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CHAPTER 12 MANAGEMENT ACCOUNTING TECHNIQUE (2) Estimating Project Budgets…
CHAPTER 12
MANAGEMENT ACCOUNTING TECHNIQUE
1) Budgeting
Type of budget
b) BOTTOM UP
Advantages
Greater buy in by low level managers
More likely to catch unusual expenses
Disadvantages
People to overstate their budget requirements
Management tends to cut the budget
Definition
Overhead and profits are added to develop the budget
Low level managers price out each work package
Project is broken down into work packages
c) NEGOTIATED
Definition
Most projects use some combination of top-down and bottom-up budgeting
Both are prepared and compared
Any differences are negotiated
a) TOP DOWN
Definition
Top managers estimate/decide on the overall budget for the project
These trickle down through the organization where the estimates are broken down into greater detail at each lower level
The process continues to the bottom level
Advantages
Overall project budgets can be set/controlled very accurately
A few elements may have significant error
Management has more control over budgets
Small tasks need not be identified individually
Disadvantages
More difficult to get buy in
Leads to low level competition for larger shares of budget
Def : A plan for the costs of project resources
2) Estimating Project Budgets
On most project
: Material + Labor + Equipment + Capital + Overhead + Profits = Bid
The more standardized the project and components, the lower the uncertainty
The more experienced the cost estimator, the lower uncertainty
3) Rules of Thumb
Some estimates are prepared by rules of thumb
Printing cost by number of pages
Lawn care cost by square feet of lawn
Construction cost by square feet
However, this is still easier than starting the estimate from scratch
These rules of thumb may be adjusted for special conditions