1 Project Budgeting

2 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 ActualBudgetVariance Payroll 8511 Salaries 29,42534,5835, Payroll Tax 1,789 3,4581, Group Ins. 1,407 1, Misc Bonus Total Payroll 32,66439,1246,460

5 Obtaining Budget Data Top-Down Budgeting Bottom-Up Budgeting Mixed Methods

6 Budget Orientation Line Budgeting – Causes Budget to be Split Up among Many Different Organizational Units Program (Task) Budgeting – Aggregates Income and Expenditures across Programs. For Example: Project AProject BTotal Rent $2000 $1000 $3000 Parking Telephone Totals

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 Resources to Activities and Activities to Cost Objects Based on Resource Use. Recognizes the Causal Relationship of Cost Drivers and Activities.

10 Purchasing Budgets FUNCTIONAL Salaries & Benefits$300,000 Administration & Support 75,000 Travel 30,000 Supplies 20,000 Other 25,000 Total$450,000 ACTIVITY Sourcing & Selection$180,000 Contracting 150,000 Purchase Orders 120,000 Total$450,000

11 ABC Tracks Costs Over Time

12 Cost Estimation 1.Identify Resources Needed. Which? How Much? 2.Convert Units of Resources to Dollars. 3.Sum Painting Job Example: Labor $10= $2000 Paint (Gallons) 5= 100 Brushes (Unit) 2= 50 Cash= 100 Total $2250* *Overhead Often Added as a % Adjustment (E.G 20%).

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

14 Measuring Cost Variations Mean Absolute Deviation (MAD) MAD =  (|A(t) – E(t)|) / n WhereA(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: PeriodA(t)E(t)A(t)-E(t)|A(t)-E(t)| Totals MAD = 40 / 4 = 10TS = 36 / 10 = 3.6 Guideline for TS: TS  3

16 Measuring Cost Variations