Many projects have one overall budget that includes all of
the estimated costs – including labor costs, hardware/software costs, materials
costs, etc. This is fine for smaller and medium sized projects. However, as a
project gets larger it helps to have the overall budget broken down into a
series of smaller, more discreet entities. Smaller budgets (and projects) give
you more control. Having your budget allocated at a lower level allows you to
keep better control of the details and it may point out potential budget
trouble quicker than having everything rolled up into one consolidated project

Cost accounts are formally established in your
organization’s General Ledger so that your budget is actually allocated in each
detailed cost account and the actual project expenses are reported at that
level as well.

The cost accounts can be established a couple of ways. One
way is to simply divide the different types of costs in separate cost account
budgets. In this approach, you could have a cost account for internal labor
charges, external labor charges, hardware costs, software costs, training
costs, travel costs, etc. There are two benefits to this approach. One is that
the project manager and sponsor can determine more quickly if there is a cost
overrun in a particular category. For instance, if you’re running overbudget on your hardware costs, having this separate
cost account will point this out more quickly than if all project costs are
rolled up in one large budget. Second, this method of cost breakdown allows
your company to better classify expenses and capital purchases (which is why it
is actually fairly common on many projects).

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Another way to set up the cost accounts is by allocating the
overall budget based on groups of related work, like project phases. For
instance, you could set up a different set of project cost accounts for the
Analysis Phase, Design Phase, Construct Phase, etc. Again, the smaller budget
allocations give you a more discreet level of manageability. Here’s what I
mean: Let’s say that you have a project with a budget of $500,000. Of this
total budget, the project management cost is $75,000. The analysis work is
estimated at $150,000. The design work is $50,000, etc. (This is obviously an
oversimplification.) In a traditional, single budget project, you might have a
hard time determining exactly whether you are on budget or not since many of
the activities might overlap. However, if the major types of work are separated
into unique cost account budgets you can more quickly determine if you are
trending over your analysis work, project management work, etc.

Theoretically, for maximum control, you could set up a cost
account for each activity, but that doesn’t make practical sense. Instead you
may set up a separate cost account and budget for each phase, stage or
milestone (A milestone represents the completion of one or more deliverables.)

If you set up cost accounts for individual phases or stages
(related “chunks” of work), you can also track the types of expenses (labor,
hardware, travel, etc.) within each cost account by establishing sub accounts
within the larger cost account. Of course, the extra precision that you obtain
for tracking your expenses also requires more work in setting up, allocating
and tracking the cost account (and sub account) budgets. However, if your
project is very large and costly, you definitely want to utilize some aspects
of this technique.