets cannot reduce spending on one item and divert the savings to items that enhance their own welfare.

By maintaining tighter control over how much is spent on particular items, the organization reduces the possibility of management action that is inconsistent with organizational goals Opens in new window.

Line-item budgets, however, come at a cost. They reduce management incentives to search for cost savings and also reduce the organization’s flexibility to adapt quickly to changing market conditions.

Line-item budgets are quite prevalent in government organizations such as local councils and police authorities. They are also used in some corporations, but with fewer restrictions.

Line-item budgets provide an extreme form of control. The manager does not have the responsibility to substitute resources among line items as circumstances change. Such changes during the year require special approval from a higher level in the organization, such as the local council.

Line-item budgets illustrate how the budgeting system partitions responsibilities, thereby controlling behavior.

In particular, a manager given the responsibility to spend up to $30,000 on office equipment does not have the responsibility to substitute office equipment for postage.