Reply to Andrew.
Control systems in the controlling of the sales expenditure is procedures and policies put in place by management to prevent errors and fraud in regard to the sales expenditure (Graham, 2007). The policies and procedures not only detect fraud and errors but also the accuracy and completeness of the sales expenditure records. Control systems are put in place in several departments but, not in sales department only.
Use of sales expenditure budget.
Usually sale volume significantly influences the amount of sales expenditure. It is, therefore, necessary to prepare the sales expenditure budget in line with the sales budget for cast. The expenditure should be calculated as a percentage of sales. This will make sure that sale expenditure increases with an increase in sales, though; this should not be directly proportional. In the budget preparation, he should consider how much other companies in the same industry have allocated in respect to sales (Julie, 200).
Comparing the actual and planned expenditure.
The sales department should compare the money which has been paid in relation to the sales expense and the amount budgeted. This is obtained by adding the totals from relevant sales expenditure accounts and comparing with the amount stated in the budget. The sales department should then explain any significant difference discovered. In addition, measures to rectify this difference should be proposed to avoid further divergences Graham, 2007). It could be necessary to carry out the sales expenditure variance analysis weekly or even after a fort night.
Segregation of duties
He should make sure that the staff member who authorizes all sales expenses is different from the one who authorizes the payment as well as, and the one who makes payment. This will reduce cases of fraud and possibilities of errors (Julie, 200). The likely hood of occurrence of errors falls because after one person has done his or her worker a co- worker may look over it as he or she completes his part. However, care should be taken when segregating duties to avoid increasing number of staff out of proportion. Therefore, segregation should be done bearing in mind that over staffing will lead to increment of cost of salaries and wages. This means that a balance should be struck between the additional staff and how important is the need to segregate the duties (Julie, 200).
Rotation of staff
The staff members in the sales department should be constantly rotated. This will avoid cases of workers colluding with third parties to defraud the organization. Therefore, workers should not take considerable duration of time in one task. The fact that every employee can be transferred from to any department in the organizations makes one lack adequate time to steal. In addition, rotation of workers ensures that workers do not get bored. This avoids errors which may result from boredom. It also makes the worker aware that another person will be allocated the duty he is performing; therefore, he should leave his current position at its best otherwise he might be called to verify (Robert, 2006).
Comparing dates of delivery expenditure with delivery notes.
It is obvious that when goods are transported to the buyer some transport cost will be incurred. The date of recording such expenditure should rhyme with the date indicated in the delivery note. Other wise, this expense is likely to be a case of fraud. Therefore to control this, dates should be cross checked weekly as a way of validating the transport cost.
Reply to Breda: you need to base your argument on cost benefit analysis. Where considerations on how much the company saves on printing the machine is key to convince or else justify inclusion of this expenditure in financial budget (Robert, 2006). Calculate the total expenditure incurred by the company in purchasing the manuals from print shops in a certain period of time e.g. one year. This is obtained by multiplying the previous demand with the price per manual. Estimate the current demand of production manuals and factor any fluctuation in demand which may occur during the year. This enables the calculation of costs which the company will incur in purchasing the manuals from the shop in both short term and long term. The variable cost incurred in printing the manuals should also be estimated. This cost should then be multiplied with the annual demand to obtain the cost incurred if the company prints its own manuals. To obtain the amount which the company will save if it prefers to print a manual rather than purchasing; subtract the cost of one manual from the cost of printing a manual. Multiply the answer obtained with the annual demand so as to obtain the amount the company will save per year. Purchasing the offset print machine will involve fixed cost. It is, therefore, necessary to calculate how long the company will take to save enough money to recoup the initial cost of the machinery. This is calculating the pay back period of the machinery which can be obtained by dividing the fixed cost of the machinery by the amount the company will save per year. The cost of this machine will only be considered in the capital budget if the company will recoup the initial cost within the machines useful life i.e. before it fully breaks down or even before it becomes obsolete (Robert, 2006). When calculating the variable cost of producing the manual consider cost of repair and maintenance as well as the cost to be incurred in training some staff how to operate the machinery. It is also necessary to investigate whether it will be economical for the company to employ a specialist to operate machinery or to train the production department staff.
