It is budgetary system where the input costs are related to the performance i.e. the end results. This budgeting is used extensively in the Government and Public Sector Undertakings. It is essentially a projection of the Government activities and expenditure thereon for the budget period. This budgeting starts with the broad classification of expenditure according to functions such as education, health, irrigation, social welfare etc. Each of the functions is then classified into programs, sub classified into activities or projects.
Procedure for Performance Budgeting
Objectives of each program are ascertained clearly and then the resources are applied after specifying them clearly. The results expected from such activities are also laid down. Annual, quarterly and monthly targets are determined for the entire organization. These targets are broken down for each activity center. The next step is to set up various productivity or performance ratios and finally target for each program activity is fixed. The targets are compared with the actual results achieved. Thus the procedure for the performance budgets include allocation of resources, execution of the budget and periodic reporting at regular intervals.
The budgets are initially compiled by the various agencies such as Government Department, public undertakings etc. Thereafter these budgets move on to the authorities responsible for reviewing the performance budgets. Once the higher authorities decide about the funds, the amount sanctioned are communicated and the work is started. It is the duty of these agencies to start the work in time, to ensure the regular flow of expenditure, against the physical targets, prevent over runs under spending and furnish report to the higher authorities regarding the physical progress achieved.
In the final phase of performance budgetary process, progress reports are to be submitted periodically to higher authorities to indicate broadly, the physical performance to be achieved, the expenditure incurred and the variances together with explanations for the variances.
The main features of performance budgeting are as follows:
1. It helps the management to regulate its each and every activity according to predetermined standards of performance, targets and objectives.
2. It is not only an estimate of future needs but goes beyond that and- includes functions, programmes, activity schemes and time schedules to help effective and economic allocation for the programmes.
3. It lays great stress on the management of organisational structural and overall policy, personnel, financial, etc. from traditional to dynamic one.
4. It is not merely a projection of trends and targets but planning the business from grass root level to top level on rational thinking and forecasting.