cost estimation and budgeting

cost estimation and budgeting - Project Management A...

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Project Management A Managerial Approach Budgeting and Cost Estimation
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  What is a budget?   A Plan for allocating resources.   The act of budgeting is the process of  allocating the scarce resources to the  various endeavours of an organisation. 
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Budgeting and Cost Estimation The budget serves as a standard for comparison It is a baseline from which to measure the  difference between the actual and planned use  of resources Budgeting procedures must associate resource  use with the achievement of organizational goals  or the planning/control process becomes  useless The budget is simply the project plan in another  form
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  The degree to which the different activities  of a project are supported by an allocation  of resources is one measure of the  importance placed on the outcome of the  activity.
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A budget serves as a control mechanism. Exception reports can be generated if  resource expenditures are not consistent  with accomplishments. The pattern of deviations can be  examined to forecast significant  departures from budget.
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Estimating Project Budgets In order to develop a budget, we must: Forecast what resources the project will require Determine the required quantity of each Decide when they will be needed Understand how much they will cost - including the effects  of potential price inflation Approximation of project’s cost Last years figures+x Estimated wt of product*specific factor
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All projects are unique All project budgets are based on forecasts  of resource usage and associated costs Estimating the cost for any project  involves risk Problems in multiyear usage(cost of  materials) Degree of executive oversight and review.
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Actual use of resources Suppose you have estimated that $5000 of a  given resource will be used in accomplishing a  task over 5 weeks. The actual use of the resource may be none in  Week1, $3000 in Week2, none in Week3, $1500  in Week4, $500 in Week5 Unless time pattern of resource usage is  explained in the plan, the accounting deptt.  Which takes a linear view will spread this  equally over the 5 week period.
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There are two fundamentally different  strategies for data gathering: Top-down Bottom-up
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Top-Down Budgeting This strategy is based on collecting the  judgement and experiences of top and middle  managers These cost estimates are then given to lower  level managers, who are expected to  continue the breakdown into budget  estimates This process continues to the lowest level
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Top-Down Budgeting Advantages: Aggregate budgets can often be developed quite  accurately
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cost estimation and budgeting - Project Management A...

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