Cost Accounting & Control [AC217]

Planning & Control Functions of Business

Semester II
12.03.2020

Mr B. Kamunyaru
+263 775 852 489
kamunyaru.batanai@gmail.com
Quotes Stay Positive…

▪ “There is no passion to be found playing small and settling for a life

that’s less than the one you are capable of living.” - Nelson Mandela
▪ “Do not conform to the systems of this world, but be transformed
by the renewal of your mind.” - Paul
▪ “Don’t let others tell you what you can’t do. Don't let the
limitations of others limit your vision. If you can remove your self-
doubt and believe in yourself, you can achieve what you never
thought possible.” - Roy T. Bennett,The Light in the Heart
▪ “Where others are doing ONLY what is expected, or taking
shortcuts, if you want to succeed in life, in love, or in anything that
is important to you, then you have TO GO THE EXTRA MILE.” –
Margaret Minnicks.
Introduction Planning vs Control…

▪ Planning is Looking Ahead whereas Controlling is Looking Back.

▪ Plans are always formulated for future and determine the future
course of action for the achievement of objectives laid down.

▪ Controlling is looking back because under it a manager tries to find

out, after the work is completed, whether it has been done according
to the standards or not.

▪ Under the system of controlling, actual work performance is

compared with the standards.

▪ If the standards are not determined there is no justification left for

control, and the standards are determined under planning (budgeting).
Budgets Purposes for Budgets…

▪ What is a Budget? A quantitative or financial plan relating to

the future.
▪ Budgets can be for the whole company, departments, functions,
products or for resources such as cash, materials, labour, etc.
▪ Purposes for budgets:
▪ Planning
▪ Control and Evaluation
▪ Co-ordination
▪ Communication
▪ Motivation
▪ Authorizations
Budgets The Budgeting Process…
STEP 1
Sales Budget

STEP 2 Production Budget

STEP 3 Factory Overhead Labour Raw Materials

COGS Budget
General & Admin Selling & Distribution
STEP 4
Expenses Budget Expenses Budget
MASTER BUDGET
STEP 5 Budgeted Statement of
Income
STEP 6 Cash Budget CAPEX Budget
STEP 7 Statement of Financial
Position
Budgets The Cash Budget…

▪ Cash forecast - an estimate of cash receipts and payments for a

future period under existing conditions.

▪ Cash budget - a commitment to a plan for cash receipts and

payments for a future period after taking any action necessary
to bring the forecast into line with the overall business plan.

▪ Uses of Cash Budgets:

▪ assess and integrate operating budgets

▪ plan for cash shortages or surpluses

▪ compare with actual spending.

Budgets Interpretation of a Cash Budget…

▪ Is the balance at the end of the period acceptable or matching expectations?

▪ Is there a possibility for the cash balance to become negative at any time in the
period?

▪ Is there sufficient finance to cover any cash deficits? (Overdrafts, Short-term

loans, etc)

▪ Should new sources of finance be sought in advance?

▪ What are the key causes of cash deficits?

▪ Can discretionary expenditure (such as asset purchases) be made in another

period in order to stabilise the pattern of cash flows?

▪ Is there a plan for dealing with cash surpluses (such as reinvesting them
elsewhere)? (Re-investing in other businesses, Money Markets, Fixed Deposits,
etc)

▪ When is the best time to make discretionary expenditure?

Budgets Problems of Forecasting…

▪ Almost all forecasting tools rely on historical data to predict future

outcomes. Presenting a challenge for new products or services.

▪ Limited market knowledge or intelligence.

▪ Lack of or limited quantitative analysis in forecasts – BIG DATA

(businesses lack access or expertise to use forecasting tools.

▪ Addressing variances in figures – factors affecting forecasts (Political,

Economical, Social, Legal, Security, Cultural) can completely disrupt
the historical pattern.
Variances Reasons for Variances…

Poor Budgeting

Poor recording of costs

Operational reasons (e.g. quality or quantity of raw materials).

Random Factors
Variances Material Price Variance…
▪ Interpretation
▪ Using a different supplier, who is either cheaper or more expensive.

▪ Buying in larger sized orders, and getting larger bulk purchase discounts. Buying
in smaller sized orders and losing planned bulk purchase discounts.

▪ An unexpected increase in the prices charged by a supplier.

▪ Unexpected buying costs, such as high delivery charges.

▪ Efficient or inefficient buying procedures.

