“Performance budgeting requires preparation of periodic performance reports”. Explain.

It is rightly observed that performance budgeting requires preparation of periodic performance reports. Preparation of functional budgets is the planning function. Their implementation is, however, the controlling function. As such, mere preparation of budgets does not serve any useful purpose. They should be implemented, i.e., put into practical use. In the course of doing it, it is equally necessary to compare the actual performance with the budgeted performance.

At the commencement of the budget period, each manager will receive a copy of the budget relating to his business segment. Acting within his scope of authority, every departmental manager proceeds with the work of implementation of budget relating to his sphere of activity. If, in the course of implementation, it is found that everything proceeds exactly according to what is laid down in the budget, no deviation is said to occur. The result revealed by the financial statements will coincide with that projected by the master budget.

However, there may be deviations or discrepancies between the actual performance and budgeted performance. These deviations are of vital interest to management. The best way of bringing these deviations to the knowledge of management is through budget reports. In order that the budget programme may serve management as a control device, systematic plan of performance evaluation and reporting should be established. Daily, weekly of monthly reports should be prepared by the cost office and sent to management. These reports should show comparison between the budgeted cost and actual cost as well as deviations, if any.

Budget reports aim at making concerned executives understand the extent of the under and above achievement, the causes for below budget performance, the contemplated remedial action, and also the direction relating to budget revision, if warranted. Budget reports are submitted by the budget controller or budget officer to functional heads giving both actual and budgeted performance relating to their departments with all other details just mentioned. Budget reports are an important tool of effective communication within the organisation regarding expected and actual performance, deviations and their causes and attempts at timely correction.

Management is interested in the deviations for the following reasons:

(i) To know if there is any error in budgeting due to wrong assumptions, carelessness, etc.

(ii) To take remedial action, and

(iii) To revise the budgets, if necessary.

A good budget report should contain the following:

1. The cause of each deviation should be specified.

2. A separate report should be prepared for each responsibility centre.

3. Reports should help in fixing responsibility of each executive.

4. Reports should be brief and unambiguous.

5. Reports should bear the signature of the person who has prepared them.

6. Reports should be prompt. More delayed the reports, lesser becomes their value for fixing responsibility and for taking corrective action.

7. It should be clearly stated the expected results, actual results and the extent of positive and negative deviation.

8. Deviation should be analysed into those due to controllable and uncontrollable factors.

9. Incidence of each cause should be spelt out separately.

10. Report must contain heading and sub-headings.

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