Introduction |
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For a business to strive, they need to work on a budget, or else they will spend a lot on irrelevant things that aren’t important, and so many people finds it challenging to set up a budget.
In today's post, I will not only be giving guidelines on how to prepare your budget; I will also be exploring the relationships between budget and cost calculations, including their importance.
I will be inviting @lovelystar, @bonaventure24 and @ochelebe.
Define a budget and explain its relationship with cost calculation. |
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- What is a Budget?
Budget is like a financial road map that provides an estimated amount on what you are expected to spend and earn at a particular period in time. It can greatly enhance the success of any financial undertaking.
- How is Budget Related to Cost Calculation?
Cost calculation is the building block for any budget because it helps you determine the cost of any goods or services such as overhead cost, raw materials and labor. Once the cost is known, you can now find it easy set goals, plan ahead and track expenses.
Example:
Cost calculation: Let’s say it cost #5000 to make a shirt ( material, thread, buttons etc).
Budget: you use the calculation from the cost to make an estimate of how much it will take to sew 5 shirts. (#5000 x 5 = #25000) then you allocate extra money in case of inflation, packaging, business growth or any other unexpected expenses.
Describe the importance of budgeting in determining costs |
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Budget is important because it make sure enough money is set aside to pay for all the things you need. Whether is fabrics for sewing, or ingredient for baking, you know exactly where your money is going.
Assuming you have a wedding budget of one million naira, you stick to it. That’s one importance of budget. It will keep you from spending unnecessarily. You won’t go and mistakenly spend 2 million naira, on things you don’t need, when you already have a prepared budget of one million.
- with the help of budget, you can set a good price for your product. It shows you how much it will cost you to do a particular product. Once that’s known, it’s easier to set a price that can cover your cost and also make profit. Example; if it cost #50 to make a leather belt, you can sell it at #70 to gain #20 profit on it and also cover your cost.
- In cases, where there are unexpected increase in price of materials, with a proper budget, you have nothing to worry about because it’s been covered already. In preparation of budget, you include extra money for contingencies, so you won’t be caught off guard.
- Budget promotes better use of resources. This way you can compare cost and prioritize what is more important to spend on and avoid wasting scarce resources. I.e, if the cost of doing a package for your product is too expensive, you can ignore it and look for a much affordable option that still look good.
Prepare a budget for cake production, incorporating a 4% adjustment. |
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After bidding for a contract in NDDC, it was finally awarded to me to supply 50 cakes for them. So, I had to prepare a budget. I will be giving detail guidelines on how to prepare a budget with a 4% adjustment with different steps.
- Step 1:
We will list out what it will cost in making one cake by breaking it down into ingredients, labor and other cost.
| Items | quantity per cake | cost per unit (#) | Total cost |
|---|---|---|---|
| Egg | 3 | 250 | 750 |
| Golden penny Flour | 1kg | 1380 | 1380 |
| Sugar | 0.5kg | 495 | 247.5 |
| Butter | 1kg | 438 | 438 |
| Packaging | 1 box per cake | 500 | 500 |
| Power supply | - | - | 1500.5 |
Total cost of everything it will take to do one cake is: 750+1380+247.5+438+500+1500.5= #4,816.
- Step 2
Ingredients, packaging cost and power supply for 50 cakes.
If one cake cost = #4,816.
Then
50 cakes will cost:
#4,816 x 50 = #240,800
- Step 3
Let’s assume Labor cost is #2500 per cake.
Then for 50 cakes:
#2500 x 50 cakes = #125,000
- Step 4:
Total Cost Before Adjustment
240,800 (ingredients, packaging cost, power supply) + 125,000 (labor) = #365,800.
- Step 5
Add the adjustment of the 4% for any unexpected increase in price of goods
4% of #365,800 = ₦14632.
Add this adjustment to the total cost before adjustment:
#365,800 + #14632 = #380,432.
BUDGET FOR 50 CAKES
| category | cost |
|---|---|
| Ingredients, packaging and power supply | 240,800 |
| Labor cost | 125000 |
| adjusted (4%) | 14632 |
| Total | #380,432 |
- Step 5: Set a Selling Price
Now that we know our production cost, let’s add a profit of 19,568 per cake.
Selling price will be:
#4816 (cost per cake) + #19,568 (profit) = #24,384
Selling 50 cakes at ₦24,384
50 x ₦24,384 = #1,219,200.
So, my profit in this cake contract that was awarded to me is:
#1,219,200 - #380,432 = #838,768.
Prepare a budget for hairdressing services, incorporating a 3% adjustment |
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As a hairdresser, you render services to your customers. Assuming you want to create budget for 20 clients, this is a little guide to follow that can assist you.
- Step 1:
Hairdressing business involves direct and indirect cost.
For the direct cost (one client)
Oil and Hair cream: #500
Relaxer: #750
Shampoo and Conditioner: #700
Sterilizing agent: #600
Total direct cost for one client = 500 + 750 + 700 + 600 = #2550
Therefore, for 20 persons:
#2550 x 20 = #51,000
- Step 2:
Labor cost
Let’s assume you increase your labor cost to #5000 this Christmas season, for each person’s hair you make.
For 20 persons, it will be;
#5000 x 20 = #100,000.
- Step 3:
Indirect cost includes rent, electricity, water, equipment. let’s assume, all this cost for #7000, then for 20 people, it will be:
#7000 x 20= #140,000
- Step 4:
Addition of all the cost before the adjustment.
Direct cost = #51,000
Labor cost = #100,000
Indirect cost = #140,000
Total = #291,000.
- Step 5:
Addition of Adjustment 3%
3% of #291,000 = #8,730
Add the adjustment to the total cost:
₦291,000 + ₦8,730 = ₦299,730
| category | cost |
|---|---|
| Direct cost | 51,000 |
| Labor cost | 100,000 |
| Indirect cost | 140,000 |
| adjusted (3%) | 8,730 |
| Total | #299,730 |
Therefore, my adjustment after adding 3% will be #299, 730.