SLC | S21W4 | Costs For Entrepreneurs - Budgets.

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What is budgeting, and how does it relate to costing?

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To establish the relationship between budgeting and costing, we may have to first understand what budgeting and costing is

What is Budgeting?

Budgeting refers to the process of creating an elaborated plan for how to appropriate financial resources over a particular of time frame. It involves taking estimate of income and expenditures, and making decisions on how to appropriate resources for the achievement specific financial objectives.

What is Costing?

Costing refers to the process of ascertaining the cost of production of a product or provision of a service. It includes calculating the sum cost of production, which include direct and indirect costs, as well as allocating a price to the product or service.

Relationship between Budgeting and Costing

There is a close relationship between budgeting and costing as the two are involved in the management of financial resources. These are some ways in which budgeting and costing are related:

1. Costing assist in identifying areas for cost reduction: Costing can assist organizations discern areas that require costs reduction and this can influence budgeting decisions.

2. Budgeting constraints costing: Budgeting restraints like as limited financial resources, can affect costing decisions. For instance, an organization may require to make adjustment on its pricing strategy or cut costs in order to stay in the range of budget.

3. Costing informs budgeting: Accurate costing is crucial and necessary for the creation of a realistic budget. Having the knowledge of the cost of production of a product or provision a service, organizations can generate a budget that takes these costs into account.

4. Budgeting helps to allocate resources: Budgeting assists organizations to effectively appropriate resources, which can influence costing decisions. For instance, an organization may require to assign extra resources to a specific product or service in order to cut costs.

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Explain the importance of budgeting in determining costs.

Budgeting is indispensable and very important in determining costs because it assists organizations to:

1. Monitor and control costs: Budgeting involves carrying out of surveillance on and controlling costs to make certain that they are in line with the budget.
2. Prioritize costs: Budgeting has to do with prioritizing costs based on their significance and urgency.
3. Identify and categorize costs: Budgeting involves the identification and categorization of costs into various types, such as direct, fixed, indirect costs, and variable.
4. Allocate resources: Budgeting involves allocating resources to different activities and projects based on their priority and cost.
5. Estimate costs: Budgeting involves costs estimation based on industry benchmarks, historical data, as well as other factors.

Budgeting is also beneficial in determining costs in the following ways:

1. Better financial management
2. Enhanced resource allocation
3. Accurate estimation of cost
4. Improved decision-making
5. Cost reduction

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Prepare the budget, as explained, for the preparation of cakes. Consider a 4% adjustment.

Here is a budget for the preparation of cakes, considering a 4% adjustment:

My assumptions:

• The bakery produces 400 cakes per month.
• The cost of labor, ingredients, and overheads are based on historical data.
• The 4% adjustment is applicable to the total cost to constitute for increase in price, inflation, and other uncertainties.

Budget for Cake Preparation:

Ingredients:

• Flour: $120 x 400 cakes = $48,000
• Sugar: $80 x 400 cakes = $32,000
• Eggs: $30 x 400 cakes = $12,000
• Butter: $70 x 400 cakes = $28,000
• Other ingredients (like vanilla, salt): $20 x 400 cakes = $8,000
  Total ingredient cost: $128,000

Labor:

• Baker's salary: $3,500 x 4 weeks = $14,000
• Assistant's salary: $2,500 x 4 weeks = $10,000
• Benefits and taxes: $1,500 x 4 weeks = $6,000
  Total labor cost: $30,000

Overheads:

• Rent: $4,500 x 4 weeks = $18,000
• Utilities: $1,000 x 4 weeks = $4,000
• Equipment maintenance: $750 x 4 weeks = $3,000
• Marketing and advertising: $1,500 x 4 weeks = $6,000
  Total overhead cost: $31,000

Total Cost: $189,000

4% Adjustment: $189,000 x 4% = $7.56

Adjusted Total Cost: $189,000 + $7.56 = $196.566

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Prepare the budget as explained, for the hairdressing service. Consider a 3% adjustment.

Here is a budget for a hairdressing service, considering a 3% adjustment:

My assumptions:

• The hairdressing service makes provision of an average of 450 services per month.
• Historical data is the basis of the cost of supplies, labor, and overheads.
• The 3% adjustment is applicable to the sum cost to account for increase in price, inflation, as well as other uncertainties.
  Budget for Hairdressing Service

Supplies:

• Hair care products: $1,300 x 450 services = $585,000
• Hair color and chemicals: $750 x 450 services = $337,500
• Hair accessories: $400 x 450 services = $180,000
• Other supplies (like towels, capes): $1,000 x 450 services = $450,000
  Total supply cost: $1,552,500

Labor:

• Stylist's salary: $4,000 x 4 weeks = $16,000
• Assistant's salary: $3,000 x 4 weeks = $12,000
• Benefits and taxes: $2,000 x 4 weeks = $8,000
  Total labor cost: $36,000

Overheads:

• Rent: $5,500 x 4 weeks = $22,000
• Utilities: $1,300 x 4 weeks = $5,200
• *Equipment maintenance: $1,200 x 4 weeks = $4,800
• Marketing and advertising: $2,000 x 4 weeks = $8,000
  Total overhead cost: $40,000

Total Cost: $1,628,500

3% Adjustment: $1,628,500 x 3% = $48,855

Adjusted Total Cost: $1,628,500 + $48,855 = $1,677,355

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