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OVERHEAD COST VARIANCE

An overhead cost variance is the difference between the measure of overhead incurred during the
production process and the period and the actual measure of overhead cost during the period. The
overhead cost difference can be ascertained by subtracting the standard overhead connected from
the genuine overhead acquired amid the period.

Since most organizations utilize ceaseless stock frameworks, they should upgrade their stock
expenses progressively. This implies administration can hardly wait until the end of the period to
to add up all overhead cost and distribute them to every job. Rather, administration needs to
estimate the future overhead expenses and distribute them all through the production procedure.

Since most estimate can't be totally precise, the genuine expenses acquired for the period may
not be necessarily equal to the evaluated costs made all through the production procedure. The
distinction between these two numbers is the overhead cost difference.

Administration breaks down the cost fluctuations to decide how well the production procedure is
performing and why the evaluations are not the same as the actual sums. They typically split cost
differences into three primary classifications spending, efficiency, and volume.

The spending change happens when the organization gets it on materials. In other words, there
will be an estimate sum put aside for crude material buys and administration arranged an
alternate cost.

Fixed Overhead Cost Variance:

The contrast between the standard fixed overhead for actual yield (i.e., fixed overhead that has
been recouped) and the real fixed overhead which has been brought about, is known as fixed
overhead cost fluctuation.

The division of fixed overhead cost fluctuation can be made into fixed overhead consumption
difference and fixed overhead volume change.

Fixed Overhead Expenditure Variance:

The qualification between the fixed overhead which has been really caused and the fixed
overhead which has been initially planned is known as fixed overhead use fluctuation.
Fixed Overhead Volume Variance:

The measure of any under-or over-recuperation of overheads which emerges on account of


difference between the genuine yield and the planned is measured by the fixed overhead volume
change.

Fixed Overhead Capacity Variance:

Under-or over-recuperation of overhead emerges as a consequence of an adjustment in limit,


different things being equivalent; on the grounds that, a comparable overhead recuperation or
non-recuperation will be there for consistently distinction. In this manner, the contrast between
the planned and real hour which is duplicated by overhead rate every hour is known as the fixed
overhead limit difference.

Fixed Overhead Efficiency Variance:

With work effectiveness change, this fluctuation is firmly identified with. Under-or over-
recuperation of fixed overhead emerges as a result of an adjustment in effectiveness and
consequently fixed overhead proficiency difference emerges. An adjustment in proficiency
implies that the genuine hours which have been worked will be not quite the same as the
standard hours of yield. Just on the premise of creation, recuperation of fixed overhead will be
done, consequently bringing about under-or over-recuperation.

Fixed Overhead Calendar Variance:

Where the financial plan of the fixed overhead is done on a month to month premise and the
quantity of working days in the month fluctuates, a logbook change might be incorporated into
the volume difference. Indeed, even in circumstances when the entire year has been partitioned
into various spending periods, and equivalent number of days is there in every spending period,
timetable difference may come about because of the uneven number of occasions falling inside
every period. For the year, the total of the date-book differences will dependably be nil.
Variable Overhead Cost Variance:

The contrast between the standard variable overhead for real yield (i.e. recuperated variable
overhead) and the genuine variable overhead acquired is known as the variable overhead cost
fluctuation.

The variable overhead change can be bifurcated into variable overhead use difference and
variable overhead productivity fluctuation.

Variable Overhead Expenditure Variance:

The contrast between the measure of variable overhead that has been really brought about and
the variable overhead which ought to have been caused for the genuine hours that has been
worked is known as the variable overhead consumption fluctuation.

Variable Overhead Efficiency Variance:

The contrast between the measures of variable overhead that has been recuperated and the sum
which would have been recouped had been the genuine hours worked at standard proficiency.

ASHLY JOSE

P16175

COST CENTRE

For the purpose of administrative control, the entire organization is divided into number of
departments or branches or sections. Each department or branch or section is known as cost
centre. In simple words, cost centre means a section of the business to which cost can be charged
Cost centre is a centre around which indirect cost are collected for the purpose of their absorption
into cost units. Each cost centre is headed by a responsible person for controlling the cost in his
cost centre. Thus, a cost centre is necessary to control costs.

CIMA, London defines cost centre as a location, person, or item of equipment (or group of
these) for which cost may be ascertained and used for the purpose of cost control.
In sort, cost centre is the smallest part of an organization or area of responsibility for which the
costs are allocated.

KINDS OF COST CENTRE

The main kind of cost centre are given below:

1.OPERATION AND PROCESS COST CENTRE:

Operation cost centre consist of those machines and/ or persons carrying out similar operations.
A process cost centre in which a specific process or continues process of operation is carried out.

2.PRODUCTION AND SERVICE COST CENTRE

A production cost centre is one which is engaged on regular production. A service cost centre is
one which is engaged in rendering services to production cost centres.

3.PERSONAL AND IMPERSONAL COST CENTRE

Personal cost centre consist of a person or group of persons. For example, departmental foreman,
sales person, supervisor, factory manager etc. an impersonal cost centre consist of a location or
item of equipment or a group of these. For example, machines, departments, vehicles etc.

The manager and employees of cost centre are not accountable for its profit and investment
decision but they are responsible for its cost. They are liable for keeping their cost in line or
below budget because cost centre does not produce directly from its activities. The performance
of the managers is assessed by comparing the actual expenses incurred with the budgeted
expenses for the cost centre. Basically, cost is the control data in the cost centre.

