Page 45 - Budgeting for Managers

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Budgeting for Managers
Variable costs. These are costs that change from year to year.
We may just be showing a cost that we think will vary year by
year or we may be estimating costs based on a project plan.
Annual variable costs. These are costs that we predict will vary
year by year. For example, suppose we manufacture sports
goggles and sell them to retail stores. We’ll want to increase our
marketing efforts in years the Olympics are held. The summer
games will be held in 2004, 2008, 2012, 2016, and 2020 and
the winter games will be in 2006, 2010, 2014, 2018, and 2022.
In years without Olympics, we budget $800 for marketing. We
add $400 for summer Olympics years and $300 for Winter
Olympics years. (Aren’t goggles used more for winter sports?
Well, yes. But people pay less attention to the Winter
Olympics.) Experience indicates that the plan in Table 2-4 is a
good one. We show just the first five years, but the spending
pattern continues for 20 years. The $800 for year one and the
$4,700 for year five show up in Table 2-2 as annual variable
costs. We show the average over years in Table 2-4 to illustrate
how a cyclical cost like this averages out over time. We could
have just used a 20-year average and entered this as a fixed
cost. But, when we know what years will be higher or lower, it’s
more accurate to go year by year than to use averaging.
2003 2004 2005 2006 2007
Non- Summer Non- Winter Non-
Olympic Olympics Olympic Olympics Olympic
Annual 800 1,200 800 1,100 800
Total 800 2,000 2,800 3,900 4,700
Average 800 1,000 933 975 940

Table 2-4. Annual variable costs: marketing budget for goggles based
on Olympic years
Project costs. This is an example of a project that is expected
to take three years, at a cost of $2,500 per year. It’s happening
from 2007-2009, so the first year shows up in our five-year
budget, but the second and third do not show up until the 10-
year budget.