Question

(7) The Master Budget Budgets Discussion 0 Scenario Read the following scenario and then thoughtfully discuss the question. 2 383.000 30459 You are currently working as a contractor building state of the art airports. One of the managerial accountants of the company you work for comes to talk to you about the budget for a project on which you have taken the lead. He wants to know your estimate for the cost of the project. You know that your future with the company depends on your performance in relation to this budget. Your best guess for this project is that it will cost $2,000,000. 0.00% O Discuss • What do you say to your boss and why?

No additional information was provided for this discussion.

Answer 1

Budgeting is one of the important process that plays a key role in determining the success of a company. The company decides on whether to accept a project or not depending upon its profitability which in turn is derived from the budget plans. In case of construction contracts, the best way to predict the profitability is by making a strategic budget. Strategic budgeting used to create budgets for projects that have life of more than one year. The motive of strategic budgeting is to develop a plan that supports a long range goals and can predict position of the organisation in future.

The project can be done at a lower cost resulting in higher profit margins, but the quality will have to be compromised. I have taken into account the costs which are reasonable and also conforming to the quality standards followed by the company. Compromising on the quality of the project will have a negative impact on the goodwill of the company. Thus I believe, the company would not want to compromise on the quality of the project for higher margins.

Accordingly, giving prudent and fair consideration to all the factors affecting the costs, the estimated cost of the project will be $2,000,000.