Understanding Costs and Budgets in an Organization - Essay Example

Understanding Costs and Budgets in an Organization 0 Understanding Budgets within an Organization 1.1 Importance of agreeing to a budget and Operating Within it It is more effective to keep the business an organization’s finances on track effective the use of a budget plan. This is because, a budget usually gives the management the opportunity to review the performance of the business as well as to determine any factors that are affecting or might affect the business. Budgets are also very vital in managing an organization’s money more effectively as the management will be able to allocate the resources more appropriately, monitor business’s performance, meet the planned objectives and also plan well for the future activities of that business. For one to be more effective in management there is need to use budgets more frequently so as to be able to be proactive rather than only reacting to the problems just after they have occurred. Budgets therefore allow one to make continuous improvements which lie upon sound financial information so that managers can make more clearer and focused decisions about the business. Businesses that do not operate on budgets can result to a low performance level being recorded, making of bad decisions as well as potential problems with the cash flow. Many organizations will also use budgets as benchmarks for measuring performance, planning for the future and to determine its staff levels of progression as well as the levels of expansion of the company. 1.2 The process by which a budget is agreed in an organization A good budgeting process will engage those who will be responsible and for adhering to the budget so that they might implement the objectives of the organization’s while creating the budget. Therefore, a good budget process should follow the following process: 1) Write it down By putting this process into writing, a measurement tool is created against which the organization can monitor its progress and create a checklist with which the to ensure there is thoroughness in the process. 2) Deciding who should be involved and when A good budget process is one that involves both the executive director and the program director. However, the departmental staff members who are charged with the responsibility of adhering to the budgets should also be involved in the budgeting process for the budget to be agreed. It becomes more efficient when the staffs create budget drafts in time and take them to the departmental level for reviews and vetting before they are approved. 3) Establish an annualized timeline There is a tendency that many funders will require the budgets of the following year earlier than the time small and medium size organizations would like to present them. Therefore, it is necessary that one gets its budget approved by his boss earlier like two months before the fiscal year. 4) Listing Specific Tasks with Specific Responsibility Assignments Within the timeline provided, there is a need to list each particular task in each department specifically. There is also a need to research costs of various tasks and assign tasks to one individual leader of the task group. 5) Synchronize both the budget line items and the accounting line items If there is a mismatch between the two, extra work will be created for the administrative staff that will be required to translate between the two and also to determine inconsistencies between the two in order also to create a clear comparison between the actual and budget. 6) Develop worksheet and tools that promote the inclusion of all relevant budget components and facilitate the ‘’what if’’ scenarios. 1.3 The process of gathering information to be used in determination and revision of budgets One should search and gather information that revolves around income and expenses and are based upon program goals and assumptions. This information should then be used by management to construct the budget details by the program. For this work to be efficient and effective, the budget planning personnel needs to communicate regularly with other stakeholders so as to avoid the duplication of information and assumptions. 1.4 A method to monitor variance between actual and budgeted performance To be able to monitor the variance between the actual and the budgeted performance, one can always check the actual figures against the projected budget plans through the use of a budget tool such as MS Excel. Through this, one can check actual performance against the budget plan in order to monitor performance. And identify variances. When such kinds of records are kept and one uses them to compare with the budgets of the previous years, a base on which to measure the next year’s performance will be established. 2.0 Understanding costs within an organization 2.1 Explaining the fixed and variable costs in relation to the organization Fixed costs in an organization are those costs that do not vary with the level of sales in the organization. This kind of cost remains fixed whether the organization makes more sales or little sales. For instance, if the organization has an obligation to pay rent on the premises where its operations are based, the level of rent will always remain the same whether the organization make a single sale or it makes a thousand sales. On the other hand, variable costs are those costs that vary with the level of sales or production. These kinds of costs will decrease when the organization produces a few goods are makes little sales, and they will increase when the organization makes more sales or increases its level of production. For instance, if an organization uses 1000 units of direct material to produce 2000 units of a product, the number of units will increase when the organization produces 3000 units of the products instead. 2.2 Explaining the concept of breakeven in relation the organization The breakeven point in an organization is the level output or sales level at which the cost of production of the goods sold is equal to the level of sales of the same number of products. This is normally an important point for any business, even though the more desirable point is always for an organization to make profits. The breakeven point is calculated by dividing the fixed cost by the contribution margin of the units sold. 2.3 The purpose and nature of basic cost statements The basic cost statement is the process of breakdown of costs in order to realize a final cost of a product or a service which will then be analyzed within a period of time its nature and purpose, refer to its concern to be able to effectively analyze the costs and prepare proper financial reports which that will help the management in planning and controlling activities which can either take short or long time decisions. 2.4 The use of standard costing and its role as a control mechanism Standard costs are calculated by manager to allow comparison to be done with the actual costs so that management can determine the variance which will help in improving the production area. Its role in the control mechanism emerges when the standard cost is calculated and compared with the actual costs, hence comparison. The management then can find out areas of wastage and areas of deficit/. The correct allocation of resources will then be done through determination of the different values under excess allocations or deficit allocation. This helps in controlling the allocation of resources to ensure little or no resources go to waste and excess resources are allocated to areas that need them more and do not have adequate allocations. 2.5 Mechanisms in the organizations to maintain control of costs The bottom line to profitable and revenue growth of a company is usually the aim of every company. This is easily achieved through better mechanisms to control and maintain the organization’s costs some of these mechanisms include: 1) Renewal of all contracts annually Companies should realize and use a smart policy which is to have all its contracts not exceed a period of one year. This makes a room for annual bidding or a session to negotiate the prices with the current suppliers. These discussions mostly result in lower costs which are advantageous for companies. 2) Consulting with customers By discussing costs holistically up and down the whole supply chain of the products with your customers can help you with options from the customers in how to reduce the costs. 3) Consulting with vendors to own their inventories Companies should resort to just-in-time delivery so that there is no inventory in their warehouses. This will make suppliers to own the inventories until the time of sale. This reduces and controls costs since the inventory that hasn’t been used yet will not be purchased until the actual time when it needs to be used. This then avoid transferring of risks of keeping the inventory by the organization to the inventory vendors. 4) Match terms with turns Working capital can be reduced to zero if you match your payment terms with the inventory turns of each item. This incents the suppliers to only sell to you the best moving items in their warehouse in order to work together with you in improving your productivity. Read More