Understanding Budgets: Costs Analysis

Understanding budgets when understanding is not required on a regular basis can be difficult. Sitting in the Human Resource office all day does not often allow for many budgets to be reviewed though all levels and departments within a company should have the opportunity to examine these documents. At this time, HR officials are confused by the data on budget statements so the best way to help them understand is to explain terminology they may find. Budget statements are a representation of income and expense, or costs, expected for the company over a given period of time. Costs can be explained in a variety of ways on a budget statement. Several different terms may be used to describe cost including fixed, variable, direct, indirect, total, and variable costs. Explanation of costs will significantly help HR to understand the budget statements.

Fixed

Fixed costs are the constants in a budget. Fixed costs are costs that do not change regardless of the volume of production. A fixed cost must be paid despite the chance that production may increase or decrease. The fixed costs are typically what challenge the existence of a company when sales are low. These costs are represented in fixed objects involved in the production of a company. Warehouses or facilities are the best examples but sometimes costs such as utilities can be included.

Variable

Most production costs adjust as the level of production increases or decreases. Variable cost is the term which helps explain the costs incurred or lost when production levels change. Several different items can, and most often will. Each individual cost is known as variable, and the sum of all these costs is recognized as total variable cost (TVC). Examples include, equipment or machinery usage, labor, materials, or sometimes utilities could be included in this category as opposed to being listed as a fixed cost.

Direct

Direct costs are those costs that can be identified specifically with a particular sponsored project, or that can be directly assigned to such activity relatively easily with a high degree of accuracy. In order to determine what an appropriate direct cost would be, certain criteria may be followed. These criteria are that the cost must be reasonable-generally recognized as necessary, allocable-to the sponsored or only project, treated consistently with other similar costs in like circumstances, and must be allowable by GAAP (Vanderbilt, 2005). Examples would be data entry, copying, mailing