Paying all sales expenses by the use of cheques
All expenses should be paid though cheques to ensure that the records of such payments can be traced. This will make sure that if a dummy person is paid he or, she can easily be traced. It also voids instances which tempt sales workers to misrepresent sales expenditure to their advantage. It is obvious that those involved in writing the cheque will investigate to satisfy themselves that the expense is valid (Robert, 2006).
Reply to Carl on break even point analysis
Old break even point
Break even point helps in giving the minimum level of revenue which the company should earn from sales so as to make sure that the fixed cost is fully covered (Avis, 2009). Operating below this point is not sustainable. Therefore for any company it should be aware of its break even point so that it can put in place strategies to help achieve it. In addition, break even point gives the basis of calculating margin of safety (Boardman, 2006). In the calculation of the break even point several assumptions will be made. Firstly, the variable cost per as well as the selling price per unit will remain constant at any level of out put. Secondly, fixed level will not change within the given range of out put. Thirdly, variable costs and fixed costs are clearly distinguishable. Lastly, the production technique will not be changed within the given period of time. The data obtained from break even point assist the management in making some important decision on production and sales (Boardman, 2006).
Calculation of break even point
Contribution per unit= selling price per unit-variable cost per unit
Variable cost per unit is the entire cost which company will incur to produce only one unit.
Contribution per unit is the profit realized on sale of one unit. When calculating it fixed cost is not considered i.e it is assumed to be historical cost which is less significant.
The break even in units gives the number of units the firm should produce and sell so as to cover the production cost fully. However, at this point if the firm manufacture and sell this number of units then it will make no profit.
Break even point in units=fixed cost/ contribution @unit
= 137433 units
Break even point in money terms gives the mount of revenue which the company should raise from sales to cover exactly the entire cost of product. At this point the company will record zero profit and zero loss.
Break even point in monetary =break even point in units*selling price per unit
= 137433* 3.24
Profit before the increase in cost= operating level- break even point
= $ (3300000*3.24-445283)
= $ 623,917
New break even point = fixed costs / contribution per unit
This is the break even point which the company must strive to achieve after the increment in cost of production.
Contribution per unit = selling price per unit-variable cost per unit
=3.24-variable cost per unit
Variable cost per unit= initial cost + cost increment
Contribution per unit= 3.24- 1.52=1.72
Break even point= 257000/1.72
= 149419 units
This means that if the company does not produce and sell 149419 units then it will get loss. However, if it manages to achieve this number of units then it will make neither profit nor loss.
Break even point in money terms =149419*3.24 = $484,116
It should be noted that any additional sales made above 484,116 will make the company to earn profit and will contribute to increment in the margin of safety
Profit= operational level-new break even point
= $ (3300000 * 3.24-484116)
= $ 585082
Difference in profits = previous profit- profit after price rise
= $ (623,917- 585082)
The number of units which should be produced and sold are=38835/3.24 =11986 units
11986 more units should be produced and sold to achieve the previous profitability. It can also be said that the increase in cost of production without increase in production and sales leads to decrease in margin of safety.
Avis J. (2009).Performance Management, Managerial Level. CIMA publishing. UK.
Boardman E.(2006) Cost-benefit analysis: concepts and practice. Prentice hall. USA.
Graham L. (2007). Internal controls guidance for private, government and non profit entities.
John Wiley and sons. New Jersey
Julie H. (200). internal control strategies: A mid to business success guide. John Wiley and sons.
Robert J. (2006). Applied cost benefit analysis. Edward Elgar publishing limited. UK
Robert s. (2009).CIMA Official Learning System - Performance Operations. CIMA publishing.