Professional Documents
Culture Documents
BUDGETING AND
FINANCIAL
CONTROL]
[Prof. Dr. A.Samer Ezeldin]
Table of Contents
Section 1. Introduction…………………………...…………… 2
Section 2. Over View Of Project Management ......................... 12
Section 3. The Accounting Cycle Steps .................................... 28
Section 4. The Accounting Records ........................................... 43
Section 5. The Financial Reports ............................................... 54
Section 6. The Financial Ratios ................................................. 59
Section 7. Proect Cost Management …………………………..95
Section 8. Project Control Of Engineering Projects ................ 112
Section 9. The Fall Assignments ............................................. 143
Section 10. Glossary................................................................... 156
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Introduction
To Project Management
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Over View
Of Project Management
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to be a project manager.
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• Electrical • Financial/accounting
• Mechanical • Purchasing
• Process • Legal/contractual
• Structural • Insurance/risk management
• Architectural • Purchasing
• Civil • Drafting/Computer
• Cost estimating Aided Design
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Deliverables
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Resources
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Resource Conflicts
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Seasonal Impacts
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Budgets
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Schedule
Scheduling Tools
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Agreement
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Sure they do. And your project plan with all its
elements at various times will need to be revised to
reflect real-world conditions and "changes on the
ground." This, however, does not mean a schedule
should be revised just because of a problem or hitch on
the project. Good project managers solve and work
around the great majority of problems without changing
a due date, an end budget or quality standards.
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Content
Introduction-
flowchart -
analyzes transactions-
classifies accounts -
Journalize -
Post -
Trial balance
Adjusting entries -
Adjusted trial balance -
Financial statements -
Closing entries-
Post closing trial balance -
Sample of accounting voucher
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Introduction:
Accounting is the art of recording, summarizing, classifying and reporting
financial transactions and other events of an enterprise.
The following flowchart shows the steps in the accounting cycle. Th ese are
the accounting procedures normally used by enterprises to record transactions and
prepare financial statements
Transaction ( )
CYCLE
Financial Statement Posting ( )
Preparation ( )
Income Statement General Ledger
Adjusting Entries( )
Accruals
Prepayments
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. Transaction:
The processing of accounting data begins with an economic transaction,
where two or more parties engage in an exchange of goods or services for
some form of consideration. Evidence of this happening is the receipt of some
form of a source document. Common examples of such a source document
include:
There are a multitude of source documents, in type, shapes, and format used to
record the significant data. It is these documents, which become the basis for
data input to the accounting processing. But, prior to the actual data entry, the
documents must be subjected to a series of analysis and classification.
2.1 Analyze:
This phase of the accounting process includes the application of several
of the accounting principles, namely:
The Entity Concept - This is probably the most basic of all concepts in
accounting. As applied here in this phase of the accounting process, the
analysis must determine that the transaction in question, first relates to the
entity in question. If not it must be rejected and not allowed to continue
through the process.
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Cost Principle - All transactions are recorded at cost and not at current market
value. Cost is determined from the source documents used as evidence of the
transaction.
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Classify:
Once past the analysis phase, the transaction is then properly classified
in preparation for entry into the accounting database, commonly using a
Chart of Accounts.
Chart of Accounts - The design of a good accounting system begins with the
Chart of Accounts. This is a list of the accounts, which comprise the particular
accounting system (it is designed with the particular company and its needs
for information). Accounts are grouped according to their relationship in the
accounting equation (i.e., assets, liabilities, owner's equity, revenues and
expenses). The numberings scheme assigns a block of numbers to the
respective groups. A typical assignment of numbers might be as follows:
Assets -
Liabilities -
Owner's Equity -
Revenues -
Expenses -
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- Journalize:
This step in the accounting cycle represents the first time that the transaction
enters the accounting database. It is the data entry phase. Here the transaction,
having been analyzed and classified, is recorded in the Accounting Voucher.
In entering the transaction, various types of vouchers depending on the type
of organization are used. However, the most commonly used format of an
accounting voucher is attached in Appendix.
Sometimes, accounting vouchers are not prepared and transactions are directly
entered into Journals and this is for this reason that the journal is referred to as
the "book of original entry." The journal can be likened to a diary in which
events are recorded in chronological order of their occurrence. In the
accounting process, two types of journals are used:
If the transaction required only one debit and one credit, this is referred to
as a simple entry. On the other hand, it is requires more than one debit and/or
credit; it is referred to as a compound entry.
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. Post:
General Ledger
The general ledger is the heart of any accounting system. It is the
permanent record of the consequences resulting from the accumulation of
transaction throughout the life of the entity. Each account in the accounting
system has its separate page in the general ledger. In addition each account has
its unique identification in the form of an account number as specified in the
Chart of Accounts.
Subsidiary Ledger
An enterprise constantly needs detailed information about its dealings
with individual customers and creditors. To provide this information,
companies with several thousand customers and creditors, use a subsidiary
ledger to keep track of individual balances. Thus a typical merchandising
enterprise has subsidiary ledgers containing accounts with customers
(customers' ledger) and creditors (creditors' ledger). An account in the
general ledger is maintained that summarizes the details in the accounts
receivable and accounts payable ledgers. This summary account in the
general ledger is called a control account, because the summary account
controls the subsidiary ledger.
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. Trial balance:
. Adjusting entries:
However, those transactions, which effect the present and future accounting periods,
will at some future date require special considerations and handling. The special
considerations are caused by absence of a source document, which gives cause to their
existence. Keep in minds that these transaction either happened in a prior period or
have not yet happened The special handling is a continuation of the special
consideration, in that these transaction must be dealt with in a manner which adjusts
their effects in the current period, by means of special journal entries. Many have
already been recorded in the accounting system. What is needed then is to ensure that
their consequences are applied to the proper accounting period. Some of the examples
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• Accruals
• Amortization of prepayments and intangibles
• Deferred revenues and expenses
Also some, balances have to be reclassified from one account to another for the
purpose of proper presentation in the financial statements. Some of the examples of
such transactions are as follows:
This, then, is accomplished through the use of Adjusting Entries and Reclassifying
entries.
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After all Adjusting Entries and Reclassifying Entries have been journalized and
posted an ADJUSTED TRIAL BALANCE is prepared from the ledger accounts. It
shows the balance of all accounts, including those that have been adjusted, at the end of
the accounting period. The purpose of an adjusted trial balance is to show the effects
of all financial events that have occurred during the accounting period. The financial
statements are usually prepared from this trial balance.
. Financial statements:
The following are the basic financial statements, which are prepared at the end of
each accounting period. Each portrays a different representation of the entities financial
status and results of activities. All of them are linked together in a manner, which
presents the financial position and results of economic activities, and therefore all three
must always be presented together.
Income Statement
Income statement:
• Presents the results of economic activities, which occurred during the
specific accounting period.
• Bridges the balance sheet of the previous accounting period with that
of the current accounting period. Therefore, it covers a period of time.
• Develops the net income for the current accounting period. This is used
to reflect the profitability of that period.
• is linked to the balance sheet via the net income amount, which appears
in both of those statements.
Presents the changes that have occurred in the owner's equity as a result of the
current period's activities. Therefore its results represent what occurred within a period
of time. It is linked to the balance sheet via the capital account, retained earnings, and
any reserves.
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Balance Sheet
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. Closing entries
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Practical Session:
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Account Account
No. Description_
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Accounting Records
Contents
Part one
Classification of accounts -
Debits & Credits
Part two
General Journal -
Journalizing
The Trial Balance
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Part one
Classification of accounts
Two types of accounts:
First: Accounts belong to the Balance Sheet and represent the basic accounting equation.
These accounts are:
. Assets
Assets are the cash and non cash resources owned by a business and have
economic value, and used in carrying out future services or benefits to the entity
using them.
Classification of assets:
- Current assets
Current assets are cash and other types of assets that are reasonably
expected to be converted into cash, sold, or used up during the normal
operating year.
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- Fixed assets
Fixed assets are those assets that are used in the normal operations
of the entity to produce and sell goods or perform services for customers.
Fixed assets are expected to service for a number of years are not for re-
sell.
- Intangible assets
Intangible assets are those assets that have no physical substance but
they are expected to provide benefits to the entity for several years.
2. Liabilities
Classification of
Liabilities: -
- Short-term liabilities are obligations of the entity that are
reasonably expected to be paid or settled in the next year or the
normal operating cycle.
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- Long-term Liabilities
Long-term liabilities are those obligations that do not require payment
within the next year or the normal operating cycle. In other words, liabilities
not classified as short-term are reported in the Long-term liabilities section
of the balance sheet.
3. Owner's Equity
Owner's equity represents the owner's interest in the assets of the entity.
It is equal to total assets minus total liabilities.
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. Expenses
Expenses are the cost of assets consumed or services used in the process of
earning revenue in other words; expenses are outflows or other uses of assets
resulting from the sale or delivery of goods or the provision of services by the
entity during specific time period.
. Revenues
Revenues are cash in-flow result from the sale of goods or the rendered
of services.
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The terms debit and credit mean left and right, respectively, the
abbreviation of these two words as follows:
*Debit * Credit
Dr. Cr.
* These abbreviations come from the Latin words debere (Dr.) and credere (Cr.).
a T Account has a left side and a right side, thus, an account is debited when an
amount is entered on the left side and credited when an amount is entered on the right
side. Whether a debit or credit is an increase or decrease to the account balance
depends on the account classification as illustrated below:
+ - - + - +
Any increase in Assets will be record under debit and any decrease will be under credit
Thus the right (Liabilities & Owner’s equity) hand side of the equation as it seems clearly
will be on the contrary in order to obtain the balance of the equation
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General Journal
As you have learned, every recorded transaction affects at least two accounts. This
dual effect is known as double-entry accounting. Note, however, that the term "double
entry" does not mean that a transaction must affect each side of the transaction, it may
effects one.
Example:
Before You Go on
Review it
Do it
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Part Two
General Journal
General Journal J1
Title & explanation Ref. Debit Credit
Dec
Journalizing
General Journal J1
Date Title & Explanation Ref. Debit Credit
Bank
Nov. Capital
Investment in workshop
Dec. business
Rent expense
Bank
Payment of office rent cheque
No.2
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As every transaction results in an equal amount of debits and credits in the ledger, the
total of all debit entries in the ledger should equal the total of all credit entries. At the
end of the accounting period we check this equality by preparing a schedule called a
trial balance, which compares the total of all debit balances with the total of all
credit balances. The procedure is as follows:
2. Record the balance of each account, entering debit balances in the debit
column and credit balances in the credit column. (Note: Asset and expense
accounts are debited for increases and would normally have debit balances.
