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Question: Discuss About The Overhead Because Not Difficult To Retrieve? Answer: Introducation It is quite important to create and use flexible budgets when it comes to evaluation of past performances of a profit center in relation to manufacturing and sales of a product. It is the nature of flexible budget to consider the importance of operations conducting at different levels. For example, if an organization is working at 75% level, its raw material expenses say, shall be 7500 (10000*75%). Now, if the same organization is working at 90% level, its raw material expenses shall be 12000 (10000/.75 * .90). If an organization was using a static budget, it will be very difficult to channelize the flow of funds as per different activity levels (Accounting_Tools, 2017). The objective of such performance evaluation is to analyze a companys operating effectiveness and efficiency. It also reflects a companys true reality in terms of cost and revenue with respect to the performance levels. It is easier to control and adaptive to changes in the business environment (Accounting_Tools, 2017). A budget act as a road map or a guide for the flow of funds in an organization. Apart from preparing a cash budget for a manufacturing business, some other budgets are also prepared. The three other budgets that must be prepared at the same time or before the cash budget is prepared are sales budget, production budget and purchases budget (Accounting_Coach, 2017). In a manufacturing concern, purchases budget is related to raw materials. It is prepared weekly, monthly, quarterly or half-yearly basis. The same is the pattern for sales budget and production budget. All these three kinds of the budget are interrelated to each other. They are prepared on a similar line of cash flow when it comes to its timing i.e. weekly, monthly or half-yearly. Such data has a direct impact on a cash budget. If an organization needs to plan its purchases budget, the considerable outflow of cash shall be reflected in a cash budget. Similar is the case with the sales budget. Expected receipts can be recorded as per the flow of sales or past trends. Thus, all these three budgets influence cash budget and have its own implications on it (Lumen, 2017). Operating cycle is the time period which an organization takes to convert its inventory from purchase to selling it and receiving cash against it. Generally, an organization having shorter operating cycle is considered as a favorable position from the angle of a cash flow. Cash cycle refers to time which an organization takes to convert its resources into cash. The difference between the operating cycle and cash cycle is that the former focuses on operating efficiencies whereas the latter aims for the management of cash flow (The_Finance_Base, 2017). The elements of operating cycle are average payable days, average collection period and inventory turnover days. Cash cycles elements are days payable/ receivable outstanding and days inventory outstanding. The aim of working capital is to ensure that an organization is having enough liquid funds to run its business. Such elements help in facilitating an effective working capital. By carefully understanding the implications of receivable and payable turnover, an organization can channelize its flow of funds accordingly. For quick money, days of receivable and payable money shall be less and for a longer duration, there will be a number of days (The_Finance_Base, 2017). I do not agree with the statement. Accounting is an unbiased system which does not get influenced by the nature of an entity. Profit is one of the prime aims for any form of an organization. It is not true that government organizations should not worry about earning a profit. Yes, when compared to private enterprises, the intensity of earning a profit of government organization is low but having no intention of earning a profit is completely false (Lumen, 2017). Accounting is a mechanism which gives proper shape to an organizations flow of funds. Governed by the government regulations and accounting standards, it reflects the true and complete picture of companies. Without accounting, a company will not stand in a financial industry. Based on accounting, investors and others take vital decisions of investing in a company. It is a face of a company which cannot be ignored at all. Thus, it is totally untrue that government organizations does not have to worry for profit or pay attention towards accounting (Lumen, 2017). The main purpose of any costing system is to provide data with respect to cost to the managers which will help in decision making and plan to control cost. Costing system comes with