The concept of performance budgeting relates to greater management efficiency specially in government
work. With a view to introducing a system’s approach, the concept of performance budgeting was developed
and as such there was a shift from financial classification to ‘cost’ or ‘objective’ classification. Performance
budgeting, is therefore, looked upon as a budget based on functions, activities and projects and is linked to
the budgetary system based on objective classification of expenditure.
According to National Institute of Bank Management, Bombay performance budgeting technique is, the
process of analysing identifying, simplifying and crystallising specific performance objectives of a job to be
achieved over a period in the frame work of the organisational objectives, the purpose and objectives of the
job. The technique is characterised by its specific direction towards the business objectives of the
organisation. Thus, performance budgeting lays immediate stress on the achievement of specific goals over
a period of time. It requires preparation of periodic performance reports. Such reports compare budget and
actual data and show any existing variances.
The purpose of performance budgeting is to focus attention upon the work to be done, services to be
rendered rather than things to be spent for or acquired. In performance budgeting, emphasis is shifted from
control of inputs to efficient and economic management of functions and objectives. Performance budgeting
takes a system view of activities by trying to associate the inputs of the expenditure with the output of
accomplishment in terms of services, benefits etc. In performance budgeting, the objectives of the budget
makers and setting the task and sub-task for accomplishment of the defined objectives are to be clearly
decided well in advance before budgetary allocations of inputs are made. Each homogenous function is
broken down into a number of subordinate functions.
The main purposes of performance budgeting are:
1. To review at every stage, and at every level of the organisation, so as to measure progress towards
the short-term and long-term objectives.
2. To inter-relate physical and financial aspects of every programme, project or activity.
3. To facilitate more effective performance audit.
4. To assess the effects of the decision-making of supervisor to the middle and top-managers.
5. To bring annual plans and budgets in line with the short and long-term plan objectives.
6. To present a comprehensive operational document showing the complete planning fabric of the
programmes and prospectus their objectives inter-woven with the financial and physical aspects.
A performance budget presents estimate for expenditure and earnings in terms of functions, programmes,
activities and projects. For introducing performance budgeting financial requirements are put up in relation to:
(a) Programmes and outlay indicating the range of work to be done by each categorised agency.
(b) Object-wise classification showing objects of expenditure, e.g. office establishment, etc. is usually
shown in the conventional budgets.
(c) Sources of financing.
However, performance budgeting has certain limitations such as difficulty in classifying programmes and
activities, problems of evaluation of various schemes, relegation to the background of important
programmes. Moreover, the technique enables only quantitative evaluation scheme and sometimes the
needed results cannot be measured.