Question

In: Accounting

i. Discuss the factors that are likely to cause managers to submit budget estimates of sales...

i. Discuss the factors that are likely to cause managers to submit budget estimates of sales and costs that do not represent their best estimate or expectations of what will actually occur.

ii. Suggest, as a budget accountant, what procedures you would advise in order to minimize the likelihood of such biased estimate arising.

Solutions

Expert Solution

Answer of question 1 -- Causes of wrong cost estimate are as follows :-

1. Cost data of previous similar project - If data is taken from previous similar project, It may or may not be correct, it can be a cause of wrong cost estimate.

2. Project assumption - project assumption that lead to wrong cost estimate is a cause of wrong estimate.

3. Lack of trained / experienced resources - resources used in the production such as material, land, labour , if these are not experienced then it leads to the cause of wrong cost estimates.

4. Technical issues - This cause occur at any step or in any way.

5. Not referring to lessons learned - Not all organisation follows the best practice of documenting lessons learned prior to the project closure.

Answer of question 2 -- As a budget accountant, when you make an estimation of cost in a project without knowing much about it, then these type of baised estimate arises. It can be removed by taking various small steps to avoid these mistakes. Some of these are -

1. Quality cost - Measure the cost of quality is very important. It tells about the future cost which should be spent on a particular product so that quality remains same and no wrong estimation is done.

2. Resource cost rates determination - To determine the cost of basic resources used in production figuring out what the rate for labour and materials will be is to be estimated.

3. Reserve Analysis - Making reserve for different purposes is important for business to run efficiently. Reserve for asset purchase, reserve for any risk in future. Reserve means putting some cash away in case of overruns.

To make several estimation rightly at present for near future can help to minimize the baised estimate arising.

ekkarill92 answered 2 years ago
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