1

Project Budgeting

2

Project Budgeting Control or Feedback Involves Monitoring/Assessing Output to

Determine Necessity of Making Changes in Input or Transformation of Input.

INPUT TRANSFORMATION OUTPUT

Budgeting is an Important Control Technique. Does the Output or Result Use Up More or Less Resources than Expected? (I.E. Does It Cost More?) What Action Can be Taken to Correct the Problem if There is One?

A Budget is a Baseline Measuring the Differences between the Planned and Actual Use of Resources.

3

The Control Process

4

Budget Example

Expenses Actual Budget VariancePayroll

8511 Salaries 29,425 34,583 5,1588512 Payroll Tax 1,789 3,458 1,6688513 Group Ins. 1,407 1,040 -3678515 Misc. 43 43 08517 Bonus 0 0 0

Total Payroll 32,664 39,124 6,460

5

Obtaining Budget Data Top-Down Budgeting

Bottom-Up Budgeting

Mixed Methods

6

Budget Orientation Category or Line Budgeting – Causes Project Budget to

be Split Up among Many Different Organizational Units

Program (Project) Budgeting – Aggregates Income and Expenditures across Programs. For Example:

Project A Project B TotalRent $2000 $1000 $3000Parking 1000 500 1500Telephone 500 200 700

Totals 3500 1700 5200

7

1. Planning-Programming-Budgeting System (PPBS)

Cost/Benefit Analysis of Sets of Projects. Problem: Measuring Costs and Benefits.

2. Zero-Base Budgeting (ZBB)

Review Desirability of Each Program before Funding Problem: ZBB Perceived as a Threat.

Types of Program Budgeting

8

3. PERT/COST

Costs Assigned to Workpackages (Activity Groups).

Problem: Time and Cost of Updating Information.

4. Activity-Based Costing (ABC)

Can be Used to Track Sums of Activity Costs Over Time.

Types of Program Budgeting

9

Activity-Based Costing

Measures the Cost and Performance of Activities, Resources, and Cost Objects.

Assigns Activities to Resources and Cost Objects Based on Their Use.

Recognizes the Causal Relationship of Cost Drivers and Activities.

10

Purchasing BudgetsFUNCTIONAL

Salaries & Benefits $300,000Administration & Support 75,000Travel 30,000Supplies 20,000Other 25,000

Total $450,000ACTIVITY

Sourcing & Selection $180,000Contracting 150,000Purchase Orders 120,000

Total $450,000

11

ABC Tracks Costs Over Time

12

Activity Cost Estimation 1. Identify Resources Needed. Which? How Much?

2. Convert Units of Resources to Dollars.

3. Sum

Painting Job Example: Labor (Hours) 200 @ $10 = $2000 Paint (Gallons) 20 @ 5 = 100 Brushes (Unit) 25 @ 2 = 50 Cash = 100 Total $2250*

*Overhead Often Added as a % Adjustment (E.G 20% ).

13

Problems in Estimation

Learning Curves More Resources Required than Anticipated Changes in Resource Prices (E.G. Inflation) Waste and Spoilage Loss of Project Professionals Allowance for Contingencies

14

Measuring Cost Variations

Mean Absolute Deviation (MAD)MAD = (|A(t) – E(t)|) / n

Where A(t) = Actual Cost E(t) = Estimated Cost n = Number of Observations

Tracking Signal (TS) TS = RSFE / MAD RSFE is Running Sum of Forecast Errors

15

Measuring Cost Variations

Example:

Period A(t) E(t) A(t)-E(t) |A(t)-E(t)| 1163 155 8 8

2 240 242 -2 2 3 67 46 21 21 4 78 69 9 9 Totals 36 40

MAD = 40 / 4 = 10 TS = 36 / 10 = 3.6

Guideline for TS: TS 3

16

Measuring Cost Variations