The document outlines the objectives and key principles of project cost budgeting and control, including the importance and features of budgeting as a financial plan. It details the budgeting process, stages involved, as well as various budgeting approaches like incremental, zero-base, and rolling budgeting. Additionally, it discusses the purpose, functions, limitations, and the process of budgetary control to ensure effective financial management in organizations.

1. Project Cost Budgeting and
Control
KIGOZI MOSES RICKY
0703079486
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2. OBJECTIVES OF THE SESSION
By the end of the session, participants
should be able to ;
•Define a budget
•Describe the importance of budget
•Discuss the principles of an effective
budgeting system in projects.
•Carry out budgetary control
•Budgeting approaches
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3. Meaning of Budgeting and a
Budget
• Budgeting is the process
process of preparing a
a
detailed
detailed statement of financial results
that are expected
expected for a given time
time
period in the future
period in the future.
• A budget is a financial plan for implementing
the various decisions that management has
already made.
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4. Features of a budget
Futuristic.
Expressed in terms of money.
Estimates of expected income and
expenditure.
Time bound.
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5. PURPOSE AND FUNCTIONS OF
BUDGETING
1.Harmony between short run and long run
objectives
• A budget establishes harmony between the
short run and long run objectives of an
organization. It helps to clarify the
assumptions underlying the future goals.
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6. 2. A budget is a planning tool.
• It leads to the refinement of the plans.
The budgeting process ensures that the
manager plans for future operations.
• Budgeting encourages managers to anticipate
future changes and prepare to respond to
them.
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7. 3.Coordination
• Budgeting facilitates coordination among
the different functions of the organization.
• It ensures that the activities of the various
departments of an institution are
harmonized with each other and focused
towards the overall goal.
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8. Budgeting purposes- continued
4. Motivation.
• The budget can be a useful device for
motivating managers to perform in line with
the organizational objectives.
It provides standards which managers may
be motivated to strive to achieve.
• If managers have participated in the budget
preparation process it provides a challenge
for them to achieve.
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9. Budgeting purposes continued
5. Performance evaluation.
The budget indicates the performance
expected of employees. It may therefore be used
to serve as an index for measuring employee
performance.
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10. Budgeting purposes - Contd
6.Control
• A budget assists managers in managing and
controlling the activities for which they are
responsible.
• Budgets facilitate expenditure control.
• The budget helps managers to ensure that
funds are spent according to the approved
notes.
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11. Budgeting purposes - Contd
7.Efficiency
Budgets facilitate efficient allocation and
utilization of resources.
8.Resource mobilization.
Budgets can be useful devices for sourcing
funding. E.g. Funding the unfunded priorities.
9. Accountability.
It can be a tool for accountability. E.g. The
Parliament Accounts Committee
interrogations.
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12. Principles of an effective budgeting
system in Projects.
• Top management support.
• Clear realistic goals.
• Assignment of authority and responsibility.
• Creation of responsibility centers.
• Adaptation of the accounting system
( responsibility accounting).
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13. Principles of an effective budgeting
system in Projects.
• Full participation.
• Effective communication
• Budget education.
• Flexible ( to incorporate emerging issues
that are pertinent).
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14. Limitations of budgeting
Budgets have some limitations which tempt some
organizational members to resist them.
i. Some budgets are not participatory. When
people are not involved in the budgeting process,
they lack commitment in implementing the
budget.
ii. Budgets require specialized skills which may be
lacking in some organizations.
iii.The budgeting process consumes a lot of time
and resources. Budgeting
does not waste time!!
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15. Limitations; continued
iv) Misuse of performance reports. When reports
are used to apportion blame, there is a danger that
the staff will be demotivated.
v) Some budgets tend to be un flexible. Therefore,
they do not help the organization to respond to un
foreseen changes.
vi) Bias in setting of standards. When managers set
their own standards, they may bias information to
gain personal advantage. e.g. setting very low
standards which they can easily achieve.
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16. The budgeting process- stages
The process follows a number of stages:
1. Communicating details of the budgeting policy.
[Call circular]
• Top management should communicate to their
staff responsible for preparing budgets the policy
effects of the long-term plan. e.g. planned changes
in sales, expansion in production, increases in
allowances, price increases, etc.
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17. Budgeting Process- Ctd.
2. Identifying factors affecting performance.
• Top management should determine the
factor that restricts performance, prior to
preparation of the budgets. e.g. sales
demand or production capacity.
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18. Budgeting Process-Ctd.
3.Preparation of the revenue budget
[Identifying sources of funding].
