Performance budgeting involves the development of refined management tools (such as work measurement performance) so as to achieve the specific goals of the business over a period of time. The emphasis in performance budgeting is on the improvement of internal management, keeping in view the volume of work and its cost, that has to be accomplished during a financial year.
Performance budgeting is a convenient tool in the hands of management to achieve the objectives of an organization. In the short-run, it lays immediate stress on achieving the objectives as specified in the budget. In the long-run, it serves both as a tool for reviewing the efficiency of existing operations and their
results and as a system of feeding the data for planning future services. It helps in making the organization sensitive and adaptive to the dynamic needs of the organization.
The first step in the technique of performance budgeting is the establishment, improvement and extension towards the programmes which help in achieving the specific and overall goals of the organization. The resources to be used should be clearly specified so that the financial responsibility at every level within the organization can be clearly specified.
The second step towards performance budgeting is to develop a yardstick for work measurement and also for determining performance standards. The most suitable method for a given performance should be devised and the aim should be to move towards higher levels of perfection. Suitable standards should be determined and variances between the actual and the budgeted may suggest the need for remedial action, thereby increasing the value of budget control.
The final step in performance budgeting is preparing the record keeping along functional lines. These records would indicate the variance between budgeted and actual costs. This helps the management in taking suitable action to correct the variances.
Thus, performance budgeting helps to organize the work in a systematic and scientific manner. It helps to provide information for the effective and efficient working of the organization towards the achievement of the business objectives of an organization.