▪ A change in material quality, resulting in either higher or lower purchase prices

▪ Formula: [Standard Purchase Price (per unit) – Actual

Purchase Price] X Actual Quantity Purchased
Variances Material Usage Variance…

▪ Interpretation
▪ A higher than expected or lower than expected rate of scrap or wastage.

▪ Using a different quality of material (higher or lower quality) could affect the wastage
rate.

▪ Defective materials.

▪ Better quality control.

▪ More efficient work procedures, resulting in better material usage rates.

▪ Changing the materials mix to obtain a more expensive or less expensive mix than the
standard.

▪ Formula: [Actual Quantity - Standard Quantity] x Standard

Price
Variances Labour Rate Variance…

▪ Interpretation

▪ An unexpected increase in basic rates of pay.

▪ Payments of bonuses, where these are recorded as direct labour costs.

▪ Using labour that is more or less experienced (and so more or less

expensive) than the 'standard’.

▪ A change in the composition of the work force, and so a change in average

rates of pay.

▪ Formula: [Standard Rate (per UOM) – Actual Rate ( per

UOM)] X Actual (UOM) paid for
Variances Labour Efficiency Variance…
▪ Interpretation
▪ Taking more or less time than expected to complete work, due to efficient or
inefficient working.
▪ Using labour that is more or less experienced (less efficient) than the 'standard’.
▪ A change in the composition or mix of the work force, and so a change in the level
of efficiency.
▪ Improved working methods.
▪ Industrial action by the work force: 'working to rule’.
▪ Poor supervision.
▪ Improvements in efficiency due to a 'learning effect' amongst the work force.
▪ Unexpected lost time due to production bottlenecks and resource shortages.

▪ Formula: [Standard Hours Specified for Actual Production –

Actual Hours Worked] X Standard Hourly Rate
Variances Idle Time Variances…

▪ During a period, there might be idle time, when the work force
is not doing any work at all.

▪ When idle time occurs, and if it is recorded, the efficiency

variance should be separated into two parts: an idle time
variance and an efficiency variance during active working
hours.

▪ If there is no standard idle time set, then the idle time variance
is always adverse, because it represents money ‘wasted’.
Variances Overhead Variances Interpretation…

▪ Fixed overhead expenditure adverse variances are caused by

spending in excess of the budget. A more detailed analysis of the
expenditure variance would be needed to establish why actual
expenditure has been higher or lower than budget.
▪ The fixed overhead volume variance (and therefore the capacity and
efficiency variance) is caused by changes in production volume
(which in turn might be caused by changes in sales volume or
through increased labour productivity).
▪ Variable production overhead expenditure variances are often
caused by, for example, changes in machine running costs (for
example, if electricity rates have changed).
▪ Variable production overhead efficiency variances: the causes are
similar to those for a direct labour efficiency variance.
Variances Sales Price Variance…

▪ Interpretation

▪ Higher than expected discounts offered to customers to persuade

them to buy, or due to purchasing in bulk.

▪ Lower than expected discounts, perhaps due to strength of sales

demand.

▪ The effect of low price offers during a marketing campaign.

▪ Market conditions forcing an industrywide price change.

▪ Formula: (Actual Price – Standard Price) X Actual Units

Sold
Variances Sales Volume Variance…
▪ Interpretation

▪ Successful or unsuccessful direct selling efforts.

▪ Successful or unsuccessful marketing efforts (for example, the effects of an

advertising campaign).

▪ Unexpected changes in customer needs and buying habits.

▪ Failure to satisfy demand due to production difficulties.

▪ Higher demand due to a cut in selling prices, or lower demand due to an

increase in sales prices.

▪ Formula: (Actual Units Sold – Budgeted Unit Sales) X

Standard Profit (or Contribution) Per Unit
Variances The Operating Statement…

▪ An operating statement is a top level variance

report, reconciling the budgeted and actual profit
for the period.

▪ An operating statement starts off with the expected

figure, e.g. budgeted or standard profit or
contribution or cost, etc. and ends up with the
corresponding actual figure.

▪ List all variances (+/-) in between.

Variances Investigating Variances…

▪ It is important to identify the reason for a variance so that

appropriate action can be taken, but time and effort will be wasted if
all variances are investigated as many will arise as a normal part of
the process.
▪ When should a variance be investigated?
▪ Factors to consider:
▪ the size of the variance.
▪ the likelihood of the variance being controllable or its cause
already known.
▪ the likely cost of an investigation.
▪ the interrelationship of variances.
GOD bless you!