Performance Budgeting – Features, Process, Advantages, Limitations

Performance Budgeting refers to a budget in terms of functions, programmes and performance units (functions, activities and projects) reflecting the revenues and expenditures of an Organization or Government.  Performance Budgeting refers to a budget in terms of functions, programmes and performance units (functions, activities and projects) reflecting the revenues and expenditures of an Organization or Government.  

Features of Performance Budgeting 

♦ Performance Budgeting provides

• The purpose and objectives for which funds are required
• Costs of programs and related activities proposed to accomplish those objectives
• The output that will be produced under each activity.

♦ Performance Budgeting implies that the budget must clearly indicate the actual achievement or output, expected by spending a particular amount on a particular activity. Hence, It is an output oriented budget that focuses more on achievement rather than means of achievements.

♦ The costs and benefits of each activity are analysed for making decisions regarding allocation of funds.

♦ It involves use of management tools such as – work measurement, bench marking and unit costing etc. to prepare a budget.

♦ This system has been designed to plan for long term.

Process of Performance Budgeting

• Formulation of objectives
• Identifying various programmes and project which will accomplish these objectives
• Evaluation & selection of programmes & projects on the basis of cost benefit analysis
• Development of performance criteria for various programmes
• Preparing financial plans for each program and the final annual budget
• Assessing the performance of each programme an comparing the same with budgeted performance
• Correcting deviations

Advantages of Performance Budgeting

• It states clearly the purpose & objectives for which funds are needed.
• It improves performance of units in a continuous manner
• It brings transparency in the budget formulation process
• It helps in decision making regarding allocation of funds
• It acts as a tool for reviewing efficiency of programs
• It integrates the process of planning, programming & budgeting

Limitations of Performance Budgeting 

• It focuses on quantitative evaluation rather than qualitative evaluation.
• It is ineffective without a proper and systematic accounting and reporting system.
• It is difficult to quantify social benefits.
• It is difficult to accurate estimate benefits arising out of each activity.

Also Read:  Zero-Based Budgeting