Bhimani, Horngren, Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 Closing stock is not just a leftover it is planned or budgeted. The amount budgeted depends on the firm’s philosophy (JIT or traditional, the variation in demand for the product, perishability, etc. Students often fail to appreciate potential behavioural effects of budgeting. If employees perceive budgets
as too difficult to achieve, they may simply view the budget as unrealistic and give up trying to achieve it. This is particularly likely if employees feel the budget has been imposed by higher levels. On the other hand, if employees themselves determine the budget, they often set budgets that are too easily achieved by building in slack. (These behavioural issues arise in cost budgets as well as revenue budgets) Management must make tough choices in determining the degree of employee participation in the budgetary process and the extent to which employees should view the budget as achievable. The nature of the product makes it difficult for some companies to synchronise production levels with expected sales. When inputs
are available only seasonally, production occurs when inputs are available. For example, a manufacturer of jams produces the year’s supply of strawberry jam during the strawberry season, the year’s supply of cherry
jam during the cherry season, etc. Variable OH costs fluctuate in proportion to the quantity of the cost allocation base (DLH in the Wessex Engineering example, given in Chapter 14), whereas fixed OH remains constant across a wide range of output. Walk the students through the consumption of the cost/unit of FG. This shows how the DM, DL and MOH budgets fit together. Students often have trouble with this integration.
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