Quiz 14: Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Business

Direct cost Sales variance Control Systems Sales variance is the breakdown of sales volume and which includes components like manufacturing cost (which is a direct cost), labour cost, material costs. Certain procedures are set in place, which help the organisation to control performance, which will include components from planning to evaluation. Similarly, operational financial controls are also applied for cost control in their respective areas. Discussion and analysis: Single output level for an upcoming period based on forecasted operating profit represents a master budget. It is referred as static budget. Various output levels for budgeted operating income represents Pro-forma budget. For an output level, Pro-Forma budget can be prepared within the relevant range. At the end of period to prepare control budget, we reserve the term flexible budget i.e. flexed to the actual output achieved. The key to explain the process of total static budget for variance period, flexible budget is introduced i.e. for a period total static budget variance can be divided into sales volume variance and total flexible budget variance. Flexible budget is also referred as Control budget.

Direct cost Sales variance Control Systems Sales variance is the breakdown of sales volume and which includes components like manufacturing cost (which is a direct cost), labour cost, material costs. Certain procedures are set in place, which help the organisation to control performance, which will include components from planning to evaluation. Similarly, operational financial controls are also applied for cost control in their respective areas. Discussion and analysis: Construction of operating earnings for a period, planned amount or established targets and flexible budgets, standard costs are used. The difference between operating earning specified in firm's static budget and actual earning for that period can be determined using standard costs. Sales volume, sales mix, selling prices, variable costs per unit and total fixed costs are the five factors that combines to determines operating income and the five factors attributable portion makes total operating income variance.

Direct cost Sales variance Control Systems Sales variance is the breakdown of sales volume and which includes components like manufacturing cost (which is a direct cost), labour cost, material costs. Certain procedures are set in place, which help the organisation to control performance, which will include components from planning to evaluation. Similarly, operational financial controls are also applied for cost control in their respective areas. Discussion and analysis: Scarce is time management. Management by exception has a philosophy that managers are departing materially from plan i.e. not going according to plan and give primary attention to things. As the corollary, according to the basically proceeding plan the areas are given relatively less attention by the managers. When the things are not going according to the plan to identify situation from a financial standpoint, the variance can be referred as information signals. Thus, there on part of managers, no intervention is needed in which variances are deemed small or immaterial. On the other hand, to uncover the underlying cause which may lead to some changes or intervention, it may trigger the need of investigation. In that case the variance is considered abnormal.