Unrealistic normal production volume fails


A company has been operating a budget system for a number of years. Pro- duction volume fluctuates widely. It reaches its peak in the fall but is quite low during the rest of the year. Manufacturing for stock during the dull period as a means of smoothing out the volume fluctuations is impractical because of frequent and sudden changes in specifications prescribed by the customers. Actual annual volume has been substantially below normal volume. The budget produces large unfavorable capacity variances since overhead rates are computed from normal volume and are inadequate to absorb the overhead which should be charged into production during the low-volume periods. This fixed type of budget based on an unrealistic normal production volume fails to serve its planning and control purpose.

As a consultant you are asked to diagnose the situation and offer advice.

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Accounting Basics: Unrealistic normal production volume fails
Reference No:- TGS02054841

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