A comparison of the actual and budgeted costs should be closely monitored to determine the efficiency of the system in place. If the current technique does not always reflect the true cost of operation or reports wide gaps between budgeted and actual costs, a change in technique could be a solution.
The company has been employing process costing to budget and monitor its various costs. This method is a widely used tool in costing of its products. In order to do this, the company recognizes the following cost pools:
The production budget of the company is set before the production period usually for one year. Traditional costing method and variance analysis are used to adjust the different costs incurred. At the end of each quarter, the company computes the different variances to determine whether the company is above or below the set level. However, no effort is made to correct the budgeted costs.
As the size of the company is relatively small, it currently doesn't employ any software in order to efficiently track costs. The data for production is gathered for each pool center manually and is sent to each department involved such as purchasing, billing, and inventory.
It is also apparent that the company has no formal monitoring system as the budgets are never adjusted. It should be noted that the price of materials being used by the company often vary with their availability. ...