Interdependence of Budgeting and Cost Accounting
Budgeting and cost accounting form the most important aspects of accounting in a modern day business. The managers depend on cost accounting for providing an idea about the actual expenditure of departments, processes, product or operations. This lays the foundation of a budget for the organization. Besides this, it facilitates in analyzing the fluctuations as well as the use of funds for profit-making or social purposes.
Cost accounting forms an integral aspect of management accounting. Here, managers are able to offer a justification for the ability to decrease expenditure of a company for increasing its profit. Since the use of cost accounting is pragmatic, it need not follow the Generally Accepted Accounting Principles.
Now the question arises “how are budgeting and cost accounting interrelated?” Undoubtedly, cost accounting forms a necessary system for managing the budget of a company. It provides essential data for analyzing the variations taking place in the production expenses of a company. Moreover, cost accounting helps in determining the most effective methods for enhancing the profitability of an organization.
Budgets are useful for making predictions about future expenses, cash flow and income. They also help in predicting future performance through financial models as well as with the financial forecasts. Moreover, forecasts and budget facilitate in making a feasibility analysis. This helps in development of business models, review of important assumptions, identification of resources as well as capital requirements.
Apart from these, forecasts and budgets can be utilized for searching sources of funds. They help in establishing your business potential to lenders and investors. Moreover, these are utilized as management tools. Not only do forecasts and budgets help you in establishing milestones, but also support in achieving the milestones. Besides this, they also facilitate in identification of risks and show the benchmarks. Therefore, small business owners can make the required adjustments for risk-avoidance thereby reaching the milestones and matching up to the benchmarks. The budgets as well as forecasts provide feasibility analysis. Moreover, after obtaining a cash flow forecast, you can decide you plan of action for achieving the financials as well as cash goals.
Budget creates financial value from the production of goods. By acquiring the recorded historic costs, it also helps in allocation of fixed costs of a company over a specific period of time to the items that are produced during that particular period of time.