Question

The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. The manager is threatening to withhold year-end bonuses unless an explanation is presented. As the company’s management accountant, you have been asked to provide explanations for the disappointing September results. How can the data be presented to show that the managers did control the costs that were controllable?

Answer 1

The explanations are as follows,

In the given situation, despite high selling price and lower variable cost per unit are achieved than the budgeted one's. The overall profit of the conpany is not satisfactory.

The only costs that are under the control of the management are variable costs of production. Fixed costs. Administration and selling costs cannot be controlled by the Management however. We can present the results in a summarised manner showing the budgeted variable cost and the actual variable cost achieved. And the other costs budgeted and actual in comparative manner so that the management can take necessary decisions accordingly. The cost sheet should be prepared for budgeted and actual costs and the reasons for the variences should be highlighted.