Question

Please describe what is the scientific way to allocate a fixed amount of budget to two expense items that have no relation to each other.

-How do you compare two expenses that have almost no relation to each other? This allocation of resources between competing and dissimilar parts of the business is a great challenge.

Answer 1

Budget is a financial plan for the ensuing fiscal year.It is drawn up ,by the top management with inputs from department managers and finally passed on for exceution ,to the same departments,so as to ,stay on line ,with the planned allocation of resources, to be relied upon , with respect to timeline as well as amount.

While allocating funds for two expenses that are totally unconnected,the only scientific way to connect and compare them, is through another common line item, with which both are individually connected.

As for example,two different expense heads like direct labor costs & selling expenses/commissions are not connected directly--but they both are individually connected to the sales revenues or Cost of goods sold.

So, they can be assessed in relation to that third item & that way budget funds , can be set aside /earmarked for these two expenses.

Even though these two are dis-similar expenses, they both are integral to earn revenues and need to be taken care of , by proper resource allocation and monitoring of trends--so as to result in overall profitability.

When such budgetary estimations /allocations , seem to be exceeded,budgets need to be modified ,even after adoption, by making rectifications that sometimes include even transfer of surplus funds from other expense -heads or from the company's surplus funds--that are kept in readiness, to address such shortages.

The above is possible , only by a constant comparison of actual performance with that budgeted, at every turn-point.Though , it is a challenge, it is common in a budgetary exercise.Not all expenses are inter-dependent & there are numerous loosely-connected expenditure-heads, in all years--which also need careful planning.

so,that way, they can be compared to the previous years' budget & actual performance & that can also help to form this year's budget amount.The same head-of -expense of this year , can be compared with the same head-of -expense , of the previous period-- to analyse any trend.