Page 129 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 6.7 Performance Budget

The performance budgeting was first applied in the USA in 1920. It has little difference from the
conventional budgeting technique. In conventional budgeting system, the performance of any
organisation or company is considered in terms of financial aspects and generally physical
aspects are not much emphasised to be taken into account. As a consequence, budgetary control
in terms of physical volume and their associated costs cannot be affected. So, the performance
budgeting is a concept evolved for removing this drawback.

6.7.1 Meaning of Performance Budgeting

The term performance implies results or outputs. These terms should, of course, be interpreted
in a wider sense. They should include any identifiable, measurable consequences of a series of
activities and expenditures. Thus, even if tangible goods are not sold, nor services supplied for
a price, it should still be possible to discover alternative standards of accomplishment.

Did u know? Performance budgeting provides a meaningful relationship between
estimated inputs and expected outputs as an integral part of the budgeting system.
According to J. Burikhead, “A performance budget is one which presents the purposes and
objectives for which funds are required, the costs of the programmes proposed for achieving
those objectives, and quantitative data measuring the accomplishments and work performed
under each programme.” Thus performance budgeting is a technique of presenting budgets for
costs and revenues in terms of functions, programmes and activities and correlating the physical
and financial aspects of the individual items comprising the budget.

6.7.2 Objectives of Performance Budgeting

The main objectives of performance budgeting are:
(i) To improve the budget formulation at various levels of management,

(ii) To facilitate performance audit and to make it more effective,
(iii) To establish the relation between physical and financial aspects of each activity and
programme,
(iv) To measure the progress against both the short-term and long-term objectives,
(v) To improve the review, decision-making and control at all levels of management, and

(vi) With reference to government administration, to help in better appreciation and review
by controlling authorities like legislature, PAC, Board of Trustee, etc.

6.7.3 Steps in Performance Budgeting

In preparing a performance budget, the following steps are necessary:
(i) Goals, objectives and policies are to be set at the beginning,
(ii) In attaining the goals and objectives, programmes are to be checked out,

(iii) The budgeted course of activities are to be executed in response to responsibilities so as to
achieve the target within the time specified and the costs so identified in the budget, and
(iv) For implementing control over the performance and getting the budget updated according
to requirements, a system of evaluation and appraisal is to be developed.

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