• The sales/revenue budget is the most
important plan in the annual budgeting
process because often the volume of sales or
amount of revenue determine the level of the
company’s operation.
• Sales demand may be estimated based on
opinions of sales staff or market research.
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19. Budgeting Process-Ctd.
4.Initial Budget preparation (preparation of
departmental budgets).
• The preparation of the budget should be “bottom-
up” process.
• Budgets should originate at the lowest levels of
management and be refined and coordinated to
higher levels. i.e. managers responsible for budget
performance should prepare the budget for those
areas for which they are responsible.
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20. Budgeting Process; Continued.
• Quantities for particular budget items may be
estimated based on past data and
incorporating any anticipated changes in
activities.
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21. Budgeting Process- Ctd.
5. Budget negotiation.
• The manager at the lower level should submit
his/her budget to the superior for approval.
• The superior should incorporate the budget
with other budgets for which he/she is
responsible and submit this budget for
approval to his/her own boss.
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22. Budgeting Process- Ctd.
6.Coordination.
• At this stage, budgets from different sections
or departments are examined in relation to
each other to remove any inconsistencies or
conflicts.
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23. Budgeting Process- Ctd.
7. Final acceptance.
• When all departmental budgets have been
harmonized they are summarized into master
budgets consisting of budgeted:
-profit or loss account
-balance sheet.
-cash flow statements.
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24. Budgeting Process- Ctd.
8.Budget implementation and review.
• Periodically actual results should be compared
with budgeted results to enable management
to identify deviations and investigate causes
for deviations and where possible take
corrective action.
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25. The process of budgetary Control
1. It involves monitoring the budget.
Compare the actual performance with
targets and obtain variance. This process
is usually carried out by the accountant
who produces performance reports. The
reports are sent to the various
departments and units.
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26. The Process of budget budgetary Control
2. Analyze the discrepancies and
their significance.
The various departments have the
responsibility of studying
performance reports and providing
possible explanations for the
significant variations for the budget.
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27. The process of budget budgetary
Control
3. Investigate the causes of
discrepancies.
The responsible manager should
investigate the reasons for
variances.
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28. The process of budget budgetary
Control
a) What are the likely causes of variance
in revenue?
i. Over estimation
ii. Change in demand
iii. Fall in prices.
iv. Break-down in production
v. Poor morale
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29. The process of budget budgetary Control
b. Costs
–Increase in prices.
–Under estimation of Quantity.
–Increase of operations.
–Inefficiency, waste.
–Failure by purchasing department to seek
most advantageous sources of supply
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30. The process of budget budgetary
Control
4. Taking corrective action.
• Some variances are beyond the control of the
management. These are unforeseen and un
avoidable variances. e.g. A sudden change in
government policy leading to price rise,
sudden fall in demand, sudden break down of
plant.
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31. The process of budget budgetary
Control
• However management can still take
corrective action upon some controllable
costs:
–by reducing expenditure (e.g reduce use of
telephone, electricity)
–Use of alternative means of power,
materials.
It is important to avoid apportioning
blame.
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32. The process of budget budgetary
Control
–Cutting out activities like
advertising, staff parties, bonuses,
social responsibility activities
–Adjust the budget to reflect the
realities, known as flexing
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33. BUDGETING APPROACHES
• These include:
• Incremental budgeting
• Zero base Budgeting
• Rolling or continuous budgeting
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34. Incremental Budgeting
• This is the traditional approach to budgeting and involves
basing next years budget on the current year’s results plus an
extra amount of estimated growth or inflation for the next
year.
• Incremental budgeting is concerned mainly with the
increments in costs and revenues that will occur in the
coming year.
• It is commonly used on routine income and expenditure
especially where there has been no significant change in size
of operations or procedures in an organisation.
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35. Zero base budgeting
• Zero base budgeting is an approach to budgeting for
the activities of an enterprise as if each activity were
being performed for the first time, i.e from a zero
base.
• A number of alternative levels of provision for each
activity are identified, costed and evaluated in terms
of the benefits to be obtained from them.
• Every item of expenditure has to be justified in its
entirety in order to be included in next years budget
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36. Rolling or continuous budgeting
• An approach where the budget is continuously updated by
adding another accounting period when the earlier
accounting period has expired.
• Its is an attempt to prepare targets and plans which are more
realistic and certain.
• There would be detailed budgets every one, two, three or
four months (three to six each year) and less detailed one for
the remaining period. Each of these budgets would plan for
the next twelve months so that the current budget is
extended by an extra period as the current period ends:
hence the name rolling budgets.
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37. The End!!
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