Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability

Chapter 4. Cost

When considering the topic of cost, a project manager may well ask, “Doesn’t the project budget cover cost?” The answer is . . . it depends! Budget, first of all, is concerned with three areas: predicting what income and expenses will be, monitoring expenses and cash flow, and producing information to predict profit and loss. Cost, however, is concerned with analyzing the source and behavior of cost, its effect on finances, and the processes used to manage cost in an optimal way.

To further illustrate the difference between budget and cost, let’s look at two examples. It will become clear why we differentiate between the two.

Let’s take a new product development project as an example. The project will develop a new widget, and the budget contains the information, as shown in Exhibit 4.1.

Table 4.1. Widget Budget

Cost	Amount
Direct Labor	$20,000
Materials	$5,000
Machinery – Setup for 4 widgets	$1,000 × 4 = $4,000
Machinery – Use 4 hours for 4 widgets	$250 × 4 = $1,000 × 4 = $4,000
Machinery – total	$10,000

There are three components to the cost of the project: labor, materials, and machinery. (We will ignore overhead for the moment.) The materials and machinery will be used to create prototypes, and the cost of each prototype is $3,000. It seems like we have all the information to move ahead.

However, a closer look at how the costs of this project behave may reveal useful information to the astute project manager. The machinery cost actually contains two components: a setup cost of ...