PROFIT CENTRE

Revenue is a monetary measure of output. Expense is a monetary measure of input. Profit is the
difference between revenue and expense. Thus, if the performance in a responsibility centre is
measured in terms of both revenue and expense. Thus if the performance in a responsibility
centre is measured in terms of both the revenue it earns and the cost it incurs, it is called a profit
centre. It is responsibility centre in which inputs are measured in terms of expenses and outputs
in term of revenue. It is a segment of organization in which financial performance is measured
on the basis of profit. Managers of the profit centers are held responsible for all activities relating
to production and sale of products or services. The main objectives of a profit centre is to
maximize centers profits.

In fact, cost center, revenue and profit centre are the types of responsibility centre. There is one
more type of responsibility center called as investment centre. A responsibility centre is the unit
activity for which a manager is to a higher authority. It is a segment of an organization, heade by
manager. He has a direct responsibility for its performance.

TYPES OF PROFIT CENTRE

There are two types of profit centre. They are:

1.Natural profit centre:

This is a product division. It uses inputs (cost) and produces output (revenue). This is an
independent firm.

2.Constructive profit centre:

This is not natural profit centre but it may be made to appear as natural profit centre. An example
is the computer center or data processing department. It makes use of inputs. But it does not
produce any revenue. It renders computer services to other departments but does not sell its
products or services.

Divisional profit

Management accounting strategies required in coping with a division need to cover the whole
range of directing interest, preserving the score and solving troubles. with regards to the category
of prices, the division can be seemed as an investment center. One very critical element of
management accounting is to grade the performance of the divisional manager when it comes to
capital investment, revenue and prices.

Of the three income measures highlighted, contribution may be useful to the control of the
division in taking short-time period selections on manufacturing and pricing but is irrelevant as a
measure of performance as it does no longer keep in mind the constant fees that are controllable
by means of the division. The management of the department can also accept that overall
performance is exceptional measured by earnings controllable by way of the division but the
control of the organisation as an entire can be reluctant to accept this determine due to the fact,
on the give up of the day, all prices must be covered, inclusive of the constant costs incurred
centrally which can be beyond divisional control. The term contribution is implemented to the
difference between revenue and variable value of sales.

Performance of divisionalised companies may be measured either by the return on investment


(ROI) or by the residual income (RI).

Return on investment (ROI) is calculated by taking profit controllable by the division as a


percentage of the investment in assets which produces that profit.

Residual income

Residual income (RI) is defined as operating profit less an interest charge based on the assets
used and controlled by the division.

BALANCE SCORE CARD

Prepared By: Teena Mary Kurian (P16221)

Balanced Score Card is a performance management tool. It is used to keep track of the staffs
activities that are within their control and to monitor the consequences arising from these
activities. It is a semi standard structured report. It takes the help of various design and
automation tools. It is mostly used by top management.

The Concept of score card can be used in two ways:

1. As individual score cards to measure performance.

2. As a management system.

The main characteristics of score card are that:

1. It concentrates on the organizations strategic agenda.


2. It will contain a few items or data to monitor.

3. It can contain both financial and non-financial data items.

The balanced scorecard has evolved from its early use as a simple performance measurement
framework to a full strategic planning and management system. The balanced scorecard
transforms an organizations strategic plan from an attractive but passive document into the
marching orders for the organization on a daily basis. It provides a framework that not only
provides performance measurements, but helps planners identify what should be done and
measures it, and thereby enables executives to truly execute their strategies.

It assists organizations to clarify their vision and strategy and translate them into a plan. It
provides feedback around both the internal business processes and external outcomes in order to
continuously improve strategic performance and results. When fully deployed, the balanced
scorecard transforms strategic planning from an academic exercise into the nerve centre of an
enterprise.
By focusing not only on financial outcomes but also on the operational, marketing and
developmental inputs to these, the Balanced Scorecard helps provide a more comprehensive
view of a business, which in turn helps organizations act in their best long-term interests. This
tool is also being used to address business response to climate change and greenhouse gas
emissions.

Organizations were encouraged to measure, in addition to financial outputs, those factors which
influenced the financial outputs. For example, process performance, market share / penetration,
long term learning and skills development, and so on.

TARGET COSTING

Target costing is the process of determining the maximum allowable cost f or a new product and
then developing a prototype that can be made for that maximum target cost figure. The equation
for determining a target price is shown below:

Target cost = Anticipated selling price Target cost = Anticipated selling price Desired profit

Once the target cost is determined, the product development team is given the responsibility of
designing the product so that it can be made for no more than the target cost.

Objective of Target Costing

To reduce the costs of new products so that the required profit level can be ensured.

The newly developed products meet the set levels of quality, delivery time and price suitable for
the market.

To motivate company employees to achieve the desired profit during new product development
by making target costing an important profit management activity.

Target Costing process

Determining the target price in relation to the market competition and current price.

Analysing and finalising the profit margin;

Establishing the cost that must be achieved.

Analysing the cost of present product and processes.


Finalising the target cost by which current costs must be reduced.

After the target cost has been determined, companies take the following steps:

Developing a cross functional team, which is concerned with the implementation process
from the early design stages.

Using different tools in the design process, like value engineering.

Following cost reductions using kaizen once production has started.

Advantages of Target Costing

It implements top to bottom system to the process and product innovation to have a better
edge in the market.

It supports management for designing and manufacturing products that meet the eligible
market price.

It helps to achieve the best value for money which is better than attaining lower cost.

Meet customer demand in the market.

Motivating the customers to buy the products with the cost factor.

Enhance the development cycle of a product.

Cost of production can be reduced to a great extent.

To create a design by keeping in mind the market demand, so as to create an efficient


supply.

Disadvantages of Target Costing.

Developing a new process is a time consuming activity and it requires a series of


evaluation so as to get the product or service as per the requirement of the market.

Cost cutting in the organisation can cause internal conflicts and can disrupt the smooth
operations between the departments in the organisation.
In order to bring out a new design there are a lot of hurdles, it requires the approval from
different departments and there is a possibility of difference of opinion.