Project Budgeting

Budget

As the name suggests, a project budget is a budget for a specific project. As such, the time frame of the budget may be very short or more long-term, depending on the length of the project.

Project budgets are fundamentally different from the master budget and the flexible budget. The master budget or the flexible budget covers a distinct time span, such as the month of January. In contrast, a project budget covers an identifiable project that has its own time span. That time span may be as little as a week, or it may be as much as several years. The focus in project budgeting is on one separate project.

Examples of projects that might be budgeted for separately are capital budgeting projects such as the purchase of a new machine or the construction of a new plant. A project may be the development and testing of a new product, the acquisition of another company, a new software installation, a marketing plan for entering a new geographical area, or a budget for a long-term contract.

Projects must be planned over their entire life spans and should be viewed as special commitments. Their budgeted amounts must be integrated into the master budget of the company for the relevant period or periods.

A project budget must include all the costs that will be required for the project. Though this requirement seems obvious, indirect costs and overheads that will be allocated to the project can easily be missed. All indirect costs and overheads to be allocated to the project must be identified and included.

A long-term project budget for the introduction of a new product can also be called a life-cycle budget. A life-cycle budget plans incomes and expenses for one specific product throughout its entire life cycle, from its development through its decline, enabling the company to see the cash flows that will result from the product over its entire life. When all the lifetime development and production costs are set forth in the lifecycle budget, management can set a price that will cover not only the company’s costs but also its required
return on investment.

Benefits of Project Budgeting

  1. Management can determine in advance whether or not the project is one that should be undertaken.
  2. The project budget enables management to plan for the level of resources (personnel, effort, supervisors, and finances) that will be needed.
  3. The project budget focuses management’s attention on anticipated cash inflows and outflows from the project and the decisions that will affect the cash flows.
  4. Project budgeting fosters cooperation and coordination among the various responsibility centers that will be affected by the project.
  5. A project budget covers an identifiable project that has its own time span.

Limitations of Project Budgeting

  1. Projects must be planned over their entire life spans and thus they should be viewed as special commitments.
  2. Budgeted amounts for projects must be integrated into the master budget of the company for the relevant period or periods. Unless that is done, the project budget cannot be fully utilized
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