Budget is basically one of the most comprehensive planning related to finance which basically outline income and expenses that are projected within a particular time period like monthly quarterly or annually plan.budget is helpful for individuals businesses so that they may allocate resources properly for achieving financial goals whatever they have so that they may make informed decisions according to budget they have.
There are some of the most important components of budget;
• Income.
• Non variable or fixed types of expenses.
• Variable expenses that may change.
• Savings.
• Debt repayment.
| Relationship with cost calculation |
|---|
Calculation of cost is crucial for making budget because it is helpful and important for determining;
• Total costs which include type of expenses that are direct or indirect but they are incurred for production of products for achiving target objectives.
• For the purpose of allocation of costs which are assigned to particular departments or projects.
• For purpose of identification of some of the particular areas in which there is a need to reduce expenses.
• For purpose of identification of those areas in which resources need to be optimised.
Collectively,when I talk about some of the benefits that we can obtain from budgeting and calculation of costs then these are below;
• Enhancement of managing finance.
• Enhancement of making decisions.
• Improving efficiency.
• Reducing cost.
• Proper allocation of resources.
here I am talking about that what is the importance of budgeting in cost determination;
• Optimal resources can be allocated by budgeting due to which expenses can be minimised.
• Expenses can be estimated in correct way by keeping historical data and trends of market in consideration and budgeting is playing its role in it.
• When there is a need to identify that were there is a need to reduce cost and where there is a need to optimise resources then budgeting technique play a role there.
• Budgeting is a technique which is providing baseline for evaluation of real performance and efficiency in comparison to expenses that are projected.
• For making decisions regarding investments, pricing which are based on particular strategies budgeting plays a crucial role
• For development of mitigation strategies and food identification of expensive risks budgeting is helpful in playing its role.
• Budgeting is a technique which is enabling analysis about profit by comparison of revenues to expenses.
By integration of budgeting in cost determining, organizations may optimize allocation of resources which may minimise expenses and improvement of profit.
Now I am sharing sample budget for cake production with a 4% adjustment;
| Assumptions |
|---|
- Production volumes are 1000 cakes/month
- Production days are 20 days/month
- Cake price is $20 for each
- Required profit margin is about 30%
| Initial Budget (100%) |
|---|
• Ingredients (50% of revenue)
| Flour | $1,500 |
|---|---|
| Sugar | $1,000 |
| Eggs | $800 |
| Butter | $1,200 |
| Other | $1,000 |
• Total costs are $5,500
• Labor (30% of revenue):
| Baker | $3,000 |
|---|---|
| Decorator | $2,000 |
| Helper | $1,500 |
Total expenses are $6,500
• Overheads (15% of revenue):
| Rent | $1,500 |
|---|---|
| Utilities | $800 |
| Equipment | $1,000 |
| Marketing | $1,000 |
Total expenses are $4,300
• Miscellaneous (5% of revenue)
| Packaging | $500 |
|---|---|
| Supplies | $500 |
• Total expenses are $1,000
Total initial budget is $17,300
By making 4% adjustment;
• Ingredients are if $5,500 x 1.04 = $5,720
• Labor is of $6,500 x 1.04 = $6,760
• Overheads are around $4,300 x 1.04 = $4,472
• Miscellaneous expenses are $1,000 x 1.04 = $1,040
Total adjusted budget is around $18,002
| Revenue projection |
|---|
- 1000 cakes/month x $20/cake are of $20,000
- Desired profit: $20,000 x 30% are of $6,000
- Adjusted profit: $20,000 - $18,002 are of $1,998 ( reduced because of 4% increase)
This sample budget is used for demonstration of impact of 4% adjustment at cake production costs.
Now again I am making a budget for hair salon services with a 3% adjustment;
| Assumptions |
|---|
| Average service cost | $50 |
|---|---|
| Daily services | 20 |
| Working days | 25 |
| Staff | 5 stylists, 2 assistants |
| Required profit margin | 25% |
| Initial Budget (100%) |
|---|
• Labor (55% of revenue)
| Stylists | $15,000 |
|---|---|
| Assistants | $6,000 |
Total costs are $21,000
• Supplies (20% of revenue)
| Haircare products | $4,000 |
|---|---|
| Color/chemicals | $3,000 |
| Equipment | $2,000 |
Total costs are $9,000
• Overheads (15% of revenue)
| Rent | $6,000 |
|---|---|
| Utilities | $2,000 |
| Marketing | $3,000 |
Total costs are around $11,000
• Miscellaneous (10% of revenue)
| Insurance | $2,000 |
|---|---|
| Software | $1,000 |
Total costs are $3,000
Total initial budget are around $44,000
| 3% Adjustment (Increase) |
|---|
| Labor | $21,000 x 1.03 = $21,630 |
|---|---|
| Supplies | $9,000 x 1.03 = $9,270 |
| Overheads | $11,000 x 1.03 = $11,330 |
| Miscellaneous | $3,000 x 1.03 = $3,090 |
Total adjusted budget is around $45,320
| Revenue projection |
|---|
| Daily services | 20 x $50 x 25 = $25,000 |
|---|---|
| Required profit | $25,000 x 25% = $6,250 |
| Adjusted profit | $25,000 - $45,320 = -$20,320 (loss due to 3% increase) |
For maintaining profit you need to consider;
• Enhanced service prices
• Minimal labor/supply costs
• Optimization operations
• Enhancement of marketing efforts