The traditional, and most commonly prepared, budget is referred to as an object classification budget because it is characterized by the expenditure classification that categorizes objects— such as the type of goods or services to be acquired. The primary virtue of an object classification budget is that it facilitates control. The managers who prepare the budget, and the legislators who pass it, establish rigid spending mandates and thereby direct, in detail, how every dollar should be spent. But this strength may also be a shortcoming:

  • By expediting control, an object classification budget discourages planning. It encourages top level decision makers to focus on specific line items rather than on overall entity objectives, strategies, and measurable performance targets. Thus, the officials of a school district may focus on the need for increased appropriations for salaries, fuel, supplies, and food while failing to consider how the additional outlays will affect the school’s primary educational mission.
  • It promotes bottom-up rather than top-down budgeting, with each unit presenting its fiscal requirements for approval in the absence of coordinated sets of goals and strategies.
  • It overwhelms top-level decision makers with details. As a consequence, the decision makers are induced to take budgetary shortcuts—such as increasing all expenditures by a fixed percentage.
  • By failing to relate specific inputs (factors used to provide goods and services) to outputs (units of service) or outcomes (accomplishments in terms of organizational objectives), it limits post budget evaluation to whether spending mandates were observed.

Owing to these deficiencies, many governments and not-for-profits have adopted performance budgets in place of, or as a supplement to, object classification budgets. Performance budgets focus on measurable units of efforts, services, and accomplishments. They are formulated so that dollar expenditures are directly associated with anticipated units of outputs or outcomes.

They enable managers to define goals, plan their resource needs, and measure the achievement of their various objectives.

Comprehensive performance budgeting systems require managers to specify objectives, consider alternative means of achieving them, establish workload indicators, and perform cost– benefit analyses.

To be sure, other sound managerial approaches can overcome the limitations of object classification budgeting. Performance budgets, however, institutionalize effective decision processes and help ensure that they are carried out.


  • Granof, Michael H., Saleha B. Khumawala, Thad D. Calabrese, and Daniel L. Smith. Government and not-for-profit accounting: Concepts and practices. John Wiley & Sons, 2016.
  • Otley, D. T. (1978). Budget use and managerial performance. Journal of accounting research, 122-149.

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