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Budgeted Cost

Definition: A budgeted cost is a forecasted future expense that the company is expected to incur in the future. In other words, itís an estimated expense that management anticipates will be incurred in a future period based on projected revenues and sales.

Itís common practice for management to make budgets and forecasts to predict future needs based on growth trends and customer demand. The budgeting process also allows management to plan operations to meet the increased product demand. For instance, management might predict a doubling of sale next year that canít be produced in the current facility. Either another facility will need to be built to meet the demand or the current factory will have to double in size in order to produce enough products for the period.

The budgeting process consists of two main steps: estimating future revenues and the expenses that are associated with meeting those revenues. Most budgets start with current year figures and adjust them for trends. For example, management might think that demand might increase 10 percent next year, so they take the current sales figure and add 10 percent in the budget.

Next management must figure out what expenses are associated with producing this amount of product. These estimated expenses are considered budgeted costs. They are estimated and can vary greatly from the actual costs incurred during the production process.

Take ordering inventory for example. Management might estimate an increase in inventory costs of 10 percent, but because of the explosion in steel prices, inventory costs have risen 35 percent. The actual costs are much different than the budgeted costs. In rare circumstances will this actually affect the accounting of these expenses, but this discrepancy will affect the way the following yearís budget is created.

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