Need for performance budgeting
In the conventional budgetary control system, everybody give importance to rupee value. Nobody care about the physical units or related to cost. Gone are the days, there is no need to exercise control over physical units. But, due to globalization and cut throat competition, everybody care about the performance in terms of physical units. Hence, today, many business concerns are interested in preparing the performance budget.
Under performance budgeting, a budget is prepared in such a way so that each item of expenditure is related to specific responsibility center and is closely linked with the performance of that standard. Besides, work programmes are developed and assigned responsibility by disclosing performance expectations. The objectives of business are achieved in a better way through performance budgeting.
Stages involved in performance budgeting
The following steps should be taken to establish a performance budgeting system successfully in an organization.
1. Establishment of well defined responsibility center.
2. Development of work programmes for each responsibility center with expected performance in physical units.
3. Assessing the financial requirements under various classifications of heads to attain the performance in physical units.
4. Recording of actual performance to compare with performance budget.
5. The performance may be evaluated under two stages. They are
- The actual performance is compared with physical target mentioned in the performance budget and prepare the budget allowance according to the actual physical work performance.
- The actual expenditure is compared with the budget allowance to determine the monetary deviations.
6. A performance report is prepared which analyze the variance with reasons and causes.