Line Item Budget
A line item budget is a type of budget that lists each individual expense category (line item) separately along with the amount budgeted for each category. It provides a clear breakdown of each type of income and expense, and it can be very detailed, listing everything from salaries to office supplies.
The main purpose of a line item budget is to control costs and prevent overspending. By assigning a specific amount to each expense category, organizations can ensure that funds are spent as planned and can easily track any deviations from the budget.
A line item budget is often used by businesses, non-profit organizations, and government agencies. It is typically structured in a straightforward manner, listing each expense category and the corresponding amount, making it easy for non-experts to understand. This simplicity can also make it easier to compare budgeted amounts to actual spending, making it a valuable tool for monitoring financial performance.
However, a potential drawback of line item budgeting is that it focuses primarily on what is being purchased (i.e., inputs) rather than why the items are being purchased or what results are expected (i.e., outputs or outcomes). As such, it might not provide a clear link between expenditures and strategic objectives or performance outcomes.
Despite this limitation, line item budgeting remains a common and useful approach to budgeting, especially when combined with other budgeting methods that focus on outputs or outcomes, such as program or performance budgeting.
Example of a Line Item Budget
Let’s consider a simple example of a line item budget for a small business:
- Sales: $100,000
- Interest Income: $1,000
- Total Revenue: $101,000
- Net Income: $10,000 (Total Revenue – Total Expenses)
In this example, each type of revenue and expense is listed separately, with a specific amount budgeted for each. This makes it easy to see how much is being spent on each category and where the company’s money is coming from and going to.
With this line item budget, the company can track its actual revenues and expenses against the budgeted amounts throughout the year, and can quickly spot any categories where it is overspending or underspending. However, this budget does not show why the money is being spent in these ways, or what outcomes are expected from each type of expenditure. For this, other types of budgeting, such as performance or program budgeting, would be needed.