Question

A state finance director is concerned that the draft financial statements prepared for the
state’s Capital Projects Funds present large (millions of dollars) excesses of expenditures over
revenues even though all of the funds are well within their appropriations and none are expected
to have deficit balances when the projects are completed. (a) Why are such excesses reported?
(b) What do you suggest?

DO NOT PLAGIARIZE! ORIGINAL ANSWERS ONLY!

RESPONSE MUST BE AT LEAST 200 WORDS

Answer 1

The given scenario is used for financial control in projects. If the costs are within the estimated cost, then project is well under financial control however if such expenditure is in excess over revenues, then it means that there are possibilities that the project cost overrun might occur. It gives the project managers an indicator the potential problems that might arise. For example, in construction projects such as State’s Capital Project, the draft financial statements are the cost estimates and it is then converted to project budget. This project budget has detailed job cost elements for individual job types. The cost incurred is recorded in such individual job cost accounts such as labor, material cost, etc and any cost overrun can be easily identified using these job cost accounts. Thus, it is pertinent that project managers understand the reasons for the excesses of expenditures over revenues even though all of the funds are well within their appropriations and none are expected to have deficit balances when the projects are completed.

I strongly suggest the project managers review the draft financial statements before creating a project budget to identify areas of potential cost overrun. It is also essential for the project manager to detail job cost elements and its related job cost accounts in the project budget as a measure to control and monitor cash flow during implementing the project plan.

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