PERFORMANCE

BUDGETING

Submitted by

MUHAMMAD SALIM
07217003909
MBA-1ST SEMESTER
WHAT IS PERFORMANCE BUDGETING?
Budgeting is nothing but the technique of expressing, largely in
financial terms of management’s plans for operating and financing
the enterprise during specific periods of time. Any system of
budgeting, in order to be successful, must provide for
performance appraisal as well as follow-up measures. It should
be capable of predicting statistically the performance for the
budget period in terms of probabilities and levels of confidence.
For example, if a bank stipulates that the result of its business
budget would be correct up to a level of 5% from the budgeted
business.

Performance budgeting involves evaluation of the performance of

the organization in the context of both specific as well as overall
objectives of the organization. It presupposes the crystal clarity of
organizational objectives in general and short-term business
objectives as stipulated in the budget, in particular, by each
employee of the organization, irrespective of his level. It, thus,
provides a definite direction to each employee and also a control
mechanism to higher management.

According to the National Institute of Bank Management,

performance budgeting technique is, “the process of analyzing,
identifying, simplifying and crystallizing specific performance
objectives of a job to be achieved over a period in the framework
of the organizational objectives, the purpose and objectives of the
job. The technique is characterized by its specific direction
towards the business objectives of the organization”. Thus,
performance budgeting lays immediate stress on the achievement
of specific goals over a period of time. However, in the long-run it
aims at continuous growth of the organization so that it continues
to meet the dynamic needs of its growing clientele. It enables the
organization to be sensitive and adaptive, preventing it from
developing rigidities which may retard the process of growth.

Performance budgeting requires preparation of performance

reports. Such reports compare budget and actual data and show
any existing 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 organizational
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 departmental head. Each
departmental 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 material purchase
budget so that he may arrange for purchase of necessary
materials. Periodical reports from the various sections of a
department will be received by the departmental head who will in
summary form submit a 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 submitting these
report is to convey promptly the information about the deviations
in actual and budgeted activity to the person who has the
necessary authority and responsibility so that he may take
necessary action to correct any deviation from the budget.

As shown in Figure 1, performance budgeting is an integral part of

an ongoing process that focuses on government accountability
and performance improvement.

Performance budgeting is a system of planning, budgeting,

and evaluation that emphasizes the relationship between
money budgeted and results expected.
Performance budgeting:

· Focuses on results. Departments are held accountable to

certain performance standards. There is a greater awareness of
what services taxpayers are receiving for their tax dollars.

· Is flexible. Money is often allocated in lump sums rather than

line-item budgets, giving managers the flexibility to determine how
best to achieve results.

· Is inclusive. It involves policymakers, managers, and often

citizens in the budget “discussion” through the development of
strategic plans, identification of spending priorities, and evaluation
of performance.

· Has a long-term perspective. By recognizing the relationship

between strategic planning and resource allocation, performance
budgeting focuses more attention on longer time horizons.

Common characteristics of performance budgets include:

· Agency identification of mission, goals, and objectives;

· Linkage of strategic planning information with the budget;
· Development and integration of performance measures into the
budget; and
· Disaggregation of expenditures into very broad areas (such as
personnel, operating expenses, and capital
outlays) rather than more specific line-items.