Financial control - Essay Example

These standards can at best be called current standards, as they have taken into account only the current four months conditions only. Sales activities have been started with a level 500 unit of product for first two months, which rose by 100 units of products in next two in each month. Accordingly the level of activity is assumed to be rising at the rate of 100 units of product after every two months performance. Thus level of activity is currently set at production rate increasing by 100 units after every two months till the activity reaches the optimum level of the use of total capacity over a period of time, say between one to two years.

Being variable in nature, the cost per unit of the product has been set $ 30.This is based on the fact that products consumes one hour of labour time for producing one unit of product. As the wages rate for the type of production labour involved is $ 30 per, the current direct labour cost standard is set at $30 per unit of product. Salary of administrative staff has been found to be costing at the rate $10 per unit of product. General expenses after apportioning on basis of total production during a period of one month have found to be costing $8 per unit of the product.

Depreciation being treated as fixed overhead has been calculated on basis of ‘units of production’ over the useful life of assets involved. This has given a result of $2 per unit of product and thus that is the standard set for the current period. The gross margin (i.e. contribution) has given a performance of 60% during the first four months of the performance. It appears to be a little very optimistic. As the production capacity has not been settled up to an optimum level, there will be major fluctuations in the gross margin or contribution till it finally settles at its normal level at the optimum level of production.

A full year of performance may put a proper light in this respect. The