Liability, capital, and income accounts are credited for increases and would
normally have credit balances).
If the totals agree, the trial balance is in balance, indicating the equality of the
debits and credits for the hundreds or thousands of transactions entered in the ledger.
Although the trial balance provides arithmetic proof of the accuracy of the records,
it does not provide theoretical proof. For example, if the purchase of equipment was
incorrectly charged to Expense, the trial balance columns may agree, but theoretically
the accounts would be wrong, as Expense would be overstated and Equipment
understated. In addition to providing proof of arithmetic accuracy in accounts, the
trial balance facilitates the preparation of the periodic financial statements.
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JOURNALIZING
( ) Date. The year, month, and day of the entry are written in the
date column. The year and month do not have to be repeated for additional
entries until a new month occurs or a new page is needed.
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Financial Reports
Contents
Entries
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Entries
At the end of the accounting fiscal year, the balances of the nominal accounts
are to be transferred from the trial balance to the profit and loss account through
closing entries, these entries produce a zero balance in each nominal account.
Journalizing and posting closing entries is an essential step in the accounting cycle.
Separate closing entries could be prepared for each nominal account, but the
following two entries satisfy the desired result:
1. Debit each revenue account for its balance and credit profit and loss
account for total revenues.
2. Debit profit and loss account for total expenses and credit each expense
account for its balance.
General Journal J
Date Account Titles and explanation Ref. Debit Credit
Dec., Income fees Profit and
loss account
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Salaries expense
Office rent
Dr Cr
Dr Cr
28.000
35.000 35.000
* Note that profit and loss account is used only in closing. No entries are journalized and
posted to this account during the year.
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The income statement is designed the report the results of earning activities
(operations) for a specific time period such as a month, quarter, or year.
Net income for the period is the excess of revenues over expenses for that time.
The heading of the income statement indicates the name of the business, the name of the
statement, and the time period covered by the statement. Below an illustrat ion of Judy
lawyer income statement for the month of December .
Judy, Lawyer
Income Statement
For the month of December
Rent expense
Total expenses
Salaries expense 7.000
5.000
Net Income 28.000
Note that: 2.000
Revenues are defined as in flows of assets either from the sale of goods or the
performance of services.
Expenses are defined as out flows or other uses of assets to produce revenue, and
Net income is defined as the excess of revenues over expenses, and will be
transferred to the balance sheet as either profit or loss.
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Balance Sheet
The balance sheet reports the financial position of a business at a specific point in
time. Consequently, it is often called the "Statement of Financial position". Financial
position is reflected by the amount of the business' assets (resources), the amount of its
liabilities (debts owed), and the amount of its owners' equity (assets minus liabilities).
Below an illustration of Judy lawyer balance sheet for one month practice period on
December 2009
Judy, Lawyer
Balance Sheet December ,
Assets Liabilities
Cash 65.000 Accounts payable 15.000
Supplies 3.000 Owners equity 50.000
Equipment 25.000
Net profit 28.000
The balance sheet heading indicates the name of business, the name of the statement,
and the date of the statement. The assets of the business are listed on the left side and the
liabilities and the owners' equity are listed on the right side. Note that the totals on each side of
the balance sheet are equal. This equality must exist because the left side lists the assets of the
business and the right side shows the sources of the assets.
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Financial Ratios
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A balance sheet represents the financial affairs of the company and is also referred to as
―Assets and Liabilities‖ statement and is always as on a particular date and not for a
period.
A profit and loss account represents the summary of financial transactions during a
particular period and depicts the profit or loss for the period along with income tax paid
on the profit and how the profit has been allocated (appropriated).
Net worth means total of share capital and reserves and surplus. This includes preference
share capital unlike in Accounts preference share capital is treated as a debt. For the
purpose of debt to equity ratio, the necessary adjustment has to be done by reducing
preference share capital from net worth and adding it to the debt in the numerator.
Reserves and surplus represent the profit retained in business since inception of business.
―Surplus‖ indicates the figure carried forward from the profit and loss appropriation
account to the balance sheet, without allocating the same to any specific reserve. Hence,
it is mostly called ―unallocated surplus‖. The company wants to keep a portion of profit
in the free form so that it is available during the next year for appropriation without any
problem. In the absence of this arrangement during the year of inadequate profits, the
company may have to write back a part of the general reserves for which approval from
the board and the general members would be required.
Secured loans represent loans taken from banks, financial institutions, debentures (either
from public or through private placement), bonds etc. for which the company has
mortgaged immovable fixed assets (land and building) and/or hypothecated movable
fixed assets (at times even working capital assets with the explicit permission of the
working capital banks)
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Usually, debentures, bonds and loans for fixed assets are secured by fixed
assets, while loans from banks for working capital, i.e., current assets are
secured by current assets. These loans enjoy priority over unsecured loans for
settlement of claims against the company.
Unsecured loans represent fixed deposits taken from public (if any) as per the provisions
of Section 58 (A) of The Companies Act, 1956 and in accordance with the provisions of
Acceptance of Deposit Rules, 1975 and loans, if any, from promoters, friends, relatives
etc. for which no security has been offered.
Such unsecured loans rank second and subsequent to secured loans for
settlement of claims against the company. There are other unsecured
creditors also, forming part of current liabilities, like, creditors for purchase
of materials, provisions etc.
Gross block = gross fixed assets mean the cost price of the fixed assets. Cumulative
depreciation in the books is as per the provisions of The Companies Act. It is last
cumulative depreciation till last year + depreciation claimed during the current year.
Net block = net fixed assets mean the depreciated value of fixed assets.
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Current assets – Both gross and net current assets (net of current liabilities) are given in
the balance sheet.
Company incorporation expenses or public issue of share capital, debenture etc. together
known as ―preliminary expenses‖ written off over a period of 5 years as per provisions
of Income Tax. Misc. expense could also be other deferred revenue expense like
product launch expenses.
Other income in the profit and loss account includes income from dividend on share
investment made in other companies, interest on fixed deposits/debentures, sale
proceeds of special import licenses, profit on sale of fixed assets and any other sundry
receipts.
Provision for tax could include short provision made for the earlier years.
Provision for tax is made after making all adjustments for the following:
Book depreciation and depreciation as per income tax and Concessions available to a
business entity, depending upon their activity and location in a backward area.
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As per the provisions of The Companies in the event of a limited company declaring
dividend, a fixed percentage of the profit after tax has to be transferred to the General
Reserves of the Company and entire PAT cannot be given as dividend.
Dividend tax on dividends paid by the company has been withdrawn. From that date, the
shareholders are liable to pay tax on dividend income. Thus for a period of 5 years, the
position was different in the sense that the company was bearing the additional tax on
dividend.
1. The Directors’ Report on the year passed and the future plans;
3. Auditors’ Report as per the Manufacturing and Other Companies (Auditors’ Report)
5. Accounting policies adopted by the company and notes on accounts giving details
about changes if any, in method of valuation of stocks, fixed assets, method of
depreciation on fixed assets, contingent liabilities, like guarantees given by the banks on
behalf of the company, guarantees given by the company, quantitative details regarding
performance of the year passed, foreign exchange inflow and outflow etc. and Statement
of cash flows for the same period for which final accounts have been presented.
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There is a significant difference between the way in which the statements of accounts are
prepared of the Companies Act and the manner in which these statements, especially,
balance sheet is analysed by a finance person or an analyst. For example, the current
liabilities are netted off against current assets and only net current assets are shown. This is
not so in the case of financial statement analysis. Both are shown fully and separately
without any netting off.
At the end of any financial year, there are certain adjustments to be made in the books of
accounts to get the proper picture of profit or loss, as the case may be, for that particular
period. For example, if stocks of raw materials are outstanding at the end of the period, the
value of the same has to be deducted from the total of the opening stock (closing stock of
the previous year) and the current year’s purchases. This alone would show the correct
picture of materials consumed during the current year.
Then, the quantum of raw material consumed during the year is 580L.E. and only this can
be booked as expenditure during the year. Consumption is always valued in this manner
and cross verified with the value of materials issued from stores during the year to compare
with the previous year;
Similarly, a second adjustment arises due to the difference between closing stocks of work-
in-progress and finished goods on one hand and opening stocks of work-in-progress and
finished goods on the other hand. Suppose the closing stocks are higher in value, the
difference has to be either added to this year’s income or deducted from this year’s expense.
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(Different ways of presentation). Similarly in case the closing stocks are less than the
opening stocks, the difference has to be deducted from income or added to expenses for that
year. Let us study the following example.
In a company, the opening stocks were 100L.E.and closing stocks are 120L.E.This means
that during the course of this year, the stocks on hand have gone up by 20L.E.from the
goods produced during this year. This does have an effect on the profit of the company.
The company cannot book expenditure incurred on producing this incremental stock of
20L.E. as they have not sold the goods. However the materials and other expenses have
already been incurred and hence this value is deducted.
The basic assumption is that the carry forward stocks have been sold during the current year
while at the end of the current year fresh stocks worth 120L.E.have come in for stocking.
Hence, on an ongoing basis, opening stocks are added and closing stocks are deducted. In
the above example, the effect of adding the opening stock and deducting the closing stock
would be as under:
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On the other hand, in case the closing stocks would have been 90L.E. the sales would have
been 1010L.E. more than the production value. Thus, the difference between the opening
and closing stocks of work-in-progress and finished goods affects income and thereby
profit. The companies always use this as a tool, either to increase or decrease income. In
case they show more closing stocks, income is less and thereby profit is less and tax is saved
and similarly if they show less closing stocks, income is more and profit is also more.
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Ratio analysis – i.e. to determine the relationship between any set of two parameters
and compare it with the past trend. In the statements of accounts, there are several such
pairs of parameters and hence ratio analysis assumes great significance. The most
important thing to remember in the case of ratio analysis is that you can
compare two units in the same industry only and other factors like the relative
ages of the units, the scales of operation etc. come into play.
Funds flow analysis – this is to understand the movement of funds (please note the
difference between cash and fund – cash means only physical cash while funds include
cash and credit) during any given period and mostly this period is 1 year. This means
that during the course of the year, we study the sources and uses of funds, starting from
the funds generated from activity during the period under review.
Let us see some of the important types of ratios and their significance:
Liquidity ratios;
Turnover ratios;
Profitability ratios;
Coverage ratios.
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Liquidity ratios:
Significance = Net working capital should always be positive. In short, the higher the
net working capital, the greater is the degree of overall short-term liquidity. Means
current ratio does indicate liquidity of the enterprise.
Too much liquidity is also not good, as opportunity cost is very high of holding such
liquidity. This means that we are carrying either cash in large quantities or inventory in
large quantities or receivables are getting delayed. All these indicate higher costs.
