Question

Plz have at least 200words for each Explain sunk costs and opportunity costs. Provide a business example for each of these terms. What are the difficulties in preparing a sales budget? Explain and provide a business example for each accounting term: controllable costs and noncontrollable costs.

Answer 1

Sunk cost

Sunk cost or Historical cost refers to money that has already been spent and which cannot be recovered. Sunk cost are treated as historic and not useful in decision making situations.These costs are excluded from future business decisions because the cost will remain same regardless of the outcome of business situations.They are seen as irrelevant to current and future budgetary concerns.When making future decisions only relevant costs are considered.

Example: The fixed rent charges a company paid for office building is irrelevant for future decision on whether to introduce a new product ., Sunk costs are irrelevant in make or buy decisions

Opportunity cost

Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another.The loss of potential gain from other alternatives when one alternative is chosen is the simpler meaning of opportunity cost. These cost are relevant in making future decisions.

Opportunity cost =Return on best foregone - Return on chosen option​

Example : Watching a movie is not just the price of the ticket ,but the value of the time you spend in the cinemas.

Difficulties in preparing Sales budget

Sales forecasting must be accurate or else the entire budget will be done for nothing.Sales budget is the beginning for every budget preparation. Therefor accurate market research must be needed for accurate sales volume we plan to deal with.

Sales, Cost of goods sold, operating ,fixed , administrative expenses are to be well planned for a good sales budget. So the starting point must be done with accuracy, timeliness .As sales budget is the source material for other upcoming budgets .

It is quite difficult to derive a sales forecast that proves to be accurate for any period of time, so an alternative is to periodically adjust the sales budget with revised estimates, perhaps on a quarterly basis. If this is done, the rest of the budget that is derived from the sales figures will also have to be revised, which can require a significant amount of staff time.

Controllable cost

The cost that can be altered as per the business needs. Controllable costs can be controlled (reduced) by a manager at a given organizational level. Controllable costs do not imply that they are 100% controllable.

Examples : Direct materials, direct labour eg:  the sales manager has control over the salary and commission of sales personnel.

Uncontrollable cost

Uncontrollable costs are those that are not under the control of a specified manager. These cannot be influenced by decisions or actions of the manager. These costs are imposed by the top management or allocated to several departments.

Example :   a foreman in charge of a tool room can only control costs pertaining to the same department and the matters which come directly under his control, not the costs apportioned to other department. The expenditure which is controllable by an individual may be uncontrollable by another individual.