Question

(1) Explain the similarities and differences between a traditional budget, a program budget, and a performance budget. Be specific. (2) Explain the focus and purpose of each budget.

Answer 1

Solution. (1) A traditional budget is prepared by an organization by keeping previous year's data as base and formulating current years projection of expected expenses and revenues. This form of budget includes past records as in other two budget methods and includes general consolidated budgeting method for the whole organization.

A program budget is one prepared by an organization solely to determine expected expenses and revenues based on a specific project or any program chosen during the period. In case of program budgeting, budget is based on a specific program under the organization during the period.

A performance budget is employed to determine budget based on actual and expected expenses and revenues incurred and generated respectively. In case of performance budgeting, budget renders tool to determine and understand performance based on data and correct variance thereof with help of cost benefit analysis.

(2) Focus of a traditional budget is projecting current period's budget by focussing on previous year's budget data and projects any changes and is easily incorporated by an organization.

Focus of a program budget is to generate information about the money invested and revenues efficiency under a chosen project.

Focus of a performance budget is to facilitate resource allocation decisions as resources are limited and helps in making better and efficient use of resource application and information.