Hence, if you are too liquid, you compromise with profits and if your liquidity is very
thin, you run the risk of inadequacy of working capital.
Range – No fixed range is possible. Unless the activity is very profitable and there are
no immediate means of reinvesting the excess profits in fixed assets, any current ratio
above 2.5:1 calls for an examination of the profitability of the operations and the need
for high level of current assets.
Reason = net working capital could mean that external borrowing is involved in this and
hence cost goes up in maintaining the net working capital.
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Quick assets = Current assets (-) Inventories which cannot be easily converted into cash.
This assumes that all other current assets like receivables can be converted into cash
easily. This ratio examines whether the quick assets are sufficient to cover all the
current liabilities. Some of the authors indicate that the entire current liabilities should
not be considered for this purpose and only quick liabilities should be considered by
deducting from the current liabilities the short-term bank borrowing, as usually for an
on- going company, there is no need to pay back this amount, unlike the other current
liabilities.
As quick assets are a part of current assets, this ratio would obviously be less than
current ratio.
The difference between all the current assets known as ―Gross working capital‖ and all
the current liabilities other than ―bank borrowing‖. This gap is met from one of the two
sources, namely, net working capital and bank borrowing. Net working capital is hence
defined as medium and long-term funds invested in current assets.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Generally, turn over ratios indicate the operating efficiency. The higher the ratio, the
higher the degree of efficiency and hence these assume significance. Further, depending
upon the type of turnover ratio, indication would either be about liquidity or profitability
also. For example, inventory or stocks turn over would give us a measure of the
profitability of the operations, while receivables turnover ratio would indicate the
liquidity in the system.
Hence the minimum would be 3 to 4 times, but this depends upon so many factors
such as, type of industry like capital goods, consumer goods – capital goods, this
would be less and consumer goods, this would be significantly higher;
Higher and competitive it would be less as you are forced to give credit;
Whether new enterprise or established – new enterprise would be required to give higher
credit in the initial stages while an existing business would have a more fixed credit
policy evolved over the years of business;
Hence any deterioration over a period of time assumes significance for an existing
business – this indicates change in the market conditions to the business and this could
happen due to general recession in the economy or the industry specifically due to very
high capacity or could be this unit employs outmoded technology, which is forcing them
to dump stocks on its distributors and hence realisation is coming in late etc.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
For example debtor's turnover ratio is 4. Then considering 360 days in a year, the
average collection period would be 90 days. In case the debtor's turnover ratio
increases, the average collection period would reduce, indicating improvement in
liquidity.
The above points for debtor's turnover ratio hold good for this also. Any significant
deviation from the past trend is of greater significance here than the absolute
numbers. No minimum and no maximum.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Not much of significance as the entire current assets are involved. However, this
could indicate deterioration or improvement over a period of time. Indicates
operating efficiency.
Formula = Cost of goods sold/Average current assets held in business during the
year.
There is no min. Or maximum. Again this depends upon the type of industry, market
conditions, management’s policy towards working capital etc.
Not much of significance as fixed assets cannot contribute directly either to liquidity
or profitability. This is used as a very broad parameter to compare two units in the
same industry and especially when the scales of operations are quite significant.
Formula = Cost of goods sold/Average value of fixed assets in the period (book
value).
o Profit in relation to assets – this indicates the degree of return on the capital
employed in business that means the earning efficiency. Please appreciate that these
two are totally different.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Units A and B are in the same type of business and operate at the same levels of
capacities. Unit A employs capital of 250 L.E. and unit B employs capital of 200L.E..
The sales and profits are as under:
While Unit A has higher profit margins, Unit B has better returns on capital employed.
Gross profit margin = Formula = Gross profit/net sales. Gross profit = Net sales (-)
Cost of production before selling, general, administrative expenses and interest charges.
Net sales = Gross sales (-) Excise duty. This indicates the efficiency of production and
serves well to compare with another unit in the same industry or in the same unit for
comparing it with past trend. For example in Unit A and Unit B let us assume that the
sales are same at Rs.100L.E..
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The American University in Cairo PRMG -Project Budgeting and Financial Control
While both the units have the same net profit to sales ratio, the significant difference lies
in the fact that while Unit A has less cost of production and more office and selling
expenses, Unit B has more cost of production and less of office and selling expenses.
This ratio helps in controlling either production costs if cost of production is high or
selling and administration costs, in case these are high.
Net profit/sales ratio – net profit means profit after tax but before distribution in any
form = Formula = Net profit/net sales. Tax rate being the same, this ratio indicates
operating efficiency directly in the sense that a unit having higher net profitability
percentage means that it has a higher operating efficiency. In case there are tax
concessions due to location in a backward area, export activity etc. available to one unit
and not available to another unit, then this comparison would not hold well.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Profit after Tax (PAT) / Net worth. This is the return on the shareholders’ funds
including Preference Share capital. Hence Preference Share capital is not deducted.
There is no standard range for this ratio. If it reduces it indicates less return on the net
worth.
o Return on equity
Profit After Tax (PAT) – Dividend on Preference Share Capital / Net worth –
Preference share capital. Although reference is equity here, all equity shareholders’
funds are taken in the denominator. Hence Preference dividend and Preference share
capital are excluded. There is no standard range for this ratio. If it comes down over a
period it means that the profitability of the organisation is suffering a setback.
Earnings before Interest and Tax (EBIT) / Net worth + Medium and long-term
liabilities. This gives return on long-term funds employed in business in pre-tax
terms. Again there is no standard range for this ratio. If it reduces, it is a cause for
concern.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Dividend per share (DPS) + Retained earnings per share (REPS). Here the share
refers to equity share and not preference share.
The formula is = Profit after tax (-) Preference dividend (-) Dividend tax both on
preference and equity dividend / number of equity shares. This is an important
indicator about the return to equity shareholder. In fact P/E ratio is related to this, as
P/E ratio is the relationship between ―Market value‖ of the share and the EPS. The
higher the PE the stronger is the recommendation to sell the share and the lower the
PE, the stronger is the recommendation to buy the share.
This is only indicative and by and large followed. There is something known as
industry average EPS. If the P/E ratio of the unit whose shares we contemplate to
purchase is less than industry average and growth prospects are quite good, it is the
time for buying the shares, unless we know for certain that the price is going to come
down further. If on the other hand, the P/E ratio of the unit is more than industry
average P/E, it is time for us to sell unless we expect further increase in the near
future.
Leverage ratios
Leverages are of two kinds, operating leverage and financial leverage. However, we
are concerned more with financial leverage. Financial leverage is the advantage of
debt over equity in a capital structure. Capital structure indicates the relationship
between medium and long-term debt on the one hand and equity on the other hand.
Equity in the beginning is the equity share capital. Over a period of time it is net
worth (-) redeemable preference share capital.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
It is well known that EPS increases with increased dose of debt capital within the
same capital structure. Given the advantage of debt also, as even risk of default, i.e.,
non-payment of interest and non-repayment of principal amount increases with
increase in debt capital component, the market accepts a maximum of 2:1 at present.
It can be less.
From the working capital lending banks’ point of view, all liabilities are to be
included in debt. Hence all external liabilities including current liabilities are taken
into account for this ratio. We have to add redeemable preference share capital and
reduce from the net worth the same as in the previous formula.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Coverage ratios
This indicates the number of times the medium and long-term liabilities are covered
by the book value of fixed assets.
This indicates the ability of the business enterprise to service its borrowing,
especially medium and long-term. Servicing consists of two aspects namely,
payment of interest and repayment of principal amount. As interest is paid out of
income and booked as an expense, in the formula it gets added back to profit after
tax. The assumption here is that dividend is ignored. In case dividend is paid out, the
formula gets amended to deduct from PAT dividend paid and dividend tax.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Formula is:
(Numerator) Profit after Tax (+) Depreciation (+) Deferred Revenue Expenditure
written off (+) Interest on medium and long-term borrowing
(Denominator) Interest on medium and long-term borrowing (+) Installment on
medium and long-term borrowing.
This is assuming that dividend is not paid. In the case of an existing company
dividend will have to be paid and hence in the numerator, instead of PAT, retained
earnings would appear.
The above ratio is calculated for the entire period of the loan with the bank/financial
institution. The minimum acceptable average for the entire period is 1.75:1. This
means that in one year this could be less but it has to be made up in the other years to
get an average of 1.75:1.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
1. Financial position of the company Net worth, i.e., share capital, reserves and
unallocated surplus in balance sheet
carried down from profit and loss
appropriation account. For a healthy
company, it is necessary that there is a
balance struck between dividend paid
and profit retained in business so much
the net worth keeps on increasing.
2. Liquidity of the company, i.e., Current ratio and quick ratio or acid test
whether the company is in a position ratio. Current ratio = Current
to meet all its short-term liabilities assets/current liabilities. Quick ratio =
(also called ―current liabilities‖) with Current assets (-) inventory/ current
the help of its current assets liabilities. Current ratio should not be too
high like 4:1 or 5:1 or too low like less
than 1.5:1. This means that the company
is either too liquid thereby increasing its
opportunity cost or not liquid at all, both
of which are not desirable. Quick ratio
could be at least 1:1. Quick ratio is a
better indicator of liquidity position.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
5. Relationship between the net worth of Debt/Equity ratio, which establishes this
the company and its external relationship. Formula = External
liabilities (both short-term and long- liabilities + preference share capital /net
term). What about only medium and worth of the company (-) preference
long-term debts? share capital (redeemable kind). From
the lender’s point of view, this should not
exceed 3:1. Is there any sharp
deterioration in this ratio? Is so, please
be on guard, as the financial risk for the
company increases to that extent.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
8. Future plans of the company, like Directors’ report. This would reveal the
acquisition of new technology, financial plans for the company, like
entering into new collaboration whether they are coming out with a
agreement, diversification program, public issue/Rights issue etc.
expansion program etc.
9. Has the company revalued its fixed Auditors’ comments in the ―Notes to
assets during the year, thereby Accounts‖ relevant for this. Frequent
creating revaluation reserves, without revaluation is not desirable and healthy.
any inflow of capital into the
company, as this is just an entry
passed in the books
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The American University in Cairo PRMG -Project Budgeting and Financial Control
11. Has the company during the year Any increase in unsecured loans. If the
given any unsecured loans loans are to group companies, then all the
substantially other than to employees more reason to be cautious. Hence,
of the company? where the figures have increased, further
probing is called for.
12. Are the company’s unsecured loans Any comments to this effect in the notes
(given) not recoverable and very old? to accounts should put us on caution.
This examination would indicate about
likely impact on the future profits of the
company.
