May 20, 2022


Accounting + Finance Blog

Meaning of Budgeted Cost Explained

Meaning of Budgeted Cost Explained

Budgeted cost is important not to businesses alone, but also to individuals. It helps give an estimate of what an individual or organization will spend in the future based on future income. In this article, let’s discuss more on this.

Definition of Budgeted Cost

Budgeted cost is an estimate of an expense or expenditure to be incurred by an entity in a future period based on forecasted revenue.
According to ATSWA, budgeted costs are “estimated and planned expenses or expenditure for a given activity level, function or segment of the organization within a specified time horizon.

Key Explanations

A budgeted cost is an estimated or planned cost. It is a predetermined expense or expenditure by an individual or organization. The individual planned It based on the information received and what he/she feels.

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On the other hand, the management of an entity decides on the estimate using percentages, rate of inflation, exchange rates, industrial norms, regulations, and of course personal judgment.

It applies to expenses and expenditures. Expenses are incurred or paid for on a day-to-day basis. And involved small cash expenses. However, expenditure is payment for items that occur infrequently. And the price is huge. Individuals and entities must separate their expenses or expenditures.

For an individual, payments for food items are expenses. Why? They are incurred daily and the price is small. But the payment to buy a car is an expenditure because it is incurred once In a while and the amount is huge.

It is usually done periodically or within a given time frame. They are usually done before the beginning of a new year. Individuals may set up budgeted costs for one year. Companies do the same in addition to weekly, monthly, and quarterly budgeted costs.

It is usually determined from an individual or business’s forecasted income. If an individual knows that his or her monthly and yearly income will increase, he or she may plan to increase spending limits or be conservative and save or invest more.

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Organizations may forecast growth in the customer base. Which will result in more income. For example, a business may forecast growth in sales by 12 percent. This results in changes in expenses, especially variable ones which change as a result of changes in sales. While fixed costs may remain constant.

Use of Budgeted Cost

Budgeted cost can be used for performance appraisal the same way the standard cost is applied. And can serve as a control and monitor measure. A manager at a department or function was able to beat down costs and actual expenses were lower than budgeted, then it will be a plus to him or her.

More so, the managing director (CEO), and finance manager (CFO) may use budgeted costs for control and monitoring purposes. Employees must explain why actual costs are higher than those budgeted and keep them in check, thereby reducing fraud attempts.

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In summary, the budgeted cost is estimated and planned for by an individual or management of organizations. The aim is to decide on a price that meets the business policy. It is also used for performance appraisal and monitoring.