Question

What are the contrasts between Traditional Views of Budgeting and Performance-Informed Budgeting

Answer 1

Traditional budgeting is a method of preparation of the budget in which last year’s budget is taken as the base. Current year’s budget is prepared by making changes to previous year’s budget by adjusting the expenses based on the inflation rate, consumer demand, market situation, etc. Past year’s revenues and costs form an integral part of current year’s budget. Only those items in traditional budgets need to be justified which are over and above the last year’s budget.

The Performance Budget is a budget based on functions, activities and projects which focus attention on the accomplishments, the general character and the relative importance of the Work to be done and the service to be rendered rather than the means of accomplishment such as personnel service, supplies, equipment etc. Under this system, the functions of various organisational units would be splatted into programmes of activities, sub-programmes and component schemes, etc. and estimates would be presented for each.”

In short, performance budgeting is such a budgeting system where the input costs are related to the performance of a firm.

Traditional Budget:	Performance Budget:
1. The objective of traditional budget­ing expresses that the actual expenditure cannot exceed the budgeted allocations for the same.	1. The objective of performance budgeting is, however, to have the performance as shown within the budget allocations.
2. The traditional budget gives more emphasis on the financial aspect rather than physical aspect.So it is difficult to achieve and to measure the performance in relation to physical units and related cost of such units.	2. Performance budget, on’ the other hand, aims at establishing the relationship between the inputs and the outputs.
3. Usually traditional budgets are prepared for different items of expenditure viz., Salaries, Stores & Material, Rent, Rates and Taxes etc.	3. In performance budgeting main focus is to be given on the purpose for which the expenditure is incurred and not on each item of expenses.
4. Traditional budget is not so effective while controlling activities at the time of preparing budget. It cannot measure the performance criteria.	4. Performance budgeting is no doubt, more effective to control various activities since it measures the input-output relationship.
5. Traditional budget is prepared on the basis of last year’s performance with some addition and alterations (i.e., after some adjustments).	5. Performance budget is prepared on the basis of actual need of the organisation i.e., on the basis of job analysis.