13. Has the company been regular in Any comments about over dues as in the
payment of its dues on account of ―Notes to Accounts‖ should be looked
loans or periodic interest on its into. Any serious default is likely to
liabilities? affect the ―credit rating‖ of the company
with its lenders, thereby increasing its
cost of borrowing in future.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
14. Has the company defaulted in Any comments about this in the ―Notes
providing for bonus liability, P.F. to Accounts‖ should be looked into.
liability, E.S.I. liability, gratuity
liability etc?
15. Whether the company is holding very Cash balance together with bank balance
huge cash, as it is not desirable and in current account, if any, is very high in
increases the opportunity cost? the current assets.
16. How many times the average Relationship between cost of goods sold
inventory has turned over during the and average inventory during the year
year? (only where cost of goods sold cannot be
determined, net sales can be taken as the
numerator). In a manufacturing
company, which is not in capital goods
sector, this should not be less than 4:1
and for a consumer goods industry, this
should be higher even. For a capital
goods industry, this would be less.
17. Has the company issued fresh share Increase in paid-up capital in the balance
capital during the period and what is sheet and share premium reserves in case
the purpose for which it has raised the issue has been at a premium.
equity capital? If it was a public
issue, how did it fare in the market?
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The American University in Cairo PRMG -Project Budgeting and Financial Control
18. Has the company issued any bonus Increase in paid-up capital and
shares during the year? simultaneous reduction in general
reserves. Enquiry into the company’s
ability to keep up the dividend rate of the
immediate past.
19. Has the company made any rights Increase in paid-up capital and share
issue in the period and what is the premium reserves, in case the issue has
purpose of the issue? If it was a been at a premium.
public issue, how did it fare in the
market?
21. What is the increase in sales income Comparison with previous year’s sales
over last year in % terms? Is it due to income and whether the growth has been
increase in numbers or change in more or less than the estimate.
product mix or increase in prices of
finished products only?
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The American University in Cairo PRMG -Project Budgeting and Financial Control
22. What is the amount of provision for In percentage terms, how much is it of
bad and doubtful debts or advances total debts outstanding and what are the
outstanding? reasons for such provision in the notes to
accounts by the auditors?
23. What is the amount of work in Is there any comment about valuation of
progress as shown in the Profit and work in progress by the auditors? It can
Loss Account? be seen that profit from operations can be
manipulated by increase/decrease in
closing stocks of both finished goods and
work in progress.
24. Whether the company is paying any Examination of expenses schedule would
lease rentals and if so what is the show this. What is the comment in notes
amount of lease liability outstanding? to accounts about this? Lease liability is
an off-balance sheet item and hence this
examination, to ascertain the correct
external liability and to include the lease
rentals in future also in projected income
statements; otherwise, the company may
be having much less disclosed liability
and much more lease liability which is
not disclosed. This has to be taken into
consideration by an analyst while
estimating future expenses for the
purpose of estimating future profits.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
25. Has the company changed its method Auditors’ comments on ―Accounting‖
of depreciation on fixed assets, due to policies. Change over from straight-line
which, there is an impact on the method to written down value method or
profits of the company? vice-versa does affect the deprecation
charge for the year thereby affecting the
profits during the year of change.
27. Has the company changed its method Auditors’ comments on ―Accounting‖
of valuation of inventory, due to policies.
which there is an impact of the profits
of the company?
29. Whether the company had sufficient Interest coverage ratio = earnings before
income to pay the interest charges? interest and tax/total interest on all short-
term and long-term liabilities. Minimum
should be 3:1 and anything less than this
is not satisfactory.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
30. Whether the finance charges have Relationship between interest charges
gone up disproportionately as and sales income – whether it is
compared with the increase in sales consistent with the previous year or is
income during the same period? there any spurt?
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The American University in Cairo PRMG -Project Budgeting and Financial Control
33. Whether the company had sufficient Debt service coverage ratio = Internal
internal accruals {Profit after tax (-) accruals (+) interest on medium and
dividend (+) any non-cash long-term external liabilities/interest on
expenditure like depreciation, medium and long-term liabilities (+)
preliminary expenses write-off etc.} repayment of medium and long-term
to meet repayment obligation of external liabilities. The term-lending
principal amount of loans, debentures institution or bank looks for 1.75:1 on an
etc.? average for the loan period. This is a
very critical ratio to indicate the ability of
the company to take care of its obligation
towards the loans it has taken both by
way of interest as well as repayment of
the principal.
35. Return on equity (includes reserves Profit after tax (-) dividend on preference
and surplus) share capital/net worth (-) preference
share capital (return in percentage).
Anything less than 15 means that our
investment in this company is earning
less than the average return in the market.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
36. How much earning has our share Profit after tax (-) dividend on preference
made? (EPS) share capital/number of equity shares. In
terms of percentage anything less than
40 to 50 of the face value of the
shares would not go well with the market
sentiments.
37. Whether the company has reduced its Relationship between amount of
dividend payout in comparison with dividend payout and profit after tax last
last year? year and this year. Is there any reason for
this like liquidity crunch that the
company is experiencing or the need for
conserving cash for business activity, like
purchase of fixed assets in the immediate
future?
38. Is there any significant increase in the ―Notes on Accounts‖ as given at the end
contingent liabilities due to any of the of the accounts.
following?
Any substantial increase especially in
Disputed central excise duty, customs disputed amount of duties should put us
duty, income tax, octroi, sales tax, on guard.
contracts remaining unexecuted,
guarantees given by the banks on
behalf of the company as well as the
guarantees given by the company on
behalf of its subsidiary or associate
company, letter of credit outstanding
for which goods not yet received etc.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
39. Has the company changed its policy of Substantial change in vendor charges, or
outsourcing its work from vendors and subcontracting charges.
if so, what are the reasons?
41. Has the company opened any branch Directors’ Report or sudden spurt in
office in the last year? general and administration expenses.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Ratio analysis – i.e. to determine the relationship between any set of two parameters and
compare it with the past trend. In the statements of accounts, there are several such pairs
of parameters and hence ratio analysis assumes great significance.
The most important thing to remember in the case of ratio analysis is that you
can compare two units in the same industry only and other factors like the
relative ages of the units, the scales of operation etc. come into play.
Comparison with past trend within the same company is one type of analysis and
comparison with the industrial average is another analysis
While one can derive a lot of useful information from analysis of the financial
statements, we have to keep in mind some of the limitations of the financial
statements. Analysis of financial statements does indicate a definite trend, though
not accurately, due to the intrinsic nature of the data itself.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
All Mentioned Industry Average have been taken according to the Market
Average at that certain date.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Resource Planning
Cost Estimating
Cost Budgeting
Cost Control
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Project Cost Management includes the processes required to ensure that the project is
completed within the approved budget. Figure provides an overview of the following
major processes:
These processes interact with each other and with the processes in the other
knowledge areas as well. Each process may involve effort from one or more individuals
or groups of individuals based on the needs of the project. Each process generally occurs at
least once in every project phase.
Although the processes are presented here as discrete elements with well-defined
interfaces, in practice they may overlap and interact in ways not detailed here.
Project cost management is primarily concerned with the cost of the resources needed
to complete project activities. However, project cost management should also consider
the effect of project decisions on the cost of using the project product. For example,
limiting the number of design reviews may reduce the cost of the project at the expense of
an increase in the customer's operating costs. This broader view of project cost
management is often called life-cycle costing.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
In many application areas predicting and analyzing the prospective financial per-
formance of the project product is done outside the project. In others (e.g., capital
facilities projects), project cost management also includes this work. When such pre-
dictions and analysis are included, project cost management will include additional
processes and numerous general management techniques such as return on investment,
discounted cash flow, payback analysis, and others.
Project cost management should consider the information needs of the project
stakeholders—different stakeholders may measure project costs in different ways and at
different times. For example, the cost of a procurement item may be measured when
committed, ordered, delivered, incurred, or recorded for accounting purposes.
When project costs are used as a component of a reward and recognition system,
controllable and uncontrollable costs should be estimated and budgeted separately to
ensure that rewards reflect actual performance.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
. Inputs . Inputs
.4 Computerized tools
. Outputs
.1 Cost estimates
.2 Supporting detail
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The American University in Cairo PRMG -Project Budgeting and Financial Control
. Inputs . Inputs
.4 Computerized tools
. Outputs
.2 Budget updates
.3 Corrective action
.4 Estimate at completion
.5 Lessons learned
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The American University in Cairo PRMG -Project Budgeting and Financial Control
On some projects, especially smaller ones, resource planning, cost estimating, and cost
budgeting are so tightly linked that they are viewed as a single process (e.g., they may be
performed by a single individual over a relatively short period of time). They are presented here
as distinct processes because the tools and techniques for each are different.
- RESOURCE PLANNING
• A construction project team will need to be familiar with local building codes.
Such knowledge is often readily available at virtually no cost by using local labor.
However, if the local labor pool lacks experience with unusual or specialized
construction techniques, the additional cost for a consultant might be the most
effective way to secure knowledge of the local building codes.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
. Work breakdown structure. The work breakdown structure identifies the project
elements that will need resources and thus is the primary input to resource
planning. Any relevant outputs from other planning processes should be
provided through the WBS to ensure proper control.
. Scope statements. The scope statement contains the project justification and the
project objectives, both of which should be considered explicitly during resource
planning.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
. Expert judgment. Expert judgment will often be required to assess the inputs to this
process. Such expertise may be provided by any group or individual with specialized
knowledge or training and is available from many sources including:
• Consultants.
• Industry groups.
. Alternatives identification.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
- COST E STIMATING
When a project is performed under contract, care should be taken to distinguish cost
estimating from pricing. Cost estimating involves developing an assessment of the likely
quantitative result—how much will it cost the performing organization to provide the
product or service involved. Pricing is a business decision—how much will the
performing organization charge for the product or service—that uses the cost estimate as
but one consideration of many.
Cost estimating includes identifying and considering various costing alternatives. For
example, in most application areas, additional work during a design phase is widely held
to have the potential for reducing the cost of the production phase. The cost estimating
process must consider whether the cost of the additional design work will offset the
expected savings.
. Work breakdown structure. The WBS will be used to organize the cost estimates and to
ensure that all identified work has been estimated.
. Resource requirements.
. Resource rates. The individual or group preparing the estimates must know the unit
rates (e.g., staff cost per hour, bulk material cost per cubic yard) for each resource in
order to calculate project costs. If actual rates are not known, the rates themselves may
have to be estimated.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
. Activity duration estimates. Activity duration estimates will affect cost estimates on any
project where the project budget includes an allowance for the cost of financing (i.e.,
interest charges).
• Project files—one or more of the organizations involved in the project may maintain
records of previous project results that are detailed enough to aid in developing cost
estimates. In some application areas, individual team members may maintain such records.
