Costing and Budgeting – Costing

At a basic level the process of costing is reasonably simple. You draw up a list of all your possible expenditure and put a numerical value against each item; the total therefore represents the tangible cost of your project. You may also however need to consider “intangible” items.

Tangible costs

  • Capital Expenditure – any large asset of the project which is purchased outright. This usually includes plant, hardware, software and sometimes buildings although these can be accounted for in a number of ways.
  • Lease costs – some assets are not purchased outright but are leased to spread the cost over the life of the project. These should be accounted for separately to capital expenditure since the project or company does not own these assets.
  • Staff costs – all costs for staff must be accounted for and this includes (but is not limited to): salary and pension (superannuation) costs; insurance costs; recruitment costs; anything which can be tied directly to employing, training and retaining staff.
  • Professional services – all large-scale projects require the input of one or more professional groups such as lawyers or accountants. These are normally accounted for separately since a close watch needs to be kept upon expenditure in this area. Without scrutiny the costs of a consultant engineer, accountant or lawyer can quickly dwarf other costs.
  • Supplies and consumables – regular expenditure on supplies is often best covered by a single item in your budget under which these figures are accrued. They are related to overhead below.
  • One-off costs – one-off costs apply to expenditure which is not related to any of the above categories but occurs on an irregular basis. Staff training might be an example. While it might be appropriate to list this under staff costs you might wish to track it independently as an irregular cost. The choice is yours but the principles of prudence and consistency apply.
  • Overheads – sometime called indirect costs, these are costs which are not directly attributable to any of the above categories but never-the-less impact upon your budget. For example it may not be appropriate to reflect the phone bill for your project in staff costs, yet this still has to be paid and accounted for. Costing for overheads is usually done as a rough percentage of one of the other factors such as “staff costs”.

Intangible costs

It has become fashionable to account for “intangible” assets on the balance sheets of companies and possibly also projects. The argument goes like this: some contributions to a project are extremely valuable but cannot necessarily have a tangible value associated with them. Should you then account for them in the budget or costing? The “prudence” principle says yes but practicality says “no”. If you are delving this murky area of accountancy you should seek professional help and advice.

Typical things you might place in the budget under intangibles are “goodwill” and “intellectual property”. Personnel-related figures are a frequent source of intangible assets and so you might find things like “management team”, “relationships” and “contacts” on an intangibles balance sheet.

Nick Jenkins
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