Page 43 - Budgeting for Managers

Budgeting for Managers
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Fixed Cost A cost that does not vary year to year. From
an accounting perspective, a cost that does not change
even if the amount of production changes.
Fixed Annual Cost A fixed cost that is the same every year
throughout the entire budget.
Start-up Cost A fixed cost that appears only in the first year or
years of the budget.
Interim Cost A fixed cost that appears during a period in the mid-
dle of the budget.
Variable Cost A line item where the cost varies in different years. In
accounting terms, costs that vary with the amount of production.
Annual Variable Cost A variable cost estimated as different each year.
Project Cost A variable cost calculated from a project plan.
Semi-Variable Cost A single line item calculated with a combina-
tion of fixed and variable elements.
Fixed Base/Variable Volume Cost A semi-variable cost that has a
fixed component plus a variable component based on volume.

Let’s look at this budget line by line. For sales income, we
used the simple solution: we multiplied one year’s estimated
income by five, 10, and 20. We’ll look at more accurate ways of
forecasting income in the next section.
We broke up expenses by the different ways we might try to
calculate long-term estimates. When you do this, ask which of
these methods is the best choice for each type of expense:
fixed, variable, or semi-variable.
Let’s take a look at how we estimated each line of the
expense budget.
Fixed annual costs. These expenses come from one of two
sources. They can be known expenses determined by contract,
such as mortgages, service contracts, or equipment leases.
The other possibility is that the costs are actually variable, but
neither growing nor shrinking, just varying by month and aver-
aging out over a year or two. In our example, we calculated the
annual figure from a record of the monthly expenses for the
past two years shown in Table 2-3. As you see in the table,