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Why isn’t the following a test of control?
– Establish the details of standard costing and budgeting system. Find out how costs are recorded and how variances are produced and distributed at month end.
I would think that calculating variances is a control, so why isn’t the above a test of control?
Can Someone help me with this question 🙂
W Ltd makes leather purses. It has drawn up the following budget for its next financial period:
Selling price per unit $11.60
Variable production cost per unit $3.40
Sales commission 5% of selling price
Fixed production costs $430,500
Fixed selling and administration costs $198,150
Sales 90,000 units
What is the margin of safety as a % of budgeted sales to one decimal place?
Dsodha: the initial calculating of a variance is not itself a control. It is simply a calculation like calculating wages. To create a ToC somethng needs to be checked eg
The chief accountant reviews the wave calculations
The prices on an invoice are verified.
Although it is not obvious why someone would calculate variances and not react to them, the control only happens when the variances are used. Eg
The management accountant seeks an explanation of all variances over 10% of budget.
Action is taken to control excess expenditure as revealed by the variances.
Better to start a new threat for a new question. That way people can search more easily.
Contribution/unit = SP – VC/unit (including sales commission as this varied with volume)
Contribution/unit = 11.60 – 3.40 – 5% x 11.60 = 7.62
Total FC = 430,500 + 198,150 = 628,650
Break-even point = FC/Contribution per unit = 628,650 /7.62 = 82,500 unit.
So budgeted sales of 90,000 could fall by 7,500 units to 82,500 before breakeven is reached.
% fall in sales to hit breakeven = 7,500/90,000 = 8.3%