Line Item BudgetDefined with Examples & More

Lisa Borga

What Is a Line Item Budget?

A line item budget is a budget that shows items grouped into categories.

This allows managers and owners to see which categories account for most of the business’s spending.

The information is presented in a column format with past and sometimes future periods included along with the current period.

So, managers can analyze the information to see if spending increases are reasonable.

This can give managers a chance to address any expenses that seem to be a problem.

As an example, if a specific item seems to be causing a problem with the budget, the company could monitor the issue to see if it continues to affect the budget.

Then, if the problem continues, the company could investigate the issue more carefully.

Cash budget

Characteristics of the Line Item Budget

Many businesses create a line item budget in an attempt to keep their expenses low.

It also makes it easy for businesses to set up a budgeting system that will allow them to track their expenses.

Here is an explanation of the important parts of a line item budget.

Expenses

A line item budget separates a business’s expenses into categories and represents these in columns.

It also allows each of these categories to be compared to that expense in the previous year.

A business could have expenses, such as advertising, office materials, or employee compensation.

Includes the Expenses of Past Years

One of the most important uses of a line item budget is to allow a manager to control expenses.

It does this by letting a manager see past expenses in each category.

Then, if an expense changes significantly between periods causing a manager to become concerned, they can attempt to control the expense to stay within budget.

This ability to compare is crucial for allowing the manager to adjust expenses in time to remain within budget.

Includes Present Year Expenses

The budget includes the present year’s expenses in each category, which can then be compared to the expenses of previous years.

This allows managers to either increase or decrease the budget in each area as needed.

These budgets are usually prepared monthly. So, it is a good idea to prepare a monthly budget.

Then, at the end of the month, the actual expenses can be recorded.

This can allow managers to try and control expenses as necessary.

Line Item Budget Example

Suppose Miss Jones is a manager for a small company in Iowa.

She prepared a line item budget for February 2021.

She is now preparing to take any steps needed to stay within the company’s yearly budget.

Expense Categories MonthExpense 2020

(Actual)

Expense 2021

(Projected)

Expense 2021

(Actual)

Office SuppliesFebruary$12,000$14,000$13,000
Employee CompensationFebruary$100,000$120,000$125,000
UtilitiesFebruary$15,000$17,000$19,000
MarketingFebruary$10,000$13,000$13,000
Total $137,000$164,000$170,000

Once the actual expenses are entered, the manager should compare them to the projected expenses to see if they are within the budgeted amount.

The manager will see that the company went over budget in February by $6,000.

So, the manager will want to see which categories were over the budgeted amount.

Once the manager determines which expense categories were over budget, she should try to see exactly what expense was over and try to prevent the same problem from happening in the following month.

In this example, employee compensation and utilities were over budget.

So, the manager should try to determine why these areas went over the budgeted amount.

For employee compensation, it could be due to overtime or bonuses, or other issues.

If it is over time, it might be possible to better control it.

For bonuses or other issues, it might be necessary to better incorporate these items into the budget.

Utilities were also over budget as well. An energy-saving program might be able to help with this problem.

Advantages & Disadvantages of Line Item Budgets

line item budget

Advantages

Line item budgets provide numerous advantages to owners and managers.

Additionally, these budgets are easy to use and understand.

They offer a lot of help in the budgeting process.

Here are some of the major advantages of using a line item budget.

  • Managers can use line item budgets to help make financial decisions, such as increasing funding for certain expense categories based on the money available or cutting certain expense categories based on the money available or organizational needs or policies.
  • Line item budgets are easy to create. It is not necessary to be an accountant or financial expert to make one. Each department should be able to make its own line item budget. This would allow every department to see their own expenses and how much they spend on these expenses.
  • If any expenses go over the budget during the month, a manager knows to analyze the expense and try to keep the expense within budget in future months.

Disadvantages

  • The line budget is set at the start of the year. Permission generally needs to be granted by higher-level management to change the line item budget. Therefore, it is difficult for a manager to change the budget amounts even if the amounts appear to be incorrect.
  • The line item budget deals only with expenses. This can make it hard for managers to determine why the budget is not being met. The reason is not always due to expenses. It might instead be due to other issues, such as payables, which are not shown in this budget.

Final Thoughts

Line item budgets are easy for businesses to create and use.

They are particularly good for small businesses without a lot of accounting knowledge.

This budget can help businesses to see their monthly expenses, thus making it easier to try and stay within their budget.

However, it is important for these businesses to remember that an increase in costs may not be entirely bad.

The increase in costs may be a result of an increase in revenue.

It is essential for managers or owners to look at their business as a whole when making decisions.

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  1. California State University Long Beach "BUDGETING" Page 1 . August 11, 2022

  2. University of Georgia "Understanding Line Item Budgeting" Page 1 . August 11, 2022