Cost Control, Budgetary Control and Decision Making
Domain focus
This domain tests control systems and short-term decisions: budgets, variances, relevant costing and CVP. CHSE questions often ask budget preparation, flexible budget, and make-or-buy/special-order decisions.
Core rules
- Cost control keeps costs within targets; cost reduction lowers costs permanently without losing function. Budgetary control sets budgets, compares actuals, analyses variances and takes corrective action.
- Budgets: sales budget starts the process; production budget = sales + closing stock − opening stock; material purchases = usage + closing stock − opening stock; cash budget shows liquidity, not profit.
- Flexible budget changes with activity; zero-based budgeting starts from zero each period. A key factor limits activity.
- Decision making uses relevant costs: future, incremental, cash costs that differ between alternatives. Sunk costs and allocated fixed costs are irrelevant.
- CVP: contribution, BEP, margin of safety, and limiting factor ranking by contribution per unit of scarce resource.
Worked example
A firm makes 8,000 units and has capacity for 10,000. A special order offers ₹80 per unit for 1,500 units. Variable cost is ₹60; fixed cost is unchanged. Relevant contribution = (80−60)×1,500 = ₹30,000. Accept the order if no better use of capacity exists; the ₹20 per unit fixed overhead allocation is irrelevant because total fixed cost does not change.
Traps
Do not include sunk costs; do not treat a cash budget as a profit statement; do not use absorption cost per unit for a special order when fixed costs are unchanged; do not ignore the key factor.