other ancillary objectives and features. It also aims for an effective cost reduction. It tries to cut down cost and bring it to its budget level by removing unnecessary expenses. It also aims for cost control by controlling the expenses of cost in various activities of an organization. It also serves the purpose of a guide and road map reflecting cost incurred, cost planned and future prospects of using costs in an organization. Costing system was introduced with an aim to promote effective utilization of flow of funds in an organization (Garrison, 2012). Manufacturing overhead allocation rate = manufacturing overhead/machine hours = 598080/7000 = $ 85.44 per machine hour Administrative overhead allocation rate = administrative overhead / direct labour hours = 695520 / 14000 = $ 49.68 per direct labour Direct Material = $ 19000 Direct Labour = 750 hours Material Usage = 400 hours Cost related to direct labour = Direct Labour Hours * cost per direct labour hours = 750 * 49.68 = $ 37260 Cost related to machine usage = Machine Hours * cost per machine hour = 400 * 85.44 = $ 34176 Total cost = Direct Material + cost related to direct labour hour + cost due to machine usage = $ (19000 + 37260 + 34176) = $ 90436 Applying, 40% mark on total cost = $ 90436 * 40% + $ 90436 = $ 126610.4 It is quite crucial to properly allocate overhead expenses while quoting jobs or at the time of deciding on prices. Firstly, it gives us the clear picture of the cost incurred in activities related to a company. For example, if any activity is commonly related to the accounting, HR and manufacturing department, individual allocation of cost can be identified. This can help in cost reduction and cost control. Secondly, it also helps in the framing of a budget. While quoting on jobs, a budget will tie the cost and will limit wastage of resources (Lumen, 2017) . Overhead rate is a single average rate which is applied to all the products irrespective of the activities existing in a company along with its complexities. The cost which is related to each activity differs due to price and its own circumstances. This particular overhead rate does not subsist with all the activities. The end result is quite misleading for an organization. In reality, there is more number of cost drivers but overhead allocation rate ignores it all. Activity Based Costing (ABC) is one the alternative approach that might be taken to curb the issue. This acknowledges the complexity of various cost drivers and allocates the actual cost as per its drivers and the necessity of an organization (Accounting_Tools, 2017). Companies use budgeted overhead instead of actual overhead while allocating overhead cost due to several reasons. Collecting information with respect to actual overhead, at times, is quite challenging. In a factory, there are several activities which run on a daily, monthly or in a weekly process. Within this time frame, it is very difficult to get the required actual cost for the purpose of allocation. Due to this reason, various companies use budgeted overhead because it is not difficult to retrieve. It is a well-known fact that overheads are used to combat short-run fluctuations. The process will turn very difficult if a company has to wait for year-end for having actual overhead data. Budgeted overhead allocation does not disturb the flow of cost in a company (Accounting_for_management, 2017) References Accounting_Coach, 2017. What is a flexible budget?. [Online] Available at: https://www.accountingcoach.com/blog/flexible-budget [Accessed 16 September 2017]. Accounting_for_management, 2017. Predetermined overhead rate. [Online] Available at: https://www.accountingformanagement.org/predetermined-overhead-rate/ [Accessed 16 September 2017]. Accounting_Tools, 2017. Flexible Budget. [Online] Available at: https://www.accountingtools.com/articles/2017/5/17/flexible-budget [Accessed 16 September 2017]. Accounting_Tools, 2017. Overhead Allocation. [Online] Available at: https://www.accountingtools.com/articles/2017/5/14/overhead-allocation [Accessed 16 September 2017]. Garrison, 2012. Managerial Accounting 11E W/Dvd. s.l.:Tata McGraw-Hill Education. Lumen, 2017. Boundless Accounting. [Online] Available at: https://courses.lumenlearning.com/boundless-accounting/chapter/overview-of-key-elements-of-the-business/ [Accessed 16 September 2017]. Lumen, 2017. Operating Budgets. [Online] Available at: https://courses.lumenlearning.com/managacct/chapter/sales-and-purchases-budgets/ [Accessed 16 September 2017]. The_Finance_Base, 2017. Difference Between Operating Cycle Cash Cycle. [Online] Available at: https://thefinancebase.com/difference-between-operating-cycle-cash-cycle-1763.html [Accessed 16 September 2017].