• Project team knowledge—the individual members of the project team may remember
previous actual or estimates. While such recollections may be useful, they are generally far
less reliable than documented results.
. Chart of accounts. A chart of accounts describes the coding structure used by the
performing organization to report financial information in its general ledger. Project cost
estimates must be assigned to the correct accounting category.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Analogous estimating is generally less costly than other techniques, but it is also generally
less accurate. It is most reliable when (a) the previous projects are similar in fact and not just
in appearance, and (b) the individuals or groups preparing the estimates have the needed
expertise.
Both the cost and accuracy of parametric models varies widely. They are most likely to be
reliable when (a) the historical information used to develop the model was accurate, (b) the
parameters used in the model are readily quantifiable, and (c) the model is scalable (i.e., it
works as well for a very large project as for a very small one).
. Bottom-up estimating. This technique involves estimating the cost of individual work
items, then summarizing or rolling-up the individual estimates to get a project total.
The cost and accuracy of bottom-up estimating is driven by the size of the individual work
items: smaller work items increase both cost and accuracy. The project management team
must weigh the additional accuracy against the additional cost.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
. Cost estimates. Cost estimates are quantitative assessments of the likely costs of the
resources required to complete project activities. They may be presented in summary or in
detail.
Costs must be estimated for all resources that will be charged to the project. This includes,
but is not limited to, labor, materials, supplies, and special categories such as an inflation
allowance or cost reserve.
Cost estimates are generally expressed in units of currency (dollars, francs, yen, etc.) in order
to facilitate comparisons both within and across projects. Other units such as staff hours or
staff days may be used, unless doing so will misstate project costs (e.g., by failing to
differentiate among resources with very different costs). In some cases, estimates will have to
be provided using multiple units of measure in order to facilitate appropriate management
control.
Cost estimates may benefit from being refined during the course of the project to reflect the
additional detail available. In some application areas, there are guidelines for when such
refinements should be made and what degree of accuracy is expected. For example, AACE
International has identified a progression of five types of estimates of construction costs
during engineering: order of magnitude, conceptual, preliminary, definitive, and control.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
. Supporting detail. Supporting detail for the cost estimates should include:
• A description of the scope of work estimated. This is often provided by a reference to the
WBS.
• Documentation of the basis for the estimate, i.e., how it was developed.
The amount and type of additional detail varies by application area. Retaining even rough
notes may prove valuable by providing a better understanding of how the estimate was
developed.
. Cost management plan. The cost management plan describes how cost variances will be
managed (e.g., different responses to major problems than to minor ones). A cost
management plan may be formal or informal, highly detailed or broadly framed based on
the needs of the project stakeholders. It is a subsidiary element of the overall project plan
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The American University in Cairo PRMG -Project Budgeting and Financial Control
- COST BUDGETING
Cost budgeting involves allocating the overall cost estimates to individual work items in
order to establish a cost baseline for measuring project performance.
. Cost estimates.
. Work breakdown structure. The work breakdown structure identifies the project
elements that costs will be allocated to.
. Project schedule. The project schedule includes planned start and expected finish
dates for the project elements that costs will be allocated to. This information is needed in
order to assign costs to the time period when the cost will be incurred.
. Cost baseline. The cost baseline is a time-phased budget that will be used to measure
and monitor cost performance on the project. It is developed by summing estimated costs
by period and is usually displayed in the form of an S-curve, as illustrated in Figure 2.
Many projects, especially larger ones, may have multiple cost baselines to measure
different aspects of cost performance. For example, a spending plan or cash flow
forecast is a cost baseline for measuring disbursements.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
- COST CONTROL
Cost control is concerned with (a) influencing the factors which create changes to the
cost baseline to ensure that changes are beneficial, (b) determining that the cost baseline
has changed, and (c) managing the actual changes when and as they occur. Cost control
includes:
• Ensuring that all appropriate changes are recorded accurately in the cost baseline.
Cost control includes searching out the "whys" of both positive and negative variances.
It must be thoroughly integrated with the other control processes (scope change control,
schedule control, quality control, and others as discussed in Section 4.3). For example,
inappropriate responses to cost variances can cause quality or schedule problems or
produce an unacceptable level of risk later in the project.
. Cost baseline.
. Change requests. Change requests may occur in many forms—oral or written, di-
rect or indirect, externally or internally initiated, and legally mandated or optional.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Changes may require increasing the budget or may allow decreasing it.
. Cost change control system. A cost change control system defines the procedures
by which the cost baseline may be changed. It includes the paperwork, tracking sys-
tems, and approval levels necessary for authorizing changes. The cost change control
system should be integrated with the overall change control system.
. Revised cost estimates. Revised cost estimates are modifications to the cost infor-
mation used to manage the project. Appropriate stakeholders must be notified as
needed. Revised cost estimates may or may not require adjustments to other aspects of
the overall project plan.
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. Budget updates. Budget updates are a special category of revised cost estimates.
Budget updates are changes to an approved cost baseline. These numbers are generally
revised only in response to scope changes. In some cases, cost variances may be so
severe that "rebase lining" is needed in order to provide a realistic measure of
performance.
. Corrective action. Corrective action is anything done to bring expected future pro-
ject performance into line with the project plan.
• EAC = Actual to date plus the remaining project budget modified by a per-
formance factor, this approach is most often used when current variances are seen as
typical of future variances.
• EAC = Actual to date plus a new estimate for all remaining work. This approach is
most often used when past performance shows that the original estimating
assumptions were fundamentally flawed, or that they are no longer relevant due to a
change in conditions.
• EAC = Actual to date plus remaining budget. This approach is most often used when
current variances are seen as atypical and the project management team's expectation is
that similar variances will not occur in the future.
Each of the above approaches may be the correct approach for any given work item.
. Lessons learned. The causes of variances, the reasoning behind the corrective action
chosen, and other types of lessons learned from cost control should be documented so
that they become part of the historical database for both this project and other
projects of the performing organization.
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Project Control
Of Engineering Projects
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OVERIEW
The goal of exercising control is to achieve project objectives; there are cost, time,
Performance and scope targets those are always important. As we have noted, we
exercise Control to bring Performance back on target by comparing Performance to
plan and taking Corrective actions when deviations or variances.
Naturally, if you can't tell where you are, you can't exercise control. Note the word
estimate in measuring progress. What is an estimate?
It’s a guess and so we are guessing about where we are. Well know where we are
when we get there until we actually arrive, we are guessing.
Does this not sound like something from Alice in wonderland? Now, what was that
definition of control again? Let's see – compare where you are…..
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Oh. So if one guess doesn’t agree with the other guess, we are supposed to take
corrective action to make the two of them agree, is that it?
The difficulty of measuring progress doesn't justify the conclusion that progress
shouldn't Be measured. You cannot have control unless you measure progress.
Well, since it is impossible to know for sure where we are, then perhaps we should
just give up on the whole thing and keep running projects by the seat of the pants.
Right?
Wrong
The fact that planning and monitoring progress may not always be accurate does not
justify the conclusion that they shouldn’t be done. Remember, if you have no plan,
you have no control, and if you don’t try to monitor and follow the plan, you
definitely don’t have control and if you have no control, there is no semblance of
managing.
What is important to note, however, is that some projects are capable of tighter
control than others. Work that can be accurately measured can be controlled to tight
tolerances. Work that is more nebulous (such as knowledge work) has to allow larger
tolerances.
Management must recognize this reality and accept it. Otherwise, people will go
crazy trying to achieve 3 percent tolerances. It’s like trying to push a noodle in a
straight line or nail jelly to a wall.
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Project control
One important distinction should be made here. The word< control> often refers to
power, authority, command, or domination. Another meaning, however, is that of
Guiding a course of action to meet predefine objective. This is meaning of Control
that should be applied to project control systems. With these ideas in mind, let’s look
at some premises of management control systems.
The objective is to get the work done, not Make worker s < toe the line.>
Authoritarian management generally leads to an atmosphere that breeds resentment
and stifles creativity –- just the opposite of what is needed. Control should be viewed
as a tool that the worker can use to perform more effectively and efficiently.
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.Methods of obtaining control data must be built into the work process.
That is, those doing the work must be able to tell where they are at any given Time.
When driving, we use road signs to tell us where we are, and we Compare those
against our map to see if we are in course. If bricks wall is being constructed t of the
wall) so that the figure can be compared with the Plan. As pointed out previously,
however, knowledge work is harder to Measure and usually will be an estimate of
progress.
As a further consideration, only data that is actually required for control should be
Collected, The control process should not be a burden.
That which is exceptional at one level may be routine at the next-higher level.
Only the most pressing problems should find their way to the top level of control.
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- Project plan :
Even though there are limits in assessing exactly how much work has been done on
a Project, there can be no control unless some assessment is done. The most robust
Method of measuring project progress is through variance or earned- value analysis.
The Method was originally developed to measure work accomplishment in
manufacturing, And was later adopted as part of the cost/ schedule control systems
criteria (C /SCSC) for Measuring progress in project s if you have knowledge of
standard cost systems in Measuring progress in project s .If you have a knowledge of
standard cost systems in Manufacturing, you will be right at home with earned –
value analysis First, we define variance as any deviation form plan. Variance
analysis allows the project Manager to determine< trouble spots > in the project and
to take corrective action .there Are four areas of the project that the project manager
is expected to con troll .these are the performance, cost time, and scope objectives.
Variance deviation from plan Cost is the easiest of the four variables to measure.
The others can become considerably more difficult.
If the deviation is not significant, it can be ignored, but note the word significant.
What is meant by significant should be determined in the planning stage of a project
In general, a deviation should exceed 5 percent to be considered significant, since
most control systems cannot maintain a tighter tolerance.
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Example
Consider, for example, that you are building a brick wall. The plan calls for a
vertical wall 10 feet high and 1foot thick. You can inspect to see that the wall is
vertical and that the mortar is clean –this is performance or quality of work done.
You can also measure the height and thickness. If you find that the wall is only8feet
high, you know that work on the wall is behind schedule. What is completed is only
about 80percent of what was planned. The measure isn't perfect, but it is much better
than can be gained in knowledge work projects.
Example .
As an example, assume that a programmer is writing code. He estimates that he will
have about 10.000 lines of code in the module, and he has written about 8000 lines.
Is he 80 percent complete? Probably not .For one thing, you can t tell if unfinished
code will work when it is finished, so you have no idea about quality. Also, you
don’t obtain a good measure of percent complete by taking a ratio of lines written to
estimated lines required.
So if you don’t know scope or quality, you can t know anything about progress on
Schedule. The only measure that is accurate is cost. You know how many hours the
Programmer has worked on the code, but that is all.
