Page 203 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes According to the above information, the author says that 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.

Purpose of Performance Budgeting

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 systematic view of activities by trying to associate the inputs of
the expenditure with the output of accomplishment in terms of services, benefits, etc.
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 assess the effects of the decision-making of supervisor to the middle and top-managers.
4. To bring annual plans and budgets in line with the short and long-term plan objectives.
5. To present a comprehensive operational document showing the complete planning fabric
of the programmes and prospectus and their objectives inter-woven with the financial and
physical aspects.
6. To facilitate more effective performance audit.

Limitation of Performance Budgeting

1. Performance budgeting has certain limitations such as difficulty in classifying programmes
and activities.
2. Problems of evaluation of various schemes, relegation to the background of important
programmes.
3. The technique enables only quantitative evaluation scheme. Sometimes, the needed results
cannot be measured.

9.5.3 Responsibility Accounting

Responsibility accounting is an underlying concept of accounting performance measurement
systems. The basic idea is that large diversified organizations are difficult, if not impossible to
manage as a single segment, thus they must be decentralized or separated into manageable
parts. These parts, or segments are referred to as responsibility centers that include:
1. Revenue centers,
2. Cost centers,

3. Profit centers, and
4. Investment centers.
Responsibility accounting is appropriate where top management has delegated authority to
make decisions. The idea behind responsibility accounting is that each manager’s performance
should be judged by how well he or she manages those items under his or her control. This

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