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What is budgeting and how does it relate to costing?

Every one of us has a financial plan and not only businesses. Some people, see budgeting as a plan of action that is set to accomplish whereas to businesses, scholars, and myself, budgeting is simply the process of creating a financial plan for a specific period, outlining expected expenses, savings, and income.

Also, budgeting refers to the tools that are used by businesses to allocate resources effectively and achieve the financial goals of the business. Businesses value budgeting so much because it helps in planning the future needs of a business, ensuring financial stability, and controlling of expenses of a business without budgeting a business will have no direction in spending its resources.

On the other hand, costing which we have learned about before now, is simply the process of determining the actual cost of production, project, or service. Costing involves businesses analyzing all direct cost and indirect costs of production to know how much (total sum) is spent on delivering or producing goods. Note; _{materials, Labor, and overheads are classified as direct and indirect costs which we have learned before now.}

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How Budgeting Relates to Costing

Here I will be looking at the four ways budgeting relates to costing which these ways are;

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Foundation for Budgeting:

What is needed to provide a realistic budget is the detailed information that is provided by costing without cost data information it will be difficult for a business to prepare its budget which makes budgeting relate to costing.

Decision-making:

Correct costing information supports informed budgeting decisions by identifying the areas where costs can be optimized and adjusted.

Comparison and Control:

In a business establishment, costing helps monitor whether what the business is targeting is being met by comparing its actual costs against the budget, whereas budgeting sets financial targets.

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Profitability Assessment:

Costing ensures that the budget of a business aligns with the business profitability goals via analyzing margins and cost structures.

In conclusion to the best of my understanding, costing and budgeting work hand in hand to manage the finances of a business more effectively, by ensuring that all resources of a business are used efficiently while achieving the financial objectives of the business.

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Explain the importance of budgeting in determining costs.

Freepik

When it comes to determining costs budgeting is important in determining costs because budgeting provides a structural framework for monitoring, controlling, and planning expenses. Let's take a look at how budgeting is important in determining costs as we have shared below 👇.

• Establishing Financial Limits: Budgeting ensures that all planner activities or operations stay within available financial resources. Also, budgeting helps to set a financial boundary for departments, personal expenses, and projects.

• Predicting Costs: Budgeting enables individuals or businesses to anticipate financial needs and overspending which can lead to bankruptcy. Also, budgeting needs forecasting future expenses, which helps in identifying and estimating the cost that is associated with specific tasks services, or products.

• Resources Allocation: With the help of budgeting, resources are allocated to different cost activities or centers based on priority and expected outcomes. Also, it ensures that goals or essential operations are well-funded adequately while reducing waste.

• Cost Control: budget stands as the benchmark for comparing planned costs against actual costs. Also, budgeting helps to address and analyze the variances between actual cost and budget to help avoid unnecessary spending.

• Strategic for Decision Making: Budgeting helps to provide a clear picture of the expected costs of a business, enabling sound financial decisions. For instance, businesses can decide whether to invest in new projects, cut expenses based on budgeted costs, or increase production.

Budgeting is far beyond planning for future spending as it goes beyond that in helping businesses manage resources and serves as a reminder of how resources are to be used.

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

freepik

For us to prepare a budget for the preparation of cakes we will have to include the components that are the key cost and apply an adjustment of 4% for inflation or any contingencies below we can see how it can be done.

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Cake Preparation Budget

Ingredients Costs:

Ingredients	Amount
Sugar	300
Flour	400
Eggs	200
Butter	600
Flavorings & Decorations	500
Total Ingredients	2000

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Labor Costs:

• Baking, mixing and decoration time (5 hours @ ₦200/hour) = ₦1000

• Total Cost for Labor = ₦100.

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Overhead Costs:

Items	Amount
Gas/Electricity	3000
Equipment maintenance	2000
Miscellaneous (packaging)	1000
Total overhead	60

The subtotal cost for overhead is ₦6000

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Total Cost (Before Adjustment)

• Ingredients + Labor + Overheads = ₦2000 + ₦1000 + ₦6000 = ₦9000

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For 4% Adjustment

• Adjustment = ₦9000 × 0.04 = ₦360
• Adjusted Total Cost = ₦9000 + ₦360 = ₦9360

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Summary of Final Budget

Ingredients	2000
Labor	1000
Overheads	6000
Adjustment	360
Total Budget	9360

From the above, we can see that the budget ensures that all costs, including a 4% buffer, are accounted for when preparing cakes. The quantities or hourly rates can be adjusted.

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

Here I have prepared a budget for hairdressing service as requested including a 3% adjustment for inflation or contingencies:

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Hairdressing Service Budget:

Materials Costs

Shampoo, conditioner, and styling products	5000
Equipment maintenance (scissors, clipper, combs, etc)	3000
Disposable items (gloves, caps towels)	2000
Total Materials	10,000

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Labor Costs

• Hairdressers time (4 hours @ ₦500/hour): ₦2000
• Total Labor Costs ₦200

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Overhead Costs

• Booking and administrative costs: ₦400
• Rent/utilities for salon (shared per client): ₦1,00
• Total overhead ₦1400

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Total Cost (Before Adjustment)

• Materials + Labor + Overheads = ₦10000 + ₦2000 + ₦1400 = ₦13400

For 3% Adjustment

• Adjustment= ₦12000 × 0.03 = ₦402
• Adjusted Total Cost ₦13400 + ₦402 = ₦13802

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Summary of Final Budget

Materials	10000
Labor	2000
Overheads	1400
Adjustment	402
Total Budget	13802

From the above, we can see that the budget includes l anticipated costs for a single hairdressing service with a 3% for unexpected expenses which can be modified according to quantity or hours.

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