The Laboratory Budget  Variable Cost- costs that change with the increase or

decrease in the amount of goods or services produced

Budgeting or sold
 The process of planning, forecasting, controlling and monitoring
the financial resources of the organization.
Operational Budgeting
 Process of planning for the laboratory as an ongoing business
concern; accounting for everyday needs and expenditure
Capital Budget – covers the acquisition and completion of specific
equipment and building projects that require major financial
commitments
Example:
 Purchase of a new microscope to help with the company
operations
 Investing on a new plot of land to set up a new laboratory

A. Types of Operational Budget 3. Zero Based Budgeting

1. Forecast/ Projection Method
 all budgeting type requires the company’s needs to be
assessed. As such, they all depend on the tools and techniques
used in this method.
 Under this, the budgets are prepared based on:
i. A forecast of what is expected to occur during the next
defined period
ii. Projections of the increases and decreases based on
anticipated changes (inflation) or historical data (nature
of business) are calculated.
2. Flexible Budgeting
 a budgeting process that attempts to set expenditures based
on a variable workload volume
 to implement flexible budgets, one must identify fixed costs
and variable costs.
 Fixed cost – costs that do not change when there is
an increases or decrease in the amount of goods or
services produced or sold.
 A method that analyses needs based on prioritizing of goals
and objectives and not on past allocations
 It assumes that an item is not a necessity, and provides it zero
financial budget; then the line item is justified and provided a
budget based on prioritized goals and objectives until the end
of the budgeting decision.
B. Operational Budget Preparation
- Four issues must be addressed when preparing an operational
budget
1. Time Frame
 How long a budget is good for?
 A standard calendar is the normal Jan 1st – Dec 31st
2. Forecasting Stage
 What are the factors to be considered?
3. Scheduling Stage
 When should this project start?
  A budget will go through multiple revisions of the draft
before it is finalized.
 If a budget is roughly determined, the project’s start
is estimated to give the company a head start in
preparation of a budget
4. Synthesis of Information
 What do all these data mean in the context of budget
preparation?
 Data is combined, and the variance is noted to help
prepare a budget
The Capital Budget
 In general: the monetary needs of an institution
Ex. We must raise the needed capital to afford this project
 In accounting: Capital items are purchases or projects that meet
specific guidelines of item, price and purposes
1. Time criteria: 1 year, if the item can provide service for
more than 1 year, it meets this criteria, If less it is usually
expensed in the year (an expense item)
2. Price Criteria: High values can make items marked as a
capital item. Less it can be marked as an expense item.
3. Purpose Criteria: the purpose determines if the item will be
marked as an expense item or a capital item (e.g. furniture,
building projects, items that are not easily consumes fall
under capital)
Parts of a capital Budget
 Capital budgets are divided into two parts according to the
amount of the expenditure
 A set limit is defined on this budget then:
a. Projects costing less than this set limit require minimal
paperwork;
b. Project costing more than this limit require extensive in-depth
analysis
 Narrative/ qualitative tools are required for more in-depth
analyses in capital expenditures
A. Certificate of Need (CON)
 a document issued by a government regulatory body to authorize
a capital project
 This is issued and required by items that exceed a set limit. In the
united states, most states have set this limit at $150, 000
following federal guidelines
 This program was established in an attempt to control spiralling
medical costs and to avoid duplication of services and the
overbuilding of hospital beds.
B. Instrument/ Project Capital Proposal
I. Narrative tools
 Includes a written justification of the project, a prioritization
of the competing proposals, and the comparison opportunity
costs.
a. Justification
 The manager must explain why the project is needed;
how it can benefit and why it should be considered over
other projects.
 Proposal can be justified by being grouped into one of the
four categories
1. Necessary to maintain present service levels
2. Will provide significant savings over current methods
3. Will enhance or improve current programs
4. Will offer new procedures or services
b. Prioritization
 Indicates the priority of the proposal- as an addition to
the justification portion, also explain why the priority is
accordingly set
c. Opportunity cost
 When comparing two proposals, one will have to
compare the advantages/disadvantages of a specific
proposal over the other
 What isn’t taken is considered an opportunity cost- the
value of what is given up to pursue another project.
II. Quantitative Tools
 Quantitative tools evaluate investment opportunities by
utilizing data in profit-and-loss projections and using them
alongside models that take various economic factors
 a. Payback period – in simple terms, this determines how long the c. Time value of money- the future value of a dollar compared
investment will take to recover the cash outlays today
Formula:

d. Net present value – this is used to calculate the risk of

investment by assessing the value worth of future earnings at
today’s rates.
Example: e. Internal Rate of Return - the ratio of cash flow and cost-of-
capital factors to the amount of investment required
f. Required Rate of Return – a bottom-line level of income
required by a company before any project is considered
C. Financing a project
 After a financial proposal has been evaluated and decision
has been made to proceed, there are several alternatives in
b. Average rate of Return (ARR) – it is a straightforward financing projects:
calculation of the attractiveness of the average yield that will be i. Outright purchase - buying the item
earned over the life of an investment ii. Leasing- renting the item for a recurring fee
Formula: a. Operating lease: lease that can be cancelled at
any time
b. Capital lease: lease that can be cancelled easily
or includes a provision to purchase the item
 Depreciation – the monetary value by which assets diminish
with time and usage
Example: a. Salvage value – the value of an item at the time of resale,
trade-in or disposal
b. Straight-Line Depreciation – method based on the time
element of depreciation
c. Unit of output – a method of determining depreciation

allowance based on unit output. Price per unit is obtained

and used as a measure to get data how many times a product
 can output its task, and how much the item would cost by the
times of resale.
d. Accelerated depreciation –methods allowed by regulatory
agencies to encourage investments
 Capital Budget Proposal
 This is the culmination of the preparation done in the
capital budget process
 The format varies from company to company, but this is
the proposal you give after collecting all data, calculating
the costs, advantages and disadvantages and justification
provided as to why the proposal should be considered