In this task I will analyse the reasons why costs need to be controlled to budget. Budget: An estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals. One of the most important administrative tools, a budget serves also as a plan of action for achieving quantified objectives, standard for measuring performance, and device for coping with foreseeable adverse situations. Variable costs: Variable costs include raw material, energy usage, labor, distribution costs, etc. Companies with high variable costs are significantly different from those with high fixed costs. This difference affects the financial structure of the company as well as its pricing and profits. The breakeven point in such companies (in comparison with high fixed cost companies) is typically at a much lower level of output, but their marginal profit (rate of contribution) is also much lower.
Fixed costs: A periodic cost that remains more or less unchanged irrespective of the output level or sales revenue, such as depreciation, insurance, interest, rent, salaries, and wages. While in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed costs are significantly different from those with high variable costs. This difference affects the financial structure of the organization as well as its pricing and profits. Reasons why it is good to monitor and control costs and budgets:
Easier future’s planning: By identifying progress from a preceding position we are better informed regarding the effects of our actions and have a clearer understanding of the effect of any future action we take. Knowing how much is being spent each month enables a manager to consider whether action needs to be taken to spend more or less in the future.
Easier manage the money: the business may have different types of expenses, if the business control expenditures during the time period of the budget help prevent overspending. The business should control its costs so that it saves money and by having the right amount of stock the business can then have the full benefits of selling those stocks and receiving cash which could be used for other areas of the business.
Meeting budget targets: is secondary to other performance measures. Such companies use a balanced set of performance measures to chart progress toward strategic goals, and use the same measures in their incentive programs. This reinforces the importance of key strategies and communicates what results will be rewarded.
It is a simple way to make financial information accessible to all people in the organisation who need to use it. Each member or staff member should know how much money is available for what part of your work.
Company can always improve: An important part of understanding costs is to looking at the way that costs changing when the level of activity of the business changes. If the business didn`t control her costs by spend more than this will make her business to loss.
If you don’t control the spending of your budget then how do you know what is received and spent. If the receipts and spending of the receipts are not controlled then you have uncontrolled spending and since money spends faster than it is earned in most instances one would find themselves without the resources needed for the budget, the project or the results desired in the budgeting process.
Conclusion: In this task I analysed the reasons why costs need to be controlled to budget.