What is budget and what is its relationship with costs calculation

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.

---

PIXABAY

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.

Importance of budgeting in cost determination

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.

PIXABAY

By integration of budgeting in cost determining, organizations may optimize allocation of resources which may minimise expenses and improvement of profit.

Budget for cake production considering 4% adjustment

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.

Budget for hair salon services considering 3% adjustment

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

PIXABAY

• 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