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Production Know How
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Labor costs in a budget

1. Labor costs consist of the wages, salaries and honoraria paid to individuals directly involved in implementing the project.

2. Labor costs are calculated by multiplying the personnel time needed in the project by the unit cost of the resource. The unit costs for personnel are usually in hours or days.


The basic elements of a budget

1. Expenditure, in any budget, is shown in three categories:

a) Labor

b) Materials

c) Services and,

in some budgets there will be: Income within each element of the budget the items will be:

1.Fixed costs: expenses that stay the same regardless of the amount of activity in the project

2.Variable costs: expenses that increase with the level of activity in the project


Using the budget

1.Once a budget has been developed and approved, it is important that the manager use the budget: it is a living document.

2. The budget document should not be placed in a drawer and left there for the duration of the project. It is continually reviewed and compared with the actual operations of the project.

3. Financial reports accumulate the income and expenditure for a project in a form that is useful to the project manager.

4. To assist the manager financial reports must show for each item in the budget the:

a) amount budgeted

b) actual amount spent or received to date

c) variance above or below the budget

5. This information allows the manager to identify where projects are working to plan and where there is significant deviation that needs some form of corrective action.

6. The financial reports should be prepared regularly and, most importantly, at times when the managers need the information to adjust the program.


The connection between budgeting and accounting

1. The purpose of budgeting is to create a financial plan for a project – a financial plan that is based on a sound operational plan directed at achieving well defined goals.

2. Management accounting records all financial transactions during the operation of the project.

3. Management accounting also prepares reports of these transactions and shows their variance from the budget.

4. The manager continually reviews the accounting reports and identifies where the actual operations are deviating from the budget.

5. This enables the manager to take corrective actions as required in time to affect the outcomes of the project.


The types of accounting

1. In any organization other than small ones, there will be a person, or section, that handles the accounts of the organization.

2. This person or section provides the organizational accounting.

3. The finance section records and reports on the organization’s financial performance.

4. At the unit or project level, the manager needs to accumulate and report on financial activities – this accounting is referred to as management accounting – that which the manager conducts within the section or project to assist with immediate management.


The role of accounting

1. The purpose of any accounting system is to record, classify and report financial transactions.

2. The purpose of any accounting system is to provide managers across the organization with information that facilitates:

a) Control of activities and expenditure

b) Refinement of operational plans

c) Accountability

d) Reporting on project outcomes, and

e) The writing of bids for new funds.


The benefits of an effective budget

1. When an effective budget has been created it is a powerful tool for the manager to use during the project implementation.

2. The budget’s creation has already been used to:

a) Plan all activities

b) Ensure all activities are necessary

c) Cost each activity

3. In addition, during the project’s implementation, the budget provides a basis for the manager to evaluate activities and staff performance.

4. The budget also operates to foster coordination between activities and cooperation between staff. The budget is also a tool that can be used to create awareness of business costs.

5. The budget provides a vehicle whereby the organization can satisfy its contractual requirements.


What is a budget

1. The budget is a translation of plans into “money terms”; that is, the budget expresses the resources needed to achieve each activity that will occur during the project.

2. To be effective, a budget must be goal-oriented and realistic – all activities must be directed towards and necessary for achieving the project goals.

3. The activities must be realistic and the allocation of resources to the activity must also be realistic.

4. The development of a budget requires managers to:

a) clearly define all activities

b) allocate appropriate resources to each activity consider how realistic the project plan is

c) The budget provides the link between the project plans and the operational control of the project.


The Financial cycle

1. Financial management starts with the 

clearly defined goals of the project.

2. These goals are used to develop a plan of action to achieve them – a plan that is realistic, able to be assessed and is the most efficient way of achieving the goals.

3. These plans are translated into a budget that assigns resources to each activity – the budget preparation will provide additional information about each activity which may cause the plan to be amended.

4. When this part of the cycle is completed, there will be a concise budget that allocates resources to each activity.

5. The aim is to create a budget that will be as close as possible to the actual project operation.

6. When the project commences, accounting is also commenced. Accounting records and reports on all financial transactions.

7. There are two types of accounting – the formal organizational accounting performed by the accounting section of the organization and the management accounting performed by the project manager.

8. Periodically, throughout the project, the manager transfers information from the accounting reports into the budget.

9. During this phase the manager continually compares the projections of the budget with the actual results of the accounting. This activity may lead to management intervention in the project to address areas of concern.

10. Finally, at the end of the project, the manager along with the accounting personnel will produce a series of reports of the financial outcomes of the project.

11. These reports will be incorporated into the overall report of the project and provide valuable information to aid in the development of future projects.


Planning and control

1. There are two crucial aspects to the management of any project – ‘planning’ and ‘control’.

2. These are essential functions for every successful manager – without them, projects are generally not successful, not completed on time, or cost more than they should.

3.The successful manager must always ensure that projects are based on excellent plans and followed by good control during implementation.

4.Planning’ is the setting of realistic goals and choosing effective ways to achieve these goals. Goals must be understandable, achievable and able to be assessed. If a goal is not clear, it cannot be assessed and, hence, it cannot be managed. If a goal is unrealistic, any plan will also be unrealistic and, therefore, unlikely to succeed. The successful manager must ensure that a project’s plan is clearly defined and realistic.

5.Control’ is the process by which the manager ensures that all actions are consistent with the plan – all actions are, therefore, directed at achieving the stated goals. ‘Control’ is the systematic effort of comparing performance to plans.

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