Acc_504_Mod_1_Case

Costing, Budgeting for Projects TUI University Unknown Module One Case Study #1 ACC 504 Dr. Wagner January 2011 Introduction I will include the essential elements of managing, planning, and controls in projects. I will explain the key elements of cost accounting typical in most projects and integrate my answers and analyses from the reading. What is included in cost and budgeting for projects' “Project management includes developing a project plan, which includes defining and confirming the project goals and objectives, identifying tasks and how goals will be achieved, quantifying the resources needed, and determining budgets and timelines for completion. It also includes managing the implementation of the project plan, along with operating regular 'controls' to ensure that there is accurate and objective information on 'performance' relative to the plan, and the mechanisms to implement recovery actions where necessary,” according to the article “All about Project Management.” What is costing and budgeting' In accounting, costs are the monetary value of expenditures for supplies, services, labor, products, equipment and other items purchased for use by a business or other accounting entity. It is the amount denoted on invoices as the price and recorded in bookkeeping records as an expense or asset cost basis, according to Wikipedia. Costing is also the process of estimating costs for items in a program. The result of costing is a budget for the program. So, what is budgeting' The truth is that budgeting isn't just for times when your money is tight or your life is undergoing a major transition. Budgeting is for everyone, rich and poor alike. In fact, budgeting will be that much easier in times of change if you do it all the time. Where do you think a Fortune 500 company like Amazon would be today without proper budgeting' What about wealthy people like Warren Buffett' There's no way that he or his holding company, Berkshire Hathaway, could have achieved such success without paying attention to their monthly, quarterly and annual cash inflow and outflow. Let’s take a look at elements of managing, planning and control, within a project. Managing What is managing all about' Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions, according to Wikipedia. A concept that describes how new skills or knowledge can be quickly acquired initially, but subsequent learning becomes much slower. At first, a minimal investment of resources yields significant results, but the payback from continuing effort is smaller. The learning curve was first described by psychologist Hermann Ebbinghaus in 1885 and elaborated by psychologist Arthur Bills in 1934, according to answers.com. In a visual representation of a learning curve, a steeper curve indicates faster, easier learning and a flatter curve indicates slower, more difficult learning. The concept of a learning curve is important to companies in hiring and training new employees and managers, in working to increase production efficiency, and in budgeting and forecasting costs. Planning A project management plan or project plan is the main document used to guide a project toward successful completion. The purpose of the project plan is to provide important information required by stakeholders and project team members to define, execute, and close a project. The content of project plans will vary greatly from project team to project team and organization to organization, but the plans generally fall into two categories: summary or detailed. A summary project plan provides only high-level details about a project, and a detailed project plan contains the sub-plans typically required by a project. Control Although the project work is completed and delivered by the project team, this work needs guidance and control to ensure it stays on track. This is the primary function of the project manager during the implementation phase. The project manager must have sufficient understanding of the issues involved in the work to guide the team but need not be an expert at any particular type of work. Often it is detrimental to the project if the project manager has a particular expertise because there will be a natural tendency to concentrate on that element, to the detriment of the project as a whole. It is better that there is a peer review meeting with an expert from outside the project (a senior technical manager or business process expert) to review elements that require special expertise. The project manager must use the project organization that has been created (reporting and communications structures, work review and performance testing) to report on and control the project. Swift and decisive action must be taken if the project does not stay on course or work to plan and budget. The project manager must be a diplomat who can persuade but also a force to be reckoned with if the situation demands it. The higher authority of a program manager, project sponsor or even the senior management team should be invoked if necessary to ensure that the timely decisions, necessary resources and removal of obstructions. Cost Accounting Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions. Cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision-making to cut a company's costs and improve profitability. As a form of management accounting, cost accounting need not follow standards such as Generally Accepted Accounting Principles, because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically, according to Wikipedia. Costs are measured in units of nominal currency by convention. Cost accounting can be viewed as translating the supply chain (the series of events in the production process that, in concert, result in a product) into financial values. Here are some key elements of cost accounting: • 1. Material (Material is a very important part of business) o A. Direct material • 2. Labor o A. Direct labor • 3. Overhead o A. Indirect material o B. Indirect labor (In some companies, machine cost is segregated from overhead and reported as a separate element) They are grouped further based on their functions as, • Production or works overheads • Administration overheads • Selling overheads • Distribution overheads Results In reviewing the data, if EEL carefully planned and utilized the learning curve, there could have been more bids awarded. From the data, we are able to tell that the production of the 1st unit takes 29K DLH, while the 14th unit will take 7K DLH. The difference is quite large and should be viewed using the incremental unit time method to get a clearer picture. When using this method, you can notice from the spreadsheet that the learning curve has been quickly affected. By the time the 14th unit is produced, the average time per unit has dropped by over 50% percent. If the right percentage of learning has been applied a manager could now take this data and produce better production schedules, delivery plans, as well as budget forecasts. Overall, EEL was in desperate need of better judgment, planning, and managing skills. Hopefully, with this report EEL can now make more competitive bids. Conclusion In Management Accounting, the learning curve or affect is important when making cost estimates and assessing cost behaviors as a basis for pricing decisions, and for setting standards and performance targets for work scheduling. The main impact of the learning curve is likely to be in providing better cost predictions to enable price quotation to be prepared for potential orders. In this perspective, the learning curve plays a critical role in understanding the procedures in the planning and managing a project. The learning curve could also be uses for obtaining strategic advantages by forecasting cost reductions and consequently selling price reductions of competitors. In the case of Elora Electronics Limited, although being very successful in the past, the company has seen a decline in the number of bids it has won. In my opinion, the result of winning fewer bids was due to the lack of judgment, planning and skills of their managers. What is costing and budgeting' In accounting, costs are the monetary value of expenditures for supplies, services, labor, products, equipment and other items purchased for use by a business or other accounting entity. It is the amount denoted on invoices as the price and recorded in bookkeeping records as an expense or asset cost basis, according to Wikipedia. The idea of managing a project can seem like a daunting task, however, provided with the right tools, any project can achieve success. When undertaking any type of project management, there must be a working set of guidelines and objectives that must be followed, in order to guarantee success for that particular project. An essential element when entering into any type of project management is cost budgeting. To create an effective cost budgeting plan, a total budget for the entire project must first be established. To achieve this, each area of the project must be analyzed and given a particular cost estimate. Once that is done, the total sum of cost assessments, whether those costs are in individual projects or in work packages, are combined to establish a certain parameter to provide a working elements for the budget. These elements are set in place so that the allotted costs are divvied up amongst the appropriate project needs. This will ensure that the budget goals are being accurately met. The process of cost budgeting is a simple, yet necessary process of any successful type of project management. Reference Page 1. Accessed on 17 Jan 2011 from: http://managementhelp.org/plan_dec/project/project.htm. 2. Accessed on 17 Jan 2011 from: en.wikipedia.org/wiki/Costing. 3. Accessed on 17 Jan 2011 from: http://www.investopedia.com/university/budgeting/basics1.asp. 4. Accessed on 17 Jan 2011 from: http://www.answers.com/topic/experience-curve-effects. 5. Accessed on 17 Jan 2011 from: http://en.wikipedia.org/wiki/Cost_accounting. 6. Stout, David E and Juras, Paul E., (2009). Instructional Case: Estimating Learning-Curve Functions for Managerial Planning, Control, and Decision-Making. Issues in Accounting Education, 24(2), 195-217.  Retrieved July 26, 2010, from http://proquest.umi.com/pqdweb'did=1742378651&sid=3&Fmt=6&clientId=2944 0&RQT=309&VName=PQD, accessed on 14 Jan 2011.