If we begin by measuring scope and performance, we- can then determine if there
are Schedule and cost variances. These are defined as follows:
Cost variance: compares deviations only from budget and provides no comparisons
of work scheduled and work accomplished.
Schedule variance: compares planned versus actual work completed. This Variance
can be translated into the dollar value of the work, so that all Variance can be
specified in monetary terms.
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In some organizations, project managers do not deal with costs, but rather with
labor-hours. Once standard Variance analysis has been presented in terms of cost,
method of dealing with working hours will presented.
- project Monitoring :
In order to assess cost and schedule variance, three measures are used. The
definitions Are provided below, together with examples of how the measures are
calculated.
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The budgeted cost of work actually performed in a given period. BCWP is also called
earned value. It is a measure of how much work has been accomplished. The BCWP
figure is calculated as follows. For the example- assume that two Employees who are
assigned to work for a full 40hours each do indeed put in that Amount of effort. One
worker actually gets her work complete, while the other does not. He completes only
about 80percent of the work supposed to be done. The worker
Assigned to put in only 30 hours also completed his work as planned. We say that
the Earned value of the work completed, then, is as follows
40hours × 30/hour = 1200
0.8× 40hours × 30/hour = $ 960
30hour× $ 50/hour = 1500
Total BCWP = 3660
The amount of money actually spent in completing work in a given period. This is the
amount of money paid to workers to do the work that was completed during the time
period in question. To continue with the above example, assume that the work
completed has actually cost the organization $ 3900. If this figure were compared with
BCWP, we might think the Project was in good shape. The scheduled work was
supposed to cost 3900, and that is what has been paid in labor? However, we also
know that one person did not get through with the work he was supposed to do. the
value of his accomplishment is only 960, but Was supposed to do 1200. In order to
see what this means for the project, the following Formulas are employed:
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Again, a negative schedule variance means that the project- is behind schedule, and
so is also unfavorable. Looking at these two figures together tells us that the project
has gotten behind schedule in the amount of $ 240 worth of work.
What is an S-curve?
An S-curve, also called a cost baseline, is a time- phased cost model that is used to
Determine cost & schedule variance for a project. A project s S-curve is created by
totaling The estimated costs for each phase of a project and then placing the total
estimated onto A graph that represents that cost at all times throughout the project.
The S-curve is shaped as an <S> due to the rate money is spent on a project. As a
project is initiated, the spending rate is slow. Then, throughout the planning and
executing steps, the Spending rate increases, resulting in a steadily rising curve. As
the project goes through the Controlling and closing steps, the spending rate slows
so that at the end of the project, the Slope of the curve is not as steep.
The difference in heights on the chart between the planned S-curve and the actual
Expenditures represent s a cost variance for the project. The S-curve for a project
provides an easy way for stakeholders to compare actual costs for a project against
the projected costs.
Variances are often plotted using spending curves. Figure 1.1 is a BCWS curve for
a Project .It shows the cumulative spending planned for a project, and is sometimes
called a baseline plan. Such curve can often be plotted automatically by transferring
spending Data form a scheduling program (which calculates labor expenses on a
daily or weekly Basis by multiplying labor rates times' labor – hours expended) to a
graphics program.
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In the event that software is not available to provide the necessary data, figure1.2
Shows how data for the curve is generated. Consider a simple bar chart schedule.
Only Three tasks are involved. Task 1 involves 40 labor- hours per week at an
average loaded Labor rate of 20 per hour, so that the task spends 800 per week
task 2 involves 100hours per week of labor at 30 per hour, or 3000 per week .
Finally, task3 spends $ 2400per week, based on 60 hours of labor at $ 40per hour.
Task A
Task B
Task C
Weekly
Spending
Cumulative
Spending
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At the bottom of the chart we see that during the first week 800 is spent for project
Labor; in the second week both tasks 1 and 2 are running, so the labor expenditure is
3800. In the third week, all three tasks are running, so labor expenditure is the sum of
the three, or 6200. These are the weekly expenditures. The cumulative expenditures
are calculated by just adding the cost for each subsequent Week to the pervious
cumulative total .At the end of week 1, 800 has been spent. At The end of week2, the
figure is 4600; at the end of week 3, it is 10,800; and so on these cumulative
amounts are plotted in figure1.3. This is the spending curve for the Project, and is
another BCWS curve. Since it is derived directly from the schedule, it represents
planned performance and therefore is a baseline plan. Further, since control is
exercised by comparing progress against plan, this curve can be used as the basis for
such comparisons so that the project manager can tell the status of the program.
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- project Evaluation:
Cost variance
Costs are readily summarized and reported back to project management via the
financial community which exists in every company to take care of payroll, billing,
subcontracts, etc.
In a typical project management environment, the one extra step of comparing the
planned Budget to the actual expenditures on a periodic basis (weekly, monthly, etc.)
is readily accomplished. This gives rise to the first measure of successful
performance, the cost Variance, defined herein as:
How does the cost data assist in measuring technical success being?
Investigated herein? Obviously costs are one important part of the project triangle;
but, costs are really an outgrowth or derivative of the two other parts of the
triumvirate planning process, schedule and technical tasks, which preceded costs in
the planning of the project.
To get to that elusive measurement of technical success, the process must march
backward along the path that created the project. The next step to be examined is the
schedule, step two, in the planning process.
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Schedule variance
Measuring scheduler success is somewhat of a subjective departure from the hard,
cold cost Data in the special information must be set up in the plan to identify key
milestones thought to be significant to the project. Furthermore, these milestones
must be of sufficient quantity And small enough periodicity to provide management
with a quantitative measure, i.e., the Second variance in the project, defined herein
as:
Using the BCWS, BCWP, and ACWP, there are two variance that can be calculated:
cost Variance, or CV, and schedule variance, or SV.CV and SV can be calculated for
one Activity at a time or the individual variance for each activity can be totaled to
arrive at Overall project variance. The equation to determine CV for an activity is as
follows:
CV = BCWP – ACWP
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SV = BCWP – BCWS
IF this equation results in a negative number, the project team is behind schedule for
the activity. If the equation results in a positive number, the project team is ahead of
schedule for the activity. If the value of the equation is zero, then the activity is on
schedule
What are the formulas used to calculate performance efficiency?
To calculate the SPI, which is the ratio of budgeted cost of work performed to
budgeted cost?
Many project managers use these formulas more than the most variance and
schedule Variance formulas because these formulas provide an easy way to compare
the index a Baseline of 1. In other words, any CPI that is greater than 1 indicates that
the cost Performance of the project is highly efficient and CPI less than 1 indicates
that the cost Performance is not efficient. The same analysis applies to the SPI
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Example
Consider the curves in Figure1.4. On a given date, the project is supposed to have
accomplished $ 50,000 in labor (BCWS). The people working on the project were
supposed to do 1000 hours of work at a loaded labor rate of $ 50 per hour. When the
project manager Checks progress, he finds that the amount of work actually
accomplished to date is 80 Percent of what was supposed to be done. The value of
this work to the organization is then, 80 percent of the scheduled work (BCWS), $
40,000. This is shown in Figure1.4.
The actual cost of the work per formed (ACWP) is $ 60,000. This might be because
the People doing work have put in 1200 hours at $ 50 per hour, or they put in 1000
hours of work but the labor rate escalated to 60 per hour. Actual cost variance,
then, is a composite variance. Either way it occurs, it means that labor is costing
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more than was originally planned. These Figures are usually obtained from
accounting, and are derived from all the time cards that have reported labor applied
to the project. Note that material or capital equipment costs are not included in these
figures. They are kept in a separate account the first question we ask is <what is the
project status?> we always begin with schedule variance, which is BCWP- BCWS
.In this case, 40,000 - 50,000, or 10,000. That is the project is 10,000 worth of
work behind schedule. Note in Figure1.4 that this variance can be obtained in dollars
or time units. The project should have hit the 40,000 point earlier, so if you drop a
perpendicular down to the time axis, you can see that project is x units behind
schedule.
The cost variance is BCWP – ACWP. Think always of BCWP as what you got for
the effort expended. We are then taking the difference between what we got for our
money and what it cost us. In this case, we have $ 40,000 - 60,000, or - 20,000.
If we say it in words –- we spent 60,000 to accomplish 40,000 worth of work ---
we see that we are not getting enough for our expense. Note that the 20,000
variance is the sum of two variance. We are 10,000 above budget (BCWS) and
10,000 behind schedule, so the total cost or spending variance is the sum of the
two. Thus, we are behind schedule and overspent. This is the worst situation project
can be in .It is bad enough to be behind schedule or overspent, but to be both at the
same time is really A problem and, unfortunately, it happens. The second question
we answer we must answer is, <what caused the deviation?> we generally don’t
Know for certain. The estimates could be wrong. The work turned out to be harder
than we expected, or there were unforeseen problems that caused the work to take
longer and cost more than originally estimated.
Or the people may have been unproductive. We don’t know in many cases. The third
question that must be answered is. <What should be done about the variance?>
There are a number of possibilities. Figure1.5 plots trends for the BCWP and ACWP
curves. If nothing changes, this appears to be where they are headed. Note that the
BCWP curve must eventually hit the total labor figure of x, and if it continues as
shown, the project will be Late by x.
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The ACWP curve must intersect the finish date, so at its present rate it will go up to
Approximately x dollars, which means that the project will end up late and yet spent
by x Dollars. But what if it is unacceptable to slip the end date? Can it still be met?
There are two possibilities. Note in Figure1.5 that if the scope were reduced to x
dollars, the Project could be finished on time, even though it would be overspent by
x dollars. If such a Solution is acceptable to all stakeholders, then we could continue
the project so that it would finish in this manner. However, if it is not acceptable to
be late or to reduce scope, then we are going to have to accelerate the work, making
the BCWP curve turn upward, so that it will intersect the finish Point on the required
date. As shown, it is likely to cost us more money to do this, so the Project will wind
up spending x dollars. Now you may ask if it isn’t somehow possible to finish on
time without taking such a big hit on spending. The answer is, it is highly unlikely. It
has been found that if a project is in Trouble only 15 percent of the way along the
horizontal timeline, it is going to stay in trouble. A Study of more than800 defense
contract project that was behind schedule or overspent at the 15percent mark showed
that note one ever recovered. The reason? Think about where The BCWS curve
came from. It is based on all our estimates of how long work will take. Another
word for estimating is forecasting.
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Now, with all due respect to weather forecasters, we know that if they can't tell us
what will happen tomorrow, there is not much reason to believe that their long- term
forecasts will be accurate. The same is true for project. If you can't forecast the near-
term work accurately, why should you believe your end-of – project estimate will be
right?
