Theory of Budgeting
Theory on budgeting is the process of costing varies with the object, activity or project for which a cost model is needed. There are various methods for developing a budget, but budgeting is similar to and, in many cases, dependent on the development of a costing model. Costing and cost estimating are not necessarily the same. However, for a budget to be accurate, generally the costing process is required. Therefore, Costing Theory is necessary in order to determine the sales price of the resources, labor and other expenses necessary for the particular project. For instance, a manufacturing company could use standard costing, that is cost for a time period or costing based on cost variability. The project manager can based his budget on the costing of the supplies, labor and other expenditures needed for the completion of the project. In this relation, a budgeting process is a costing of the overall expenditures of the project, product or process. It is otherwise known as specific resources necessary in order to meet a goal or objective in a particular period of time. In most cases, budget element is in monetary process, which represents the cost or value of every specific tasks and their supplies or resources needed in obtaining the goal or objective. Thus, costing and budgeting theory has two phases; first phase is the planning and the next phase is the controlling. In the planning phase, the costing theory as well as the budgeting theory is interconnected with each other. Before developing a costing model, the scope, goals, or objectives of the item, project or activity identify the detail steps, tasks or processes, along with the materials, resources or labor requirements. The detail resources are the focus of a costing model. During the control phase, the budgetary data becomes the standard against the actual performance and real monetary expenditures. In addition, during the costing stage, the stakeholders involved, must come up with agreement on a costing model. Then, costing may become a budget, standard or baseline for the production sales, project completion or commitment to a plan or project budget. In many cases, such as in manufacturing firms, the cost of selling a product, the costing model is specifically the budget. However, in the management of big construction projects, the project manager performs the costing process for each individual task or activity. The total budget of the project is also the sum of the costing for each work unit.
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Furthermore, budget is the setting out of the planned performance of a business normally in a table of numbers. These plans are typically deal with financial units. But they also consist of other measurable units such as units of output. In creating a budget makes an organization to plan ahead; and to check on its performance versus its monetary fund or budgeted figures. The difference between budgeted figures and actual figures is termed a variance. Additionally, variance is an important management tool because it enables businesses to manage their business or take informed decisions based on management information. The actual performance compares with budgeted performance, .for example, either favorable or unfavorable. A favorable variance is one where actual business performance proves to be better than what was budgeted for. Hence, a variance is a difference between what actually happens and what is budgeted to happen. Budgeting is an important management tool because it enables businesses to manage their business. In many cases, budgeting gives numerous advantages to the individuals or businesses. It provides the financial managers a great control on every financial decision whether the costs is too high, he or she has the chance to cut out waste of change supplier; if the sales costs is too low, he or she has also the chance to increase the advertising, promotion or sales effort of the workforce. On the other hand, if the production is too low, there is still a chance to remove labor efficiency. Second, budgeting enables the company to do advance planning and setting of goals to work towards a certain project. Third, it also provides a way to measure future performance of a project, especially, the budgeted figure for the desired performance. It will be showed if the favorable variance exceeds to the performance targets. And, an unfavorable variance may show poor performance. Fourth, a budget can set proper targets for everyone in order to achieve their goals. Most budgets are flexible that can be modified anytime if needed. In view thereof, budgets should be monitored from time to time in order to see if there are necessary changes to be done.
(http://www.thetimes100.co.uk/theory/theory–company–296.php)
References:
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(http://www.thetimes100.co.uk/theory/theory–company–296.php)
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