Sub: Finance Topic: Budget cost
Setting a budget is never easy as it involves predicting the future and therefore uncertainty. Theprocess is not about getting the budget absolutely right; it is about not getting it too wrong. Thisbudget process may be applied to most revenue budgets that deal with
income and costs
, but there isalso a requirement to produce a capital budget that covers the purchase, sale and replacement of fixed assets. There is normally an investment limit dictated by funding availability and depreciationcosts. The actual expenditures will be decided on the submission of business cases. Capital itemsusually involve sizeable cash outflows so their timing is an important element of the cash flow budget.In many organizations the budget process commences with the timetable, templates and guidancenotes being issued by the finance department. Those in the finance department may be the stewardsof the process, but they will often be too detached from the operations to be able to construct a validbudget themselves. Hence operational managers have to complete most of the templates. Headlinebudget values may be agreed for the whole business, and then parts of this will be allocated todivisions, departments and individual budget-holders. The budgets of central departments such asfinance, information technology and human resources can be drawn up in parallel to the operationalbudgets so that all departmental budgets can be completed within a short time frame.In setting budgets it can be helpful to break down cost areas into component building blocks.
, in a manufacturing environment the budget for cost of sales is wholly dependent upon salesvolumes and the mix of products. Therefore knowing the
budget cost (or standard cost)
per unit willspeed up the process. If,
, the manufactured product is easy chairs, a typical process willstart by setting standard quantities for the component parts such as wood, fabric and consumables.Using predicted prices the standard cost for each product can be calculated. To make the chair willrequire labor and machine time.
for each process can be identified, such ascarving the wood, assembling the frame and covering it with fabric. Knowing these times helps to