Cost Budgeting: A tool to make your business better
Hey there! TallyDekho is here to educate its readers about the concept of cost budgeting and how cost planning and control can change the complete business profile. In today’s article, we’ll understand various aspects of cost budgeting and its implementation in an organization.
In today’s business world, from the operational level to the top management of the concern, every unit functions with funds. But, mere procurement of funds is not enough, its proper allocation is equally important. Here, the business needs a well-prepared cost budget.
What is Cost Budget?
Let us understand the meaning of the cost budget in brief. When an organization prepares a financial plan wherein all the expenses related to projects or development of a product are defined, it is known as the cost budget. Every factor of production possesses its own associated cost that is mentioned in the respective cost budget in the planning phase.
A cost budget helps the business in analyzing the overall estimated costs and expenditures to be incurred in the next specified period. It contains all the expense details related to the business operations, project or product expansion. In other words, it figures out the quantity of money to be spent in business during the period of time.
Types of Costs defined in a Cost Budget
Well, the type of cost budget to be prepared varies with the requirement and objective of the business concern. However, in a full-fledged cost budget, various cost components are defined. Let’s see the most popular costs that a cost budget generally contains:
- Fixed and Variable Costs
- Direct and Indirect Costs
- Product and Period Costs
- Controllable and Uncontrollable Costs
- Incremental and Opportunity Costs
- Implicit and Explicit Costs
Process of Cost Budgeting
Well, putting a glance towards how a cost budget is processed, it basically follows a procedure wherein a complete cost structure is prepared and executed as per the planned budget. Below are the steps of the cost budgeting process in brief:
Planning Resource Allocation & Procurement
The very first step in the process of cost budgeting is to plan the complete costs that have to be incurred in the specified period of time. After planning, next the procurement planning of the resources has to be done.
Cost Estimation
This is the next step in this process. The financial plan is segregated according to the various types of costs and the overall cost estimation is done taking into consideration all the aspects of operations and other costs.
Preparing and Executing the Budget
After cost estimation, the final budget is prepared wherein all the cost components are mentioned and in the final stage the budget is executed.
Cost Control
The cost budgeting process is not complete here. An active cost control system is also required wherein the actual costs are compared to the estimated costs and then corrective measures are taken to fix the deviations. Therefore, regular follow-up is needed.
The Utility of Cost Budgeting in Business
The utility of a cost budget is pretty clear now and we can conclude that if a business actually wants to go high and bring stability, preparing a cost budget is quite important. It can guide the budget manager in estimating the costs to be incurred and this will fix the things accordingly. Let us see its utility in the business field:
Perfect allocation of funds
An ideal cost budget gives the budget manager a complete insight into the various costs to be incurred. Consequently, it results in the perfect allocation of resources.
Acts as the backbone for a project
A project is entirely based on the cost budget as the project can go well only if the funds are properly allocated. Therefore, a cost budget here acts as the backbone for any project.
Makes things clearer for budget manager
There is not a single cost that is incurred in the business. In fact, there are a certain number of costs and a cost budget helps the budget manager in making cost components clearer and sorted.
Resolves the problem of undercapitalization and overcapitalization
The problem of undercapitalization and overcapitalization is very common in businesses. Therefore, preparing a cost budget can help the business concerns to get rid of such a problem.
Prevents the concern to become extravagant
Sometimes, the business gets extravagant due to no availability of cost budget. Hence, preparing a cost budget can help the business to become cost-effective.
Facilitates easy comparison of estimated costs and actual costs
If there will be no cost budget, then no base will be available for evaluating the cost-effectiveness of the concern. Thus, a cost budget provides a base to the budget manager for comparing actual costs with the estimated ones.
In this way, cost budgeting is helpful for every type of business concern, whether it’s a small scale or large scale firm. Therefore, a cost budget can be referred to as the foundation of a strong business model. In short, a cost budget is a very crucial tool for any category of business. Stay connected for more interesting articles. Feel free to share your feedback.
