Preparation of Personal Cost Budget – SS3 Financial Accounting Lesson Note (Second Term)

A budget is a quantitative statement of income and expenditure. A personnel cost budget analyses the basic salary and allowances of the staff of each government ministry or department in a particular year. It is prepared by identifying positions, counting staff in each post, noting grade levels, and calculating basic salary and allowances.

Behavioural objectives

By the end of the lesson, students should be able to:

• define a budget and a personnel cost budget;
• list the procedures for preparing a personnel cost budget;
• calculate the total emolument of staff who are not on step one, using the incremental rate formula;
• calculate basic salary and allowances for staff on step one;
• prepare a personnel cost budget and find the total personnel emolument.

What are the procedures for preparing a personnel cost budget?

1. Identification of different positions in the ministry or parastatals.
2. Calculation of the number of staff in each post.
3. Identification of grade level.
4. Calculation of the basic salary, allowances, etc.

How is the annual incremental rate used?

When staff are not on step one

If the officers are not on the first step of their salary scale, use the formula below to calculate the staff total emolument.

Formula: (New step – 1) × incremental rate + basic salary

Illustration

Assume the staff are on step 3.

Solution

Director General
= (New step – 1) incremental rate + basic salary
= (3 – 1) 50,000 + 300,000
= 2(50,000) + 300,000
= ₦400,000

Director (for each of the 4 Directors)
= (New step – 1) incremental rate + basic salary
= (3 – 1) 30,000 + 200,000
= 2(30,000) + 200,000
= 60,000 + 200,000
= ₦260,000

When staff are on step one

Illustration: The following information was extracted from the Ministry of Finance on 31/10/99.

Additional information

Workings

One DG
Basic salary = 40,000
Housing allowance = 8,400
Transport allowance = 6,250

3 Directors
Basic salary = 32,000 x 3 = 96,000
Housing allowance = 8,400 x 3 = 25,200
Transport allowance = 6,250 x 3 = 18,750

4 Chief Accountants
Basic salaries = 28,000 x 4 = 112,000
Housing allowance = 8,400 x 4 = 33,600
Transport allowance = 6,250 x 4 = 25,000

Solution

Personnel cost budget

Total personnel emolument = ₦365,200

Evaluation

1. Define public sector accounting.
2. List seven items of government expenditure.

General evaluation questions

1. What is depreciation?
2. Explain the following methods of calculating depreciation: (i) straight line, (ii) reducing balance, (iii) sum of the years’ digits.
3. What is the difference between depreciation and amortisation?
4. State ten uses of the general journal.
5. Explain the principle of the double entry system.

Assignment

Reading assignment

1. Essential Financial Accounting by O.A. Longe, pages 376-388.
2. Simplified Bookkeeping and Accounting by Femi Olatunji, pages 489-513.

Weekend assignment

1. Public sector accounting is done on the ________ basis of (a) credit (b) cash (c) hire purchase (d) instalment payment.
2. Government parastatal accounting system is on ________ basis. (a) cash (b) accrual (c) general (d) all of the above.
3. Public sector accounts reports are to the ________. (a) shareholders (b) directors (c) public (d) customers.
4. The chief accounting officer to the government ministries is (a) auditor general (b) minister of finance (c) secretary to the federal government (d) accountant general of the federation.
5. The formula for calculating emolument where employees are on step 4 is (a) (4 – 1) x salary (b) (4 + 1) x salary (c) (4 – 1) incremental rate (d) (4 – 1) incremental rate + basic salary.

Theory

1. State the formula to apply for (i) calculating emolument when employees are on step 1 and (ii) when employees are on step 3.
2. State seven differences between public and private sector accounting.