Problems in Ferguson & Son Manufacturing Company's budgetary control:
Budgetary control is a tool used by the management of the company for both planning and controlling. Planning is crucial in this case, which has to consider all strength and weakness so that company can achieve its success as per the plan. In case of Ferguson & Son manufacturing company the budgeted values are compared directly with the actual values. The company has the practice to make comparison with the fixed budgeted values with the actual budgets without any flexibility that is there is no consideration about the current scenario. As mentioned earlier, a planning process involves an in-depth analysis about all the circumstances so that the company can achieve them. In this case, the inflexibility present in the fixed budget added more trouble to the employee’s of the company. This behavior resulted in employees to consider that the company is concerned only about money and not about the quantity of goods that were produced by them. Generally, inflexible budget add more pressure to the employees as the company will be concerned only about the profitability at any point.
For instance, if the company has set aside the target of producing 2,500 units with fixed cost amounting $30,000 and variable cost of $70,000. The total budgeted cost for producing the 2,500 units is $100,000 ($30,000 fixed costs + $70,000 variable cost). In this case, of Ferguson & Son manufacturing company will just look into the actual costs incurred for the production and will be compared with the budgeted costs. In this case, the quantity produced will be ignored for comparison, if in case the total cost incurred is $110,000 but produced 2,900 units, the company will mention that the ...
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A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Method of variable costing is a method where costing can be discovered including the variable manufacturing costs. Fixed factory visual projection is delighted as a period cost-it is abstracted along with the selling and administrative expenses in the period deserved. That is,
Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget.
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
Term “marginal” is extensively used and known with reference to the economics which means “extra”, whereas with economic view point the marginal cost is the cost of producing every extra unit; however the accounting terminology of “marginal” defines the cost incurred on production other than its fixed cost is the marginal cost. Simply, none of the technique is applied unless it serves the benefits and the marginal costing is used by the firms for its registered benefits. Among all its benefits the primary advantage it serves is its attempt to distinguish the fixed and variable costs, and the method only considers the related variable costs to be included in production cost and the fixed costs are thus later deducted out for ascertaining net profit. The inventory at the year-end is also valued on the bases of variable cost. With all these beneficial characteristics of the said system firms using marginal costing are clearly aware of its ...
Capital budgeting is one of the primary activities of a company. Most of the company uses capital budgeting for decision making process of selecting and evaluating long-term investment. The company have to make a right decision with respect to investment in fixed asset such as purchasing of new equipment and delivery vehicles, constructing additions to buildings and many more. The decision must be right because of the project involve huge amount of cash outflow and it is committed for many years.
As such, there is material cost regulator, manufacturing control, labor cost regulator, excellence control and so on. Conversely, control over the price is implemented through the methods of financial control and typical costing (Meigs, 1998). The control methods aid the management in understanding the operating competence of a firm. Cost accounting also determines the selling price. The intention of all business firms is minimizing costs and maximizing profits. The costs incurred in producing goods and services may be reduced through incorporating alternate but cheaper resources of
There are two general approaches to allocating costs that are not direct costs associated with producing a product or rendering a service. These approaches are activity-based costing (ABC) and traditional costing. The former is effort-intensive but more accurate as it identifies the associated cost per activities involved in the production or service and used this information to assign the cost of the finished product or service. The latter, on the other hand, used an average rate that is derived from estimating a pooled indirect cost for a certain period (e.g. year-long time frame) and spread this cost to a chosen cost-driver parameter such as man-hours or machine-hours (“Difference Between Activity-Based Costing and Traditional
"Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods" (1) , Now we will discuss why ABC can result in more reliable products costs than conventional labor based product costing system . In recent years, the nature of industrial production has fundamentally altered; we will discuss their characteristics. First we have machine production and capital intensive, Now machines are the main tool and at the heart of production; labors maintain machines and supervise them, and machines are the ones that dictates the pace and rate of production. The second characteristic is high level of overheads relative to direct cost; in modern businesses they tend to use overheads in different ways for example: some products need engineering time and some products require machine time so that products will use overheads differently. The third characteristic is highly competitive international market, transportation including fast freight and relatively cheap; one of the advantages is the use of internet ensures that customers can easily and quickly reach and find products and also cheaply, this environment is highly competitive so companies need to know accurately their range of prices in order to use this information to gain competitive advantage over other
Activity-Based Costing ( ABC ) Summary The business environment in the 1990s is markedly different from that of the past when conventional cost accounting procedures were established. Activity-based costing (ABC), pioneered in the late 1980s, offered a new costing approach consistent with the changed environment. However, ABC did not diffuse rapidly into the business community.
...pplied. Cost estimation and analysis could ultimately determine major decisions in both the business and political worlds today, and play a crucial role even in our day to day lives. Through activity based costing one is able to see what areas need improvement and also whether or not a business will be successful after considering all the factors. These tools are very powerful in drawing wise conclusions from cost analysis and can be a priceless tool to have even in the field of engineering.
and Mrs. Long to deal with current issues faced with the company. Firstly, the difficulties of growth in ensuring the opportune payments to employees and suppliers could be release if managers could make an expenditure budget and set up appropriate prices of flowers according to the estimate costs in current month by using the chosen method above, due to the fact that there now are only rough estimates of revenue and some main cost items are know. Also, to prevent the scale of operations grown in an uncontrollable way, the method chosen can help Mr. and Mrs. Long get the signal of the deficit before decisions cannot be reversed, because the method chosen could provide them the cost of each department to help them find out the problems more easily and
Activity-based costing is used as a supplement of traditional cost accounting in a company to support manager in internal decision making. It focus on assigning the indirect cost to direct costs in order to get a more accurate cost on products. Activity-based costing uses several cost pools instead of one in traditional cost accounting. The system is easy to implement and it provides many benefits, it allows the company to respond to inefficiency by reallocating resources to more profitable activity from areas that absorb too many resources. It also allows the company to respond to manufacturing overhead cost and assumes a more accurate selling price on products in order to make more profits. Company that do not have internal expertise to conduct activity-based costing analysis may think to hire one or ask company that provides this kind of services for help.
It requires an adequate and sound organizational structure, that is, there must be a definite assignment of responsibility for each function of the enterprise. Budgeting compels all the members of management, from the top to bottom to participate in the establishment of goals and plans. Budgeting compels departmental managers to make plans in harmony with the other departments and of the entire enterprise. Budgeting helps the management to put down in figures what is necessary for a satisfactory performance. Budgeting helps the management to plan for the most economical use of labor, material and capital. Budgeting tends to remove the cloud of uncertainty that exists in many organizations, especially among lower levels of management, relative to basic policies and objectives. Budgeting promotes an understanding among members of management of their co-workers' problems. Budgeting force management to give adequate attention to the effects of general business conditions. Budgeting aids in obtaining bank credit as banks commonly require a projection of future operations and cash flows to support