Performance budgeting: Budget in the ordinary sense of the term, denotes the facts related to the planned income and expenditure prepared for a specific future date. It is prepared in the form of a statement expressed either in monetary terms or only in numbers, or both. Performance budgeting involves evaluation of the performance of the organisation in the context of both specific, as well as, overall objectives of the organisation. It presupposes a crystal clear perception of organisational objectives in general, and short-term business objectives as stipulated in the budget, in particular by each employee of the organisation, irrespective of his level. It thus, provides a definite direction to each employee and also a control mechanism to higher management.
As per ICMA, “ The budget is a financial and or quantitative statement, prepared and approved prior to a defined period of time, of the policy to be pursed to be during that period for the purpose of attaining a given objective.”
As per the National Institute of Bank Management, Bombay the performance budget technique is “The processes of analysis, identifying, simplifying and crystallising specific performance objective of a job to be achieved over a period, within the framework of organisational objectives, the purposes and objectives of job. The technique is characterised by its specific direction towards the business objectives of the organisation.”
The Main objectives of PB are: (i) to coordinate the physical and financial aspects; (ii) to improve the budget formulation, review and decision-making at all levels of management (iii) to facilitate better appreciation and review by controlling authorities (legislature, Board of Trustees or Governors, etc) as the presentation is more purposeful and intelligible; (iv) to make more effective performance audit possible; and (v) to measure progress towards long-term objectives which are envisaged in a development plan. In performance budgeting (PB), precise detainment of job to be performed or services to be rendered is done. Secondly, the budget is prepared in terms of functional categories and their sub-division into programmes, activities, and projects. Thirdly, the budget becomes a comprehensive document. Since the financial and physical results are interwoven, it facilitates management control. Performance budgeting (or programme budgeting) has been designed to correct the shortcomings of traditional budgeting by emphasizing management's considerations/ approaches. Both the financial and physical aspects are incorporated into the budget. A performance budget presents the operations of an organisation in terms of functions, programmes, activities, and projects. The traditional (also known as line-item or object-account) budget in government enumerates estimated expenditures by type (and quantity) for a specified period of time, usually one year. The expenditure is classified by object; the personnel are listed by type of position; the budget is divided into sections according to organisational units, department sections; and the types of expenditure are listed by category. The necessity for linking the expenditures (or inputs in financial terms) to outputs (in physical terms), facilitating the evaluation of outcomes (or result of activities) cannot be overemphasized. Performance budgeting requires preparation of periodic performance reports. Such reports compare budget and actual data, and show variances. Their preparation is greatly facilitated if the authority and responsibility for the incurrence of each cost element is clearly defined within the firm's organisational structure. In addition, the accounting system should be sufficiently detailed and coordinated to provide necessary data for reports designed for the particular use of the individuals or cost centres having primary responsibility for specific cost. The responsibility for preparing the performance budget of each department lies on the respective Department Head. Each Department Head will be supplied with a copy of the section of the master budget appropriate to his sphere. For example, the chief buyer will be supplied with the copy of the materials purchase budget so that he may arrange for purchase of necessary materials. Periodic reports from various sections of a department will be received by the departmental head that will submit a summary report about his department to the budget committee. The report may be daily, weekly or monthly, depending upon the size of business and the budget period. These reports will be in the form of comparison of budgeted and actual figures, both periodic and cumulative. The purpose of preparing these reports is to promptly inform about the deviations in actual and budgeted activity to the person who has the necessary authority and responsibility to take necessary action to correct the deviations from the budget.
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