Answers
Section B Question 3
Organizations undertake the allocation of overheads because it has a direct impact on the balance sheet and income statements of the business. The accounting system requires to keep track of these expenses since they are important to the business. Many accounting systems need an allocation of costs to the goods produced. An understanding of how to allocate such costs reasonably and responsibly ensures that records are kept accurately and not distorted. Other than accounting needs, allocation of overheads ensures that decisions such as pricing are made for the company without any issue. If the product pricing is based on the direct costs, the allocation of overheads helps in cutting into the profits. The company will still be required to pay these normal overhead costs. This means that the organization will have minimum leftovers from every product sold. Including indirect costs into the pricing increases the pricing to cover them effectively without reducing the organizational profits. Allocating overhead also allows you to get better ways of reducing organizational costs.
Overhead allocation poses different problems for the organization. The most urgent problem is time. Overhead allocations require so much time for big intricate organizations. This reduces the time needed for financial close, which is so important for timely internal and external reporting. Another big problem associated with an overhead allocation is accuracy. The accuracy of allocations depends on reciprocal allocation and enough flexibility. Sometimes it is hard to track and understand the source of allocations and how they were developed thus posing transparency problems within organizations. Lastly, stakeholders within an organization may feel that they do not get the right share of support costs. This creates trust problems within the management.
Tracing the cost of production for a certain product becomes very difficult when the cost goes towards producing different products and services. Estimating the percentage of a utility directed towards the production of a certain product becomes a challenge during the product costing exercise. This becomes complicated because a certain cost can be shared in producing different products, making it hard to accurately trace the cost incurred by each product. In such situations, firms may employ driver tracing. This means that they look for traces that indicate the percentage of a given service towards each cost of an object.
Section C Question 5
Results control involve five steps. The first step is setting performance standards. Performance standards are set based on the measurements of the actual performance. Standards are either set as higher, lower or identifying new or additional standards. These standards are usually set out in terms of money like revenue, costs, or profits although they might also be stated in other means such as produced units, amount of defective products, or quality levels or customer service.
The second stage is the measurement of performance. This is done in different ways either based on the performance standards, such as financial statements, reports of sales, production results, customer satisfaction, and other formal performance assessments. Managers in every stage take part in the managerial task of controlling to some extent.
The third step is comparing the actual performance with standards. This stage deals with a comparison of the actual performance with postulated standards to find out any deviations. The amount sold in a week can be compared against the standard output for that week.
Analysis of the deviations is done in stage four. Deviations are present in almost every activity. Nevertheless, in areas of business, deviations are supposed to be corrected urgently than in any other area. Managements use critical point control and management by exception in this stage to analyse deviations.
The last stage in results control is taking corrective action. This action is taken when the deviations are not within acceptable limits. Exceeding deviations should be brought to notice immediately for the management to undertake corrective measures mostly on important sectors.
Results control pose different problems when used in any organization. The most outstanding harmful side is the costs associated with the process. Results controls pose financials which are either direct or indirect. Direct costs are paid directly to an accountant for an audit while indirect costs involve payments made by the organization whose main function is related to control, such as internal quality control. Results control also poses culture and reputation costs which are intangible and are associated with all forms of control. Intangible costs include damaged relationships with employees or a tarnished reputation with investors. Responsiveness costs is another harmful side of the result control process. A downtime might exist between a decision and acquired actions for implementation due to compliance with result control rules. Implementation of new control might also conflict with other controls thus posing a result control implementation cost.
