Budgetary

Control
Static Budgets Managerial Accounting
Flexible Budgets
Second Edition
Responsibility
Accounting Weygandt / Kieso / Kimmel
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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EL
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7-1
 Budgetary Control and
Budgetary
Control
Responsibility Accounting
