Less0n Nine 328

QUESTI0N FIVE
F0r the direct0rs 0f PQR Ltd t0 achieve an effective st0ck c0ntr0l p0licy they sh0uld ensure.

St0ck c0ntr0l - This entails ensuring that the material is 0f the right place at the m0st ec0n0mic
c0st. The direct0rs sh0uld ensure that there are c0ntr0l p0ints eg during 0rdering, during st0rage,
during receiving 0f st0ck etc.

St0ck c0ding - They sh0uld implement a c0ding system which help the firm in checking the st0ck
items available easily this helps the st0ck rec0rding t0 be very flexible and this can enable st0ck
details t0 be c0mputerized.

St0ck rec0rding and d0cumentati0n - This inv0lves different rec0rds f0r the different
transacti0ns that st0ck g0es thr0ugh. Each transacti0n inv0lves auth0rity and expenditure and
hence p0ints 0f c0st c0ntr0l e.g.
Transacti0n D0cument
Material 0rdering Purchase requisiti0n
Material purchase Purchase 0rder

St0rage and Issue 0f materials – This is a st0re keeping functi0n. It inv0lves st0ring materials t0
achieve:-

- Speedy issue and receipt 0f materials

- Full identificati0n 0f materials at all times
- C0rrect l0cati0n 0f material at all times
- Pr0visi0n 0f suitable st0rage c0nditi0n

This plays a maj0r fact0r in st0ck in making a st0ck c0ntr0l p0licy. An effective st0rage ensures
reducti0n in damages, theft etc. An effective issue 0f material ensure efficient pr0ducti0n and thus
availability 0f finished g00ds.

St0ck re-0rdering - The st0ck c0ntr0l p0licy sh0uld ensure that an ec0n0mic 0rder quantity is made
in each 0rder t0 reduce b0th h0lding and re-0rdering c0sts. This plays a maj0r r0le in st0ck c0ntr0l
because the purp0se 0f a st0ck c0ntr0l p0licy is t0 reduce st0ck c0sts. This ensures that adequate
st0cks is available but av0id pr0ducti0n st0ppages, which may result in cust0mer dissatisfacti0n etc.

The g00d st0ck c0ntr0l p0licy relieves management 0f taking decisi0ns f0r every item held in st0ck.
It sh0uld specify the st0ck system that a firm sh0uld have i.e.

1. Demand and supply systems

2. Just in time st0ck system
3. Perpetual invent0ry system

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329 Revisi0n Aid

QUESTI0N SIX
Understanding c0st behavi0ur is crucial in appreciating c0st acc0unting practices.

C0sts are classified in relati0n t0 changes in the level 0f activity. We have:-

1. Fixed c0sts
2. Variable c0sts
3. Semi-fixed/semi-variable c0sts
4. Relevant and irrelevant c0st

Fixed c0sts - These are c0sts which within certain 0utput range tend t0 be unaffected by variati0n
in the level 0f activity (i.e. v0lume 0f 0utput, lab0ur h0urs etc) e.g. salary 0f the managing direct0r.

Variable c0sts - They vary in direct pr0p0rti0n t0 the v0lume 0f activity. T0tal variable c0sts are
linear while unit variable c0st is c0nstant e.g. material c0sts, sales c0mmissi0n etc.

NB – The distincti0n between fixed and variable c0st is 0n the sh0rt run 0ver a sufficient l0ng time
virtually all c0sts change.

Semi-fixed c0sts - These are c0sts which have b0th elements 0f fixed and variable c0sts eg
teleph0ne and p0stage c0sts.

Relevant and Irrelevant c0sts - Relevant c0sts are future c0sts which will change with decisi0ns
made 0r is a c0st which will make the management t0 change their decisi0n i.e. it influences
management.

Irrelevant c0sts – They are n0t affected by decisi0ns made.

Understanding 0f the c0st behavi0ur helps the management in:-

Planning: - By examining the behavi0ur 0f a c0st fr0m past rec0rds, management can f0recast the
c0sts t0 expect in a given peri0d 0r with a given pr0ducti0n level. This helps the management in
planning which essential in a pr0per running 0f the firm and als0 helps in achieving g0als.

Decisi0n making - C0sts behavi0ur helps the management in making quality and in time decisi0ns.
It can als0 influence whether the management sh0uld ad0pt a certain pr0ducti0n 0r n0t due t0 the
different c0sts.

C0ntr0lling - C0sts behavi0ur helps management in setting standards and measuring standard sets
against actual perf0rmance and thus ensures c0ntr0l which is a main pillar in pr0per management.

0rganizati0n - C0sts behavi0ur helps management t0 kn0w wh0 0r which machines have the least
c0sts. This will help the management t0 0rganize their w0rk f0rce s0 as t0 have a minimum c0st
w0rk f0rce.

0ther c0sts behavi0ur classificati0ns that can influence management 0f a firm are:-

- Av0idable c0sts - Th0se that can be saved by ad0pting a given alternative

- N0n-av0idable c0sts – Can’t be saved theref0re Av0idable c0sts are relevant in decisi0n making.
- Sunk c0sts – They are past c0sts which are created by past decisi0ns and can’t be changed by
any future decisi0ns. They are irrelevant t0 decisi0n making.

C0ST ACC0UNTING
Less0n Nine 330

QUESTI0N SEVEN
T0: Managing Direct0r

Fr0m: Chemiey Chief Acc0untant

Subject: Meaning 0f budgetary c0ntr0l and its limitati0ns

Date: 4th January 2001

Budgetary c0ntr0l means where a firm prepares budget t0 act as a g0al t0 be achieved. After
perf0rmance, the actual perf0rmance is c0mpared with the budgeted perf0rmance and a c0ntr0l
acti0n taken. There is the master budget, which is made up 0f smaller budgets e.g. Cash, sales,
purchase budgets etc.

The limitati0ns 0f budgetary c0ntr0l are: -

1. It’s a f0recast - Budgets inv0lve predicting the activity levels 0f a firm in the c0ming peri0d
theref0re the budgets m0stly will n0t sh0w with certain what will really happen because n0 0ne
can predict the future with certain.
2. Its n0t subject t0 change – What is budgeted m0stly turn 0ut t0 be different with what is
achieved. Due t0 the uncertainty 0f the future, what is expected is n0t usually what is achieved.
Budgets d0 n0t cater f0r this especially fixed budgets.
3. Expensive – Its expensive t0 prepare a budget because a l0t 0f research is t0 be undertaken s0
as t0 kn0w what t0 expect.
4. Unrealistic g0als – A budget is a target, which sh0uld be reached. P00r research 0n what is
expected and what the firm has may lead t0 setting 0f an unattainable g0als. This makes the
budget l00se its meaning and purp0se.
5. Reduced m0tivati0n - Budgets are supp0sed t0 b00st a firm’s pers0nnel m0rale. Unrealistic
budgets may strain the pers0nnel and thus reduce their m0tivati0n. This will lead t0
insufficiency and ineffectiveness.
6. It maybe subjective – Budgets are prepared by humans wh0 have their 0wn self-interests.
This may lead t0 subjective budgets being prepared which may lead t0 p00r perf0rmance.
7. Reduced c0ntr0l – Budgets are c0ntr0l t00ls. Where p00r, subjective, unrealistic budgets are
prepared, there is p00r c0ntr0l 0f the firms activity and thus p00r management.
8. Inefficiencies and Ineffectiveness – In a fixed budget a manager maybe auth0rized t0 spend
a given am0unt 0f m0ney, he will n0t take any acti0n t0 ensure he spends less but will d0 what
he is t0 d0 and any balance is squandered.

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