Costs And Budgets

 COSTS

In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service. All expenses are costs, but not all costs (such as those incurred in acquisition of an income-generating asset) are expenses.

Classification:

• According to their function:

o Cost of production: which are generated during the process of transforming raw material into a final product as direct raw, direct labor, and manufacturing overhead costs.

o Administration’s costs

o Distribution’s or sales’ costs

• Identification with an activity, department or product.

o Direct cost: it identifies fully with an activity, department or product.

o Indirect cost: cannot be identified with a given activity.

• Time they were calculated

o Historical costs: are incurred in a given period.

o Default costs: they are set before the physical fact of the production, which can be estimated or standard.

• According to their behavior

o Variable costs: those who truck in direct relation to an activity or a given volume.

o Fixed costs: remain constant within a specified time period.

 BUDGETING

It is an estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals.

One of the most important administrative tools, a budget serves also as a (1) plan of action for achieving quantified objectives, (2) standard for measuring performance, and (3) device for coping with foreseeable adverse situations.

Budget types

 Sales budget – an estimate of future sales, often broken down into both units and currency. It is used to create company sales goals.

 Production budget - an estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material. Created by product oriented companies.

 Capital budget - used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing.

 Cash flow/cash budget – a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

 Marketing budget – an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

 Project budget – a prediction of the costs associated with a particular company project. These costs include labour, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish a project budget.

 Revenue budget – consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.

 Expenditure budget – includes spending data items.

EXAMPLES

1) Business start-up budget

The process of calculating the costs of starting a small business begins with a list of all necessary purchases including tangible assets (for example, equipment, inventory) and services (for example, remodeling, insurance), working capital, sources and collateral. The budget should contain a narrative explaining how you decided on the amount of this reserve and a description

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