## Performance Budgeting (PB)

### Definition

Performance Budgeting links budgeting with responsibility accounting. It establishes a meaningful relationship between inputs (resources) and outputs (results), presenting budgets in terms of functions, programmes, and activities — not just line-item expenditures.

### Traditional Budgeting vs. Performance Budgeting

Dimension	Traditional Budgeting	Performance Budgeting
Emphasis	Financial figures (expenditure items)	Performance & outcomes (inputs vs. outputs)
Prepared based on	Salaries, materials, rents, taxes	Functions, programmes, activities
Accountability	Limited	Each executive is held accountable for their responsibilities

### Components of a Performance Budget

1. Objectives & Purposes — what the organisation aims to achieve.

2. Costs of Programmes — cost of each programme designed to meet objectives.

3. Quantitative Data on Accomplishments — measurable work done under each programme.

4. Responsibility Accounting — each executive's performance is continuously appraised.

### Steps in Performance Budgeting

Step	Action
1	Establish functional programme & activity classification
2	Align accounting and financial management to that classification
3	Develop norms and yardsticks to measure performance
4	Define work units of performance (output units)
5	Determine unit costs (cost per output unit)
6	Report and evaluate performance under each programme

### Adopting PB in Enterprises — Key Requirements

Clearly defined, tangible objectives.
Objectives translated into functions, tasks, and programmes at each management level.
Realistic, quantifiable performance standards.
Decentralised responsibility structure.
Robust accounting and reporting system to compare actual vs. budget.

Worked example

### Example 1

Performance Budget vs. Traditional Budget — Sanitation Department Example:

Traditional Budget:

Item	Budget (₹)
Salaries	10,00,000
Fuel	2,00,000
Equipment maintenance	1,50,000
Total	13,50,000

Performance Budget:

Programme	Work Unit	Target	Unit Cost (₹)	Total (₹)
Waste collection	Tonnes collected	5,000	200	10,00,000
Street sweeping	km swept	3,000	100	3,00,000
Public toilet maintenance	Toilets serviced	50	1,000	50,000
Total				13,50,000

The PB format lets management ask: 'Are we collecting 5,000 tonnes at ₹200/tonne?' — a direct performance question that the traditional budget cannot answer.

⚠️ Common exam mistakes

Confusing Performance Budgeting with ZBB — PB focuses on linking inputs to outputs; ZBB focuses on justifying every cost from zero. They are complementary but distinct.
Defining work units vaguely (e.g., 'health services delivered') instead of precisely (e.g., 'patients treated per month') — vague units make performance measurement impossible.
Skipping the unit cost calculation step — without unit costs, PB reduces to a list of programmes with no way to judge efficiency.

Reference:

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