Ithuta JV

Source: TenStep Tom Mochal

Many projects have one overall budget that includes all of the project labour costs, hardware/software costs, materials costs, etc. This is fine for smaller and medium-sized projects. However, as a project gets larger it helps to have the overall budget broken down into smaller subsets.

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This is a similar to the concept of breaking down a project with long duration into a set of smaller projects. Having your budget allocated at a lower level allows you to keep better control of the details and it may point out potential budget trouble quicker than having everything rolled up into one consolidated project budget. Cost accounts are used to allocate the budget at a lower level. Cost accounts are formally established in your organization's General Ledger so that your budget is actually allocated in each detailed cost account and the actual project expenses are reported at that level as well.
The cost accounts can be established in a couple of ways. One way is to simply divide the different types of costs into separate cost account budgets. In this approach, you could have a cost account for internal labor charges, external labor charges, hardware costs, software costs, training costs, travel costs, etc.

Another way to set up the cost accounts is based on the WBS. After you have completed the WBS, you can create cost accounts for each group of related activities. Theoretically you could set up a cost account for each activity, but that does not make practical sense. Instead you may set up a separate cost account and budget for each phase, stage or milestone (a milestone represents the completion of one or more deliverables.)

If you set up cost accounts for related sets of work on the WBS, you have a couple choices as to what budget gets tracked. You could just track the labor costs (internal and external) associated with the work. Another option is to track all of the labor and non-labor costs associated with that work. The various types of costs can be tracked with sub-account numbers within the cost account. Of course, the more detailed your cost accounts are, the more work you will have setting up, allocating and tracking the cost account budgets. However, if your project is very large and costly, you definitely want to utilize some aspects of this technique. In very large projects, the individual cost account budgets might still be larger than the entire project budgets in some organizations.