Hi everyone, I'm glad to participate in the 4th week of this great learning task related to various costings and methods for entrepreneurs, even for people who are employed and working for else need to have this knowledge to get a better understanding of the costing and how to make the business profitable. So now let's get started.

What is budget, and how does it relate to cost calculation?

In simple terms, a budget is an estimated financial plan that outlines the expected incomes and expenses for a particular period of time, generally it's for a financial year or it can even be monthly, quarter and annually.

It simply works like a forecasting tool that helps a business to get anticipate their financial needs or goals. This also helps a business in the allocation of their resources as per the estimation of the expenses and incomes.
Generally a budget contains various cost for a businesses some common costs are like labor, material, overheads and other operating expenses.

The relationship between a budget and cost calculation is that budget works as a guideline for getting an estimation of the various costs and projected revenue of a business.

Cost calculation is an important aspect of every business as this helps the businesses to know how much operations costs are and then setting up proper prices to stay profitable without getting an idea of estimated cost it will not be easy set up an appropriate price.

Main points

• Estimation of total production costs - A budget helps the businesses understand how much it cost them to make the product including both direct and indirect costs.

• Forecasting - Calculation of total costs helps the businesses to get an idea of expenses and set a target price for their product to cover those expenses and generate incomes.

• Financial planning - With a proper planned budget a business can easily avoid situations of overspending and underspending.

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Importance of budget in determining costs

Budgeting is very essential when it comes to determine costs, because it provides you a very well structured way to estimate all the expenses properly, which is a vital component for your business decision making and as well as for financial management.

In simple terms, we can say that a budget works like a road map for managing finances of a business.

• Transparency - With the help you budget you can identify all your production costs including indirect costs.

• Cost effective - By proper budget you can get the key points where the cost is high, so you can use budget to even optimise your cost and reallocate resources in a more effective manner.

• Maximising profit - Budget makes sure that the business is in profit, by setting up the appropriate pricing.

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Create a budget for cake production with a 4% adjustment

First of all let's understand why we need to take some variation and keep a certain % for adjustment in our business.

Budget adjustment is essential to set account for the unexpected changes in the cost factors that impact the production or delivery of a service. With these adjustments you ensure that the business maintain it's profitability and operation efficency even after the fluctuations in the the market pricing for labor, raw material, overheads etc.

In order to create a budget for our cake business we need to follow this -

• List Direct Costs - Flour, sugar eggs etc
• Identify indirect costs - Electricity, labor etc
• Adjust cost - 4% for price variations

TOTAL Cost 9800INR, With adjustment 10192INR

• Conclusion - Our total cost for our cake production with adjusted price is 10192INRand to ensure that our business is profitable we need to set a price exceeding this amount.

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Budget for hair dressing service 3% adjustment

TOTAL Cost 9900INR, With adjustment 10197INR

• Conclusion - Our total cost for hair dressing is 10197INR, and to be in business even in the price fluctuations wr need to set our price higher than total adjusted amount.

I also invite my friends @ahlawat @senehasa @awesononso