Reflect on the assigned readings for the week.
Identify what you thought was the one most important concept(s), method(s), and/or specific item that you felt was worthy of your understanding from the Key Terms on page 298.
Discuss in detail what the term means, how it is used and other pertinent information about the selected term including a specific example, application or case study from your own experience. Be specific; not vague or general.
Provide a detailed discussion of why you thought this selection is important and how it relates overall to budgeting.
Respond to the post of at least two peers, using 100 words minimum each.
Your initial post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion.
Your initial post should be at least 450+ words and in APA format (including Times New Roman with font size 12 and double spaced). Post the actual body of your paper in the discussion thread then attach a Word version of the paper for APA review. Do not use lists or bullet points. This will result in substantial loss of points in the Substance section and the Requirements section.
Your initial posting should be completed by Thursday at 11:59 p.m. EST. All peer replies must be completed by Sunday at 11:59 p.m. EST.
Your posts must be substantive and demonstrate insight gained from the course material. A peer response such as “I agree with her,” or “I liked what he said about that” is not considered substantive and will not be counted for course credit. A blank post just to review other submissions will not be tolerated.
Response for Deepak
This week’s chapter, Cost Estimation, and Budgeting is based on cost management and different costs incurred in any organisation such as direct cost, indirect cost, recurring and nonrecurring cost, fix and variable cost, normal and expedited cost. Among all these costs, I have chosen variable costs for this week’s discussion forum.
Variable Cost is the expenses that are directly proportional to the usage of unlikely fixed costs (Pinto, 2019, p. 279). Fixed cost does not change with the usage, they remain the same irrespective of how much do you use such as car rental, house rental (Pinto, 2019, p. 279).
Unlike fixed cost, variable costs change as per usage and accelerate if the usage is increased and decreases if the usage is decreasing. Some of the examples are fuel required to run the equipment or machinery, electricity in the house. The example explained in Pinto (2019) for drilling equipment explains the variable cost better.
The value of the drilling equipment degrades due to depreciation and depends on usage. In such a case, the variable cost of running the drilling equipment is directly proportional to its usage (Pinto, 2019, p. 279).
I thought it is very important to learn about the variable costs because before starting any project, precise cost estimation must be done. If there flaws in cost estimation, the project may run out of budget by the time it is complete but ready to run.
Nowadays, a lot of people are diversifying as a source of income as they do not rely on a single source of income. As a result, they are starting their own businesses as an entrepreneur. Though they might have good ideas and innovations or patents to start the business, cost estimation is vital for them.
Because of inexperience, they might think that the initial investment the only cost required for the budget, once the business starts, it runs with minimal cost. But in actual, running cost can be higher in some cases and is a major portion of expenses in the balance sheet.
Fixed costs, which are for equipment, hiring people, space or rental is a one-time cost and can be recovered in whatever the payback period is. Once the initial investment is recovered, the only costs incurred to the business are variable costs. Therefore, it is important to learn about variable costs as they can impact the success of the project.
Just like in business, in any project, to understand the variable cost is very important before starting the project to plan the budget accordingly. Budget planning should consider the initial investment cost, fixed cost and running variable cost.
Funds should be allocated to each phase of the project. Though contingency or management funds are available in case an emergency occurs in the project, these funds should not be taken into consideration while planning the project. I think the variable cost is an important concept in overall budgeting of the project.
Pinto, J. (2019). Project Management: Achieving Competitive Advantage (5th ed). Boston: Pearson
Response for Praveen Kumar
What are budgets? Budgets are plans which define goals, schedules, and resource assignments, that firms put together in order to achieve a certain goal. In order for budgets to be meaningful and relevant, project managers place a heavy toll on project estimation branding it as a critical process.
It allows managers derive sound decisions in scheduling work, determining project scope, duration, and value, as well as cash flows needed initially and along the life of the project. Budgets, as plans, are like blue-prints that describe a desired outcome. Project estimation is indeed a yardstick for project cost-control.
If the yardstick is faulty, you start on the “wrong foot” (Kharbanda & Pinto, 1996). Due to limitations on resources, project managers make use of budgets to avoid over-spending on certain items or activities. Pinto (2019) listed three (3) approaches to project budgeting namely, top-down budgeting, bottom-up budgeting, and Activity-Based Costing (ABC).
Activity-Based Costing is a method in project budgeting that identifies activities along the supply chain then assigns cost of each activity, and to the entire project, based on the project’s resource requirements. Expenses by departments are used as resource drivers. Each activity is noted and assigned cost.
Cost drivers are identified with the activities. Along the supply chain, resources are used, in the form of project manpower (labour), and direct materials. The next step is to compute a cost rate per cost driver unit. In case of labour, the cost is for every hour ($cost/hour).
Cost to project activities is assigned by multiplying the cost driver rate times the volume of cost driver units for the entire project. For labour, a skilled worker, whose rate is $19/hour, working for three weeks (40 hours per week), will cost the project $2,280 in labor hours.
Generally, ABC is expensive to implement. Furthermore, there is a considerable level of difficulty on assigning costs because fixed and variable cost components of activities are usually combined.
This makes incremental analysis harder compared to traditional budgeting systems. Lastly, costs do not usually behave constantly. These are the challenges for ABC. The writer, on the other hand, contends that the benefits of ABC far outweigh its drawbacks.
Cagwin and Bouwman (2002) mentioned that there is a positive association between using activity-based costing models in the conduct of business and improvement in terms of ROI (return on investment). In other words, firms subject to the research have showed increased in financial performance through using ABC as a model for budgeting.
Activity-based costing Assigning costs to activities allow firms to reduce inventory carrying costs. Budgets determine the ceiling which is used purchasing departments as basis.
In ABC, project managers deal with activities, not only with products. Cost monitoring and evaluation are better because activities with high-cost drivers are evident.
Product costing is more accurate and reliable because the cause and effect of activity-costing is identified. As previously mentioned, cost control is better achieved because the relevant factors are considered for each activity along the supply chain.
Cagwin, D. & Bouwman, M.J. (2002). The Association Between Activity-Based Costing and Improvement In Financial Performance. Management Accounting Research. 13(1), pp. 1-39. https://doi.org/10.1006/mare.2001.0175
Pinto, J.K. & Kharbanda, O. (1996). How to Fail in Project Management (without really trying). Business Horizons. 39(4), pp. 45-53. 10.1016/S0007-6813(96)90051-8.
Pinto, J.K. (2019). Project Management: Achieving Competitive Advantage (5th ed). Boston: Pearson.