PART A Answers
1. Improving costing accuracy:
The company can chose over marginal costing rather than absorption costing. Marginal costing is a form of costing which requires the business to recognize the variable costs of material cost, labour cost and overhead cost with the products and ignore the other costs. Presently all confusion is being created by the fixed costs and their variances, and now if the business charges it as a period cost rather, the confusion could be spilled over and the management could be done more effectively. Even then it can be expected that the business would be able to do some cost saving too.
2. The fixed overhead variance:
Explanation of FOH variances and comment on management observation:
FOH Volume Variance is merely the variance between the standard and the budgeted expenses. This is in no means an indication that everything is OK rather it means that the prediction made by the company as regards the fixed cost is wrong.
Consequences for the firm:
The consequences on the firm, on the basis of the recognition of FOH variance as good could mean the company disregarding the errors being committed in the budget determination and could therefore result in the company continuing with the method of budget identification on the same basis that it is using currently. And if that continues it would result in the business earning variances every year and the procuring department, the labour hiring department and the overhead management department getting the blame for it, rather than the budget department making errors. This could result in decreasing of the morale of the employees in these departments, which could further degrade their productivity, finally resulting in reduction of the overall productivity.