This is good news, bad news story. The good news is that you can't tell early in a
project that it is likely to be a <bad> project, and you can take steps to cancel or
make changes to the plan early. The bad news is that, if a project is doing well at the
15 percent mark, it won't necessarily continue to do so .
Example
Figure1.6 illustrates another scenario. The BCWP and ACWP curves both fall at
the same Point, 60,000. Beginning with the first question <what is the project
status?> we see that the project is ahead of schedule, but spending correctly for the
amount of work done. When we say it in words; we have spent 60,000 and have
accomplished 60,000 worth of work.
However, the plan called for 50,000 worth of work, so the schedule variance
(BCWP- BCWS) is positive 10,000 worth of work, meaning the job is ahead of
schedule.
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we ask is, <what caused the deviation?>the most common cause is That extra
resources were applied, but at the planned labor rate (since there is on spending
variance). Then the question is where the project manager came up with the extra
people. In a shared- resource environment there are two possibilities: Either someone
else had problems, couldn’t use certain resources, and gave them to the project
manager or the manager diverted them to the project at someone else's expense. In
construction project this situation often occurs because weather delay days are built
into the schedule, and the weather remains good, so people are able to do work they
didn’t think they would be able to do, but is costing the correct amount.
The next question we ask is, <what should be done about the variance?>if you are
like most People, your first thought is<what does he mean, what should be done
about it? I'm ahead Of schedule and spending correctly, so I'm not going to do
anything about it>. I know, it sounds crazy to think you might need to slow down,
but you might.
The reason? Ask yourself if being ahead of schedule could cause problem in the
project, and you will see that it is possible. If you are producing something, your
customer might not be able to use it if you finish early, and you have to pay to store
it. Or you may reach a point in the project at which the people now have nothing to
do, and you have simply delayed the inevitable.
Another consideration is cash flow. Even though the project is ahead of schedule,
can it be funded at the rate being spent? If not, then the work would have to be
decelerated. This might be true in construction project, where contractors want
progress payments for the work they have done, and your controller can't pay the
bills because money isn’t coming in at the same rate as it is going out.
I know the scenario is a little depressing. Just when you thought you were doing a
good job—you got ahead for the first time in your life—people start telling you to
slow down.
Naturally, it is a matter of degree. If you are a tiny bit ahead, no one is going to get
excited however, the variances I have shown in the figures are fairly large
percentage deviations, and you may need to slow down in that case.
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Example
The next set of curves illustrates anther situation. In Figure 1.7 the BCWP and
ACWP Curves are both at40, 000. This means the project is behind schedule and
spending okay.
The most likely cause? This project is starved for resources (perhaps the victim of
another Project manager being ahead). Labor is costing what it is supposed to cost.
But not enough Work is being done to stay on schedule. In asking what you want to
do, most of the time you want to get back on schedule. The problem here is that the
preheat manager will probably go Over budget in trying to catch up, since premium
labor will most likely be required.
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Example
Finally, Figure1.8 looks like Figure1.4, except that the ACWP and BCWP curves
have been reversed. Now the project is ahead of schedule and under spent. The
accomplished work has an earned value of 60,000, but the actual cost of that labor
has been only $40,000. At first glance, this looks wonderful. But ask yourself how
the variances happened.
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There are three possible explanations for how this project- manager achieved the
result Shown:
1- Actual labor rates were considerably lower than expected and/ or the people
2- The project team had a<lucky break.> the team had expected to have to
Work really hard to solve a problem, but it turned out to be very easy.
Playing it safe.
If you believe situation 1, you will believe anything. It is very unlikely that both
variances would happen at the same time. Situation2 happens occasionally. When all
the planets are aligned—about once in a zillion years, you say. You bet!
Situation 3 is the most likely explanation. The project manager easy is playing it
safe. And he would tell you that there is no problem. After all, if he continues along
this course, the project will come in ahead of schedule and under spent, which means
the manager will give money back to the company. No problem.
The question is, naturally, <what is reasonable?> we certainly cannot expect to have
zero variances in a project. And this is true. It all depends on the nature of our
business. Well- defined construction project can be held to very small tolerances---
as small as plus- or- minus 3 to 5 percent. Research and development project are
likely to run higher tolerances, perhaps in the range of 15 to 25 percent. Each
organization has to develop acceptable Tolerances from experience.
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Cross- Charging
There is another way to deal with the project that are above and below on spending.
You tell people working on the overspent project, < don’t charge any more time to
this one.
Charge your time to the under spent project. <That way, both projects will come out
right on target, and everyone will think you are doing a super job of managing.
This is called cross- charging. If you are doing defense contracting, you will be put
in jail if you are caught. Why? Because you are lying about what you have actually
done. If you Cross- charge, you are reporting more work being accomplished on one
job than you actually did, and less on the other.
But whether or not you are doing defense contracting, you are contaminating both
project databases, and at the end of the job you won't know what either one really
cost you .Does it matter? Of course. If it is new- product development you are doing,
part of the pricing formula is the cost to develop the product? One product is going
to appear lower than it is and the other will appear higher. The pricing of both will
be wrong. Further, if a competitor enters the market, the salespeople don’t know for
sure if they can lower the selling price and still make a profit. They also don’t know
when the breakeven point is reached.
Worse yet, the status information on the project is used to decide whether to cancel
the job if it is in trouble, and if you start charging time to other projects, you make it
impossible for that decision to be made. The proper way to deal with this situation is
to do aboveboard transfers of money. You reduce the budget for the project that is
doing well, and increase the budget for the other. That way, the databases are not
contaminated.
The fear that managers have is that once they give money back, they can't recover it
should an unforeseen problem occur? Then they will come in over budget, which
would not have happened if they had held on to the money.
It is a dilemma, and there is an easy answer. The question – always is whether you
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expect to continue as you have already performed. If so, then give some of the
money back. If not, then keep it. However, the best predictor of future performance
is past performance, and we would generally not expect a successful a ongoing
project to suddenly start getting in trouble, unless we knew that there were potential
risks ahead.
Note that we said give part of it back. It is proper risk management practice to have a
small contingency in a project to cover normal variances. All targets are estimates,
and you can be sure that the variances won't be zero. As we pointed out previously,
if you can hold tolerances of 5 percent, keep that much in reserve. If your tolerances
are larger, keep a larger reserve account. No matter how you do it, this account
should be aboveboard. It should be agreed to by everyone involved.
- Project Forecasting:
The estimate at completion, or EAC, is the total estimated cost for a project activity
once the work has been completed. There are several methods for determining an
activity's cost EAC. Most of these methods include an adjustment to the original cost
estimate based on the Current status of the project.
Adding ACWP to a new estimate for the remaining work needed to complete The
activity, resulting in new estimates for the balance of the project .This Formula is
used when past performance indicates that the original cost Assumptions were
flawed. Frequently, this formula is used if sufficient changes in scope, time, or
quality require the project to adopt a new baseline adding ACWP to the remaining
budget without making any modifications, since current variances are considered
atypical. This formula is used when the Project team has a high degree of confidence
that the current variances will not occur in the future and that the budgets for
remaining activities were accurate Adding ACWP to the remaining budgets is the
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most common method for Determining EAC. The EAC can be calculated using the
CPI for a project by using the following Formula:
When using the CPI to calculate EAC, the project team assumes that the
Performance for the remainder of the project will be based on the same CPI.
Budget at completion or BAC, is the estimated total cost of the project when done
and is generally calculated before a project begins. The BAC is calculated by adding
together all Individual BCWS calculations for each portion of a project. Another
name for BAC is the <baseline>
Determining the VAC helps indicate any significant cost variances that should be
reported to project stakeholders. If the variance is great enough, the project manager
shoaled consult the teams cost management plan in order to take the correct cost
control measures
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The only problem with the analysis presented here is that it is an aggregate, and does
not permit determination of what area of the project a problem exists in. It may even
hide a Problem completely. For that reason, the variance analysis needs to be
conducted on a task –By-task basis. This is usually done at whatever level in the
work breakdown structure you have scheduled the work.
For example, someone who had been using aggregate analysis to gauge project
status for some time. He discovered that a 100,000 overspend in one area of a
project was being Counterbalanced by a 100,000 under spend in another area. Such
a project looks like it is in Good shape, but the huge variances indicate a lack of
control, and should be addressed.
Figure 1.9 shows how individual tasks are tracked. The form has been filled in with
some Data to illustrate the various combinations of numbers and their meanings.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Totals: 0 0 0 0 0 0 0 0 NA NA
Figure :
Earned- value Tracking Report Form The project status report shows the levels of
project costs and work completed to date for each work package (or whatever level
you wish to use to report progress). The columns contain the following information:
. Column 2: BCWS (budgeted cost of work scheduled to date). Look again at Figure
1.2 Fortask1, at the end of the first week, the BCWS figure is 800.At
the end of the second week, it is 1600. Note that for task2, nothing will
be entered into this cell until week2.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
. Column 4: ACWP (actual cost of work performed to date). This is the actual cost of
labor to date, as previously defined.
. Column 6: Budget variance. This is the difference between ACWP and BCWP,
calculated by the spreadsheet
. Column 7: At-completion target cost for the work. For task1, the at- completion
Cost for labor will be 2400(three weeks at 800per week). For task3,
the at Completion cost will be 14,400 (six weeks at 2400 per week).
Naturally, labor Spending will not always be uniform. This example
uses uniform Spending for Simplicity.
.column8: The latest estimate of what the work will cost when complete. If we
find On task 1 that we actually have to spend 22 per hour for labor
rather Than the 20 that was originally budgeted, but we expect the
work to be Completed in the same number of working hours as
originally estimated, then the budgeted- at- completion (BAC) figure
will be 22×40×3, or 2640, rather than the originally budgeted 2400.
The result is an overspend of 240. It is also possible for the BAC to
differ from the original estimate because more or fewer labor hours
will be needed, but labor costs will be what were originally planned.
The BAC figure is extremely important when decisions are being made
as to whether to continue or terminate a project.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
- Corrective actions:
As is true for control charts used to monitor manufacturing processes, rules can be
devised for responding to the critical ratio .Meredith and Mantel (1985) suggest
limits and actions as Shown in Figure 1.10. These limits are only suggestions, and
project managers will have to devise limits that are appropriate for their own
programs.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Print <OK> if the critical ratio (CR) is between the values 0.9 and 1.2.
Print<CHECK> if the CR is between 0.8 to 0.9 or 1.2 to 1.3. Print <RED FLAG> if
the CR is above 1.3 or below 0.8.
In addition, if the ratio falls below 0.6 company management should be informed,
since Progress is so much worse than expected that the project may be cancelled.
