Girish Engineering (MCS-2004) Numerical
Responsibility budgeting was introduced in a medium sized organization Girish Engineering.Questions:
a.Why no variance is shown in two items? Is this correct approach in performance reporting? b.Should overhead expenses mentioned above be included in Controllable Costs? Why? Why not?
Solution (a):
Variances between actual and budgeted departmental fixed costs are obtained simply by subtraction, since these costs are not affected by either the volume of sales or the volume of production. That’s why no variance is shown for departmental fixed costs.Allocated costs are a share of the costs of a resource used by a project, where the same resource is also used by other activities. These are different to the Incurred costs because these costs are not exclusively related to any individual project. However, the cost of the resource still needs to be recovered, and making a fair and reasonable charge to all projects using the resource does this.The key difference between costs and Allocated costs is that the latter will be charged based upon an estimate,rather than actual cash values. Thus as it is charged based upon an estimate the budgeted figure is the same as the actual figure and hence no variances.
Solution (b):
Overhead Expenses mentioned above should not be included in controllable costs because some costs are uncontrollable like fixed costs. . They don't vary with the change in short run managerial decisions and output.And some costs are controllable i.e. they can be managed and changed with the managerial decisions and output.As the above overhead expenses would have certain portion of fixed expenses this is hard to control. So, these should not be a part of controllable cost.