Question

"The budgeting process for indirect costs and functional account expenses is more difficult than for direct costs and natural account expenses."

Explain this statement.

Answer 1

Budgeting is one of the important part of the Planning process that is undertaken to allocate money for spending in each category. The categories could also be termed as departments, activities, etc. With appropriate budgeting in place, the expenses could be balanced well as against the income. In terms of budgeting of direct costs and indirect costs, direct costs are easily measurable in nature because those costs are directly incidental to the production process of an item. However, the indirect costs are such overheads that are general or common across various production categories, such as Rent, administrative costs, etc. Organization’s infrastructure is important and therefore the indirect costs play a significant role in the Cost of Production. However, identifying the same across every product in the costing phase, is a complex affair. It hence needs to be tediously planned. The Funders across the industry, may vary with their indirect cost allocation plans because those are not directly evident in the production process. If the planning of the indirect cost allocation varies, so does the budgeting costs overall and hence it becomes more difficult to study the budgeting of indirect costs than that of the direct ones.

It is further difficult to draw a line between he unrealistic cap of the indirect costs and functional account budgeting with that of a realistic one. The Funders need to also understand the full cost of the Organization in terms of cost of production, to arrive at the final budget for indirect costs and functional account expenses.