Note that the example is set up so that the bottom- line summary for the project
looks very good. The critical ratio for the overall project is 0.96, indicating that
everything is fine.
However, there are three work packages with RED FLAGS and two with CHECKS
indicated, which means that some parts of the project are in trouble.
However, a complete assessment of the project cannot be dong using just this report.
We also need to know exactly where in the project these work package fall. Are any
of the ones with problems on the critical path? If so, we Know we have a more
serious problem than indicated by the summary analysis .Even if none are critical,
are any of them behind far enough to be running out of float? If so, then they will
soon be critical.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
ASSIGNMENTS
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Assignment( )
Accounting Equation
1. The total assets and liabilities at the beginning and end of the year for brown company are
listed below
Assets liabilities
Beginning of the year $ 45.000 $ 11.000
End of the year $ 120.000 $ 20.000
Determine brown company"s net income for the year under each of the alternatives that
follow, which the owner made:
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Assignment ( )
Transactions Recording
Problem :-
Seven stars company a single proprietorship operated by Ahmed Hassan . Involved the following
transactions:
1985
Jul.1 Ahmad opened bank account under the name of seven Stars Company and made deposit,
taken from her personal saving account of $ 150.000 to start the new business
5 Purchased land and building for 60.000 in cash. The land was valued at 20.000; The Building
at 40.000. Issued check no.1.
11 Received furniture purchased on open charge account from the Jones Company for 12.000;
Supplier's invoice dated July 8. 1985.
20 Paid the Jones Company $9.000 from the amount owed to it. Issued check no .2.
25 The company found that some of the furniture was not what it wanted. So it sold the furniture
which had cost 2.500 to Ali Mahmoud for 2.500 on account. Mahmoud promised to pay this
amount in 30days; issued invoice no.1
29 Collected 1.600 from Ali Mahmoud from the amount he owed to seven Stars Company for the
Furniture sold to him on July 25
30 Invest 1.300 in his company after selling some of his personal heritage.
- Arrange the pervious transactions in assets liabilities and owner equity account to exhibit:
Cash, accounts receivable, land, building, furniture, accounts payable and Ahmed's capital
- Show by addition and subtraction the effect of the transaction on accounting equation.
- Show the new balances after each transaction
Followed
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Problem :-
Six transaction of horizon moving company are summarized below in equation from .each of six
transactions is identified by a letter .for each transaction you are to write a separate sentence
explaining the nature of transaction
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Assignment ( )
Debit and Credit
Problem :-
Prepare the necessary T-account for the following transactions of Good times wheel
repair Shop that occurred during January2012
Jan 3 Lucy Genova opened a bank account under the name of her new business good
times wheel repair shop she deposited 50000 in cash to start the new business
4 Rented a temporary shop and paid 600 of the January rent: issued check no 1
5 Rented automotive tools and equipment until the firm could purchase its own stuff
in the amount of 100 that was paid on January: issued check no 2
10 Purchased land as prospective building site for 20.000 paid 8.000 in cash (check
no3) and issued a one- year note for the balance
26 Made repair to Jay Munson’s motorcycle for 250 and was paid 180 a charge
account was opened under his name.
29 Purchased motorcycle parts and supplies from the Delco supply house for 650 on
account (invoice no 1004)
29 Paid the southern supplies company 400 from what they owed (check no
4)
Followed
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The American University in Cairo PRMG -Project Budgeting and Financial Control
31 Paid 2.700 as salaries for the month (check no 5 issued to obtain payroll cash)
31 Lucy Genova withdrew 600 in cash in anticipation that at least that much income
will be earned (check no 6)
31 Purchased automotive tools and equipment for cash 4.000 (check no7)
31 Received a check for 100 from George shipman as part payment of his account
31 Received the telephone bill for 500, and promised to pay later.
Problem :
Prepare a Balance sheet, income statement, and owner's equity statement for the good
times wheel repair shop.
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Assignment ( )
Adjustment
Assume that the Genove trucking company started business in June 1.2012 Assuming
that the books are closed on June 30.2012 the following trial balance was prepared
Genove trucking company
Trial balance
June ,
Acc. Account title Debit credit
101 Cash $ 5.250
111 A/R 550
112 N/R 1.440
131 Office supplies 230
141 Prepaid insurance 2.160
142 Prepaid rent 1.500
201 Office equipment 1.400
211 Trucks 26.000
301 A/P 200
302 N/P 8.000
321 Unearned rant 600
401 Lucy Genova capital 25.000
404 Lucy Genova drawing 500
501 Trucking revenue 7.465
601 Heat and light expense 40
602 Maintenance and repair expense 375
603 Telephone and telegraph expense 95
604 Gas and oil expense 525
605 Wages expense 1.200
41.265 41.265
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The American University in Cairo PRMG -Project Budgeting and Financial Control
The following adjustments are to be recorded in order to prepare the balance sheet:
a . Rent in the amount of $1.500 was paid for three months on June1, 2012.
b. Insurance premium of 2.160 for comprehensive three –year insurance policy was paid on
June1, 2012.
d. Company rented out one of its trucks on a part –time basis and collected rent of 600 in
e. The office equipment purchased on June1, 2012 has estimated life of 10 years and a
Salvage value of 200 at the end of this period: this is to be depreciated by using the
g. The trucks purchased on June1,2012 has an estimated life of 10 years and a salvage
Value of $2000 at the end of this period: this is to be depreciated by using the straight line
method.
h. The company lent 1.440 at 15 interest for 30 days note, issued on June20, 2012.
i. Wages of 150 for June28, 29and30 have not been paid or recorded.
j. The company borrowed money from a bank on June22 and issued a45 days note at
Prepare the adjusted trial balance in addition to the ordinary financial statements
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Assignment ( )
Financial Ratios
Richard Rutledge .A retired schoolteacher holds a large number of stocks in the Bangor
corporation .the dividend payment from this stock make up a significant portion of
Mr.Rutledge's income so he was concerned when Bangor dropped its2012 dividend to$
1.25 per share from$ 1.75 per share it had paid for the previous two years.
Bagnor corporation yearly balance sheet for the year: ending December
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Bagnor corporation yearly income statement for the year: ending December
2010 2011 2012
Sales $ 4.135.000 $ 4.290.000 $ 4.450.000
Cost of goods sold 3.308.000 3.550.000 3.560.000
Gross operating profit $ 827.000 $ 740.000 $ 890.000
Gen. Admin. &.selling expenses 318.000 236.320 256.000
Other operation profit 127.000 159.000 191.000
EBIT $ 382.000 $ 344.680 $ 443.000
Interest expenses 64.000 134.000 318.000
Net income before taxes 318.000 $ 210.680 $ 125.000
Taxes (40 ( 127.000 84.270 50.000
Net income $ 191.000 $ 126.410 $ 75.000
Number of shares outstanding 23.000 23.000 23.000
Per share data
EPS $ 8.30 $ 5.50 $ 3.26
Cash dividend per share $ 1.75 $ 1.75 $ 1.25
Market price (average) 48.75 25.50 13.25
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The American University in Cairo PRMG -Project Budgeting and Financial Control
1. Calculate the key financial ratios for Bagnor Corporation graph them and analyze the
Trends in the firm's ratio in relation to the industry average
(Assume the industry average constant for 2010,11,and12)
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Assignment ( )
Cash Flow Analysis
Problem ( ):-
all retained amounts are received one month after the completion of the project
Chart 1: the following chart illustrates the duration and the total cost of six activities in a project
Plot the cash–in and cash–out curve for the project and tabulate the amount to
be financed every month
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Assignment ( )
Project Control
A utility project has a 1.000.000 L.E .Budget and to be executed writhen 30 month the
project consists from the following activities:
- Excavation
- Plain concrete
- Masonry works
An update was required for this project and the planned data for this period was
computed through the planning software as follow:
1. Excavation works = 1000m3 x 15 L.E/m3 = 15.000 L.E.
The Actual to date data was received from the site as follows:
o Excavation works = 900m3 with total actual costs = 18.200 L.E.
Calculate:
1 - The cost variance and explain its budgeted status for each activity
2 - The schedule variance and explain its scheduled status for each activity
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The American University in Cairo PRMG -Project Budgeting and Financial Control
GLOSSARY
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Glossary:-
Application----------------------------------------------------------------------------------------- تطجيك
Assets----------------------------------------------------------------------------------------------- اصىل
Auditing------------------------------------------------------------------------------------------ انًشاجؼخ
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Balance--------------------------------------------------------------------------------------------- سصيذ
Cash-------------------------------------------------------------------------------------------------- َمذيخ
Collections---------------------------------------------------------------------------------------- تذصيم
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Creditor----------------------------------------------------------------------------------------------- ٍدائ
Current--------------------------------------------------------------------------------------------- انجبسي
Earn------------------------------------------------------------------------------------------------ يكتست
Employ--------------------------------------------------------------------------------------------- يىظف
Entry------------------------------------------------------------------------------------------------- ليذ
Equipment---------------------------------------------------------------------------------------- يؼذاد
Estimate-------------------------------------------------------------------------------------------- يمذس
Estimation----------------------------------------------------------------------------------------- تمذيش
Expenditure----------------------------------------------------------------------------------- يصشوف
Fees----------------------------------------------------------------------------------------------- اتؼبة
Finance------------------------------------------------------------------------------------------ تًىيم
Fiscal---------------------------------------------------------------------------------------------- ًيبن
Furniture--------------------------------------------------------------------------------------------- اثبث
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Interest---------------------------------------------------------------------------------------------- فبئذح
Invest---------------------------------------------------------------------------------------------- يستثًش
Invoice--------------------------------------------------------------------------------------------- فبتىسح
Item---------------------------------------------------------------------------------------------------- ثُذ
Journal---------------------------------------------------------------------------------------------- يىييخ
Land------------------------------------------------------------------------------------------------- اسض
Legal----------------------------------------------------------------------------------------------- ًَلبَى
List--------------------------------------------------------------------------------------------------- لبئًخ
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Property--------------------------------------------------------------------------------------------- ػمبس
Purchases----------------------------------------------------------------------------------------- يشتشي
Receive-------------------------------------------------------------------------------------------- يستهى
Record-------------------------------------------------------------------------------------------- يسجم
Records------------------------------------------------------------------------------------------ سجالد
Rent------------------------------------------------------------------------------------------------- ايجبس
Repair---------------------------------------------------------------------------------------------- يصهخ
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The American University in Cairo PRMG -Project Budgeting and Financial Control
Wages------------------------------------------------------------------------------------------ اجىس
Withdraw-------------------------------------------------------------------------------------- يسذت
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The American University in Cairo PRMG -Project Budgeting and Financial Control
References:-
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