the budget format. The format, which frequently varies between governments, provides specific guidelines regarding how a budget should be prepared, including setting goals, objectives, programs, and activities.
An important characteristic of all budgets, in particular an operating budget, is that once it has been approved and funds have been allocated for its execution it must be followed through. This may appear somewhat rigid to those who may not be familiar with public budgeting, but there is a rationale for this apparent inflexibility. In the private sector, competitive market forces serve as a vehicle to ensure that the resources of an organization are efficiently managed and utilized. In other words, when a private firm or business becomes inefficient, it will not make enough profit to stay in business, and will eventually be forced out of the market. Since no such forces exist in government, nonmarket mechanisms, such as laws, regulations, manadates, and various compliance requirements are necessary to achieve the same objective.
This chapter has presented a brief description of five of the most important activities in cost accounting: job costing, process costing, variable costing, cost allocation, and cost control. In job costing, costs are traced to a specific job, service, or activity. By tracing costs to a specific job, an organization can estimate the costs associated with each job accurately. In contrast, in process costing costs are assigned equally to all units of a job or service produced by an agency or department. The units in process costing are homogeneous, which makes it possible to assign the costs equally to these units. In variable costing, on the other hand, only variable costs are taken into consideration, rather than both fixed and variable costs. When the latter is considered in a system, it is known as absorption costing.
Cost allocation, the fourth element in this process, deals with the allocation of indirect costs to a department, an agency, or to any other responsibility center in an organization In doing so, it not only assigns costs that are indirect to a department but also examines how costs that jointly benefit several departments can be assigned. Finally, cost control deals with a set of procedues and measures that are useful in controlling the costs of an organization. A wide range of measures are currently available that can be used for this purpose. This chapter has focused on four such measures that are relatively easy to use, namely variance analysis, ratio analysis, (cash) internal control, and planning and budgeting.
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