Accounting For Manager Cost Management Accounting & Control

Question: Discuss about theAccounting For Managerfor Cost Management Accounting Control. Answer: Introduction: A cost budget is a type of financial plan which helps the company to identify its expenses for the next period. Cost budget is important to the organization internally because it helps in the process of planning and creating internal policies. Cost and expenses are the part of business which reduces our profit, bur on the other hand these help us to manufacture goods and provide services. It is necessary for an organization to plan the level of expenses which it can incur (Guerard, 2013). A cost budget helps us to monitor the expenses and also cut down the expenses wherever necessary. In short, it is of utmost importance to the internal organization and plays a leading role in structuring policies. But we should keep in mind that there can be deviations from the budget we prepare. There are a lot of reasons for deviations from budget. Cost is a very unstable element of a business. All the economic, non-economic factors affect the cost to be incurred by the organization (Kirche Sriva stava, 2005). Few factors are in the hands of the organization, while few are not. Therefore, while preparing a budget one should always keep in mind that the actual results may not come out same as they were budgeted. Orchid Ltd, a furniture manufacturer is considered for the purpose of study and the tool of budgetary control is used to create and have a strong management over the cost control. Variances and Explanation Variances normally consist of differences based on level on activity, that is the output and differences based on cost, usage and efficiency that is the expenses (Maher, 2005). The differences based on level of quantity represent the differences between actual quantities sold and budgeted quantity expected to be sold. It can also be refers to as the difference between the actual sale price and budgeted sale price. In the given case we see that the budgeted sales quantity was 800 units whereas the actual quantity sold was 810 units. The variance was not very large. Still the reason of variances can be creation of market of goods for new customers or the image of the organization was improved or was better than what the organization was affecting. Existence of good economic market also can lead to lead to increased actual sales (Maher, 2005). Sale Variances The budgeted sale price of the good was 95 per unit, but in the actual market it was sold for 93. The reasons for drop in sale price can be increased competition. May be the competitors would be selling the same product at a lower price. Selling the products at a lower price tends to create a difference. The total budgeted sales consideration was 76,000 whereas the actual consideration was 75,330. Even after increased volume of sales from that of budgeted quantity, total sales revenue earned was lower than that expected, it was due to fall in the sale price of the goods. The sale price is a major consideration and leads to a difference. Direct Material Variances Variances can happen for various reasons. The differences based on cost, usage and efficiency represent the differences between the budgeted cost and actual cost incurred. Let us consider individual expenses for analysis of variance (Shim Siegel, 2009). The direct material variances consist of two elements variance in volume and variance in price. Variance in volume can be due to increased output or degradation in quality of the material or increased wastages (Houston Brigham, 2009). Variances in price of the material can be due to changes in economies, change in government policies, change in demand of the material, etc (Lanen et. al, 2008). This can be attributed to the external factors. In the given problem we see that the budgeted consumption of material is 8 m whereas the actual consumption was 8.64 meters, also the price of material which was budgeted was 3 per unit which in the actual production was incurred at the rate of 2.75. The total budgeted cost of materials was estim ated to be 19,200 and the actual expense in connection with material was 19,250, even though the consumption of material increased by 0.64m per unit there was a minimal increase in material expense as the price of the material dropped from 3 to 2.75 per unit. Direct Labor Variances Direct labor refers to the labor that is directly employed or used for the production of goods. It is an important element that helps in production of goods. The elements of variances in labor expenses are efficiency of the labor and the rate at which they are paid (Lanen et. al, 2008). If the labor is not efficient then the organization would require to employ a large number laborers but if they are efficient then the work can be completed a few laborers only. Also idle hours can be a reason of variances. The organization is required to pay for the idle time also where there is no productive work (Houston Brigham, 2009). The idle time should be minimized to a considerable extent so that money is not outflow for the idle time. In short, idle time leads to a loss for the organization as a whole. The rate paid to the labor forces is dependent on union demands, the availability of labor, type of labor that is skilled, unskilled etc. here we see that according to the budget 1 hr was to be consumed but each unit produced but actually 1.05hr was spend on production of one unit (Don Maryanne, 2006). This may be due to inefficiency of the labor. The inefficiency of the labor tends to weaken the position of organization because it leads to slow movement and idle time. If the workers are not efficient it leads to distort the entire proceedings and creates a difference. According to the budget prepared the organization planned to pay 25 per hour, instead it actually paid 27.28 per hour to labor. The budgeted expense for labor was 20,000 but in actual the company had to pay 23,191, this was due to inefficiency of labor and also increased labor rates. Fixed Overhead Variances Fixed overhead is generally not considered in per unit terms, but in certain calculations the actual fixed overheads is divided by budgeted units to be sold in order to determine the recovery rate (Don Maryanne, 2006). The budgeted fixed overheads do not change under normal circumstances because the fixed charges are constant in nature and there it remains constant throughout the reporting period. It is only under recovery and over recovery which creates variances in fixed overhead expenses (Don Maryanne, 2006). According to the budget the fixed overhead expenses was 12,800 but the actual fixed overhead recovered was 13,000, this was majorly due to increased sale units and also increases recovery rates. Conclusion Cost is the most easily effected factor of production, any change inside the organization, or in the government polices or in the economic scenario may lead to great changes in cost of production. A budget is just created to make an overview for the company so that they can arrange materials, funds, goods and other requirements so that they can meet up with the demands of the market. But it is not necessary that the actual figure would be exactly as same as that of budget (William, 2010). There are a lot of forces prevailing in the market which affect the demand and supply forces. The demand and supply are one of the major reasons for variances in actual and budgeted cost and revenues of the organization. A budget is a very effective tool of finance which helps the organization to cut costs, improve production, etc. Therefore if the budgetary control is properly applied, it can provide the organization with a lot of benefits. The benefits can be seen in terms of cost, internal polici es and a better management (Guerard, 2013). Budgetary control provides solidity to the internal organization due to which it gets a strong momentum. References Don R. H Maryanne M. M 2006, Cost Management Accounting Control, Ohio: Thomas South-Western Guerard, J. 2013,Introduction to financial forecasting in investment analysis, New York, NY: Springer. Houston, J.F Brigham, E.F 2009, Fundamentals of Financial Management, Cincinnati, Ohio. Kirche, E. and Srivastava, R, 2005, An ABC-Based Cost Model with Inventory and Order Level Costs: A Comparison with TOC, International Journal of Production Research, vol. 43, no. 8, pp. 44-68 Lanen, W. N., Anderson, S Maher, M. W 2008, Fundamentals of cost accounting, NY: Hang Loose press. Maher, L 2005, Fundamentals of Cost Accounting, McGraw-Hill Shim, J. K Siegel, J. G 2009, Modern Cost Management and Analysis, Barron's Education Series William, L 2010, Practical Financial Management, South-Western College.