UP level accounting - Essay Example

When a semi-variable cost is treated as a variable cost for the purpose of variance analysis, the charge of overhead is exceeded. This is because semi-variable costs do not vary with each unit of activity, but change depending upon the level of activity achieved.Therefore, by granting the status of variable costs to semi variable costs, the overheads are hiked and thus profitability is reduced. Similarly, fixed costs remain fixed over a period of time, irrespective of the levels of activity. By assigning the status of fixed costs to semi-variable costs, during times of lowered levels of activity, there is a high overhead charge which significantly erodes profitability.

The result of treating a step-fixed costs, for the purpose of variance analysis, as a variable one would be that, if the costs need to be calculated on the shortest time frame, there may not be material variations, but if taken on the long time, the impact of the step fixed costs would not be realized, or in other words, profits may be over stated. For example, the costs of running a single machine for several months would be different from running several machines for a single month. (Blocher et al, 2008) Thus by assigning the nature of variable to a step fixed cost would overstate profits over a period of time.

When an operation entails both fixed and variable costs, and if all costs are taken as variable, it would wrongly inflate profits and underestimate costs. The element of fixed costs is generic to all cost centers, and very conspicuous in the cases of Health Care Providers, since investments in hospital machinery, equipments and infrastructure are quite substantial. (Blocher et al, 2008). In case of high level of activities, by not assigning the rightful fixed costs, profits become inflated; however, if all overheads are accounted for as fixed, during lowered levels of activities, costs become higher than booked and this could be disastrous, especially for smaller companies with low revenue generations.

Question 2 (i) The key drivers for profitability in an organization would be the correct assessment and implementation of cost factors- fixed, variable, semi-variable and step-fixed costs since any mis-match could lead to derailed planning, execution and incorrect decision-making. What is even more important is the correct booking of the overheads, since overheads not booked at all, or wrongly booked could lead to a host of critical problems later. The top management takes strategic decisions based on the cost data provided and it is therefore, it is essential that it be factually correct. (ii) The two variances depicted in Exhibit 3 consider the recovery of fixed overheads when the actual procedures performed, instead of the standard 50,000 procedures, was actually only 49,000 procedures.

Fixed costs were considered at $50, 00,000 for the predetermined standard 50,000 procedures. But the actual procedures billed were only 49,000 and therefore $ 100 X 1000 - $ 100,000 was unrealized. (Blocher et al, 2008). (iii) Regarding Exhibit 4, the mismatch occurred because the aspect of fixed cost overheads was not correctly judged. The mismatch occurred because of the 460 examinations made, only 310 were billed, leading to 150 examinations carried out but not billed and the profits have been inflated by (460 - 310) X $ 20 = $ 3000.

This is the reason why the profits are overstated. (Blocher et al, 2008). Question 3 (i) Traditional standard costing is a system by which predetermined value / efficiency standards are assigned for each element of cost. The actual performance is then matched against their Standard costs, and the variances, positive or negative are determined. This is an invaluable management tool since there is a complete breakup of cost components and determinants, and for each item of costs, it is possible to know the standard, the actual and the resultant variances.

Hence adverse variances could be effectively monitored by