Differentiate between the mechanisms of an “actual costing” budgetary system against a “normal costing” budgetary system.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Question 4
Differentiate between the mechanisms of an “actual costing” budgetary system
against a “normal costing” budgetary system.
Answer should not be less than 500 words. Thank you
ANSWER:-
Differentiate between actual costing against a normal costing :-
Under actual costing, rates are based on costs incurred, while in normal costing, rates are based on the anticipated total efficiency of production. For example, the actual number of units produced at each rate might be lower than your team expected, resulting in inefficient use of resources and higher costs per unit. This makes the calculation of actual costs higher than normal costs.
Under actual costing, you track costs in real-time, as calculations of actual costing occur after your team incurs the costs. You can conduct normal costing calculations at any time, as you can base future predictions of costs by using calculations on previous production data. For example, you can use the normal costing method to predict how much it may cost to produce enough products to meet consumer demand over the next three years.
If you base budgets on normal costs, then any demand increases may result in over-budget spending. This is because budgets are based on standard manufacturing rates, but actual production rates may be higher than anticipated due to the increase in demand. This may increase the total overhead costs for that period, though revenue is also likely to be higher.
Normal costing allows team members to accurately set goals and meet specific targets for production rates and costs, as they have a per-unit overhead price that they can aim to meet. As you conduct actual costing calculations after producing products, it is more difficult to use in goal-setting. You can still use actual costing to aim for specific amounts of total costs through a given time period.
A company having relatively stable production volumes from month to month will have few problems with actual costing. However, one that experiences continual variation in its production volumes, and especially one that regularly faces questions from its investors may be better off using normal costing, since that method offers greater stability in reported costs.
Step by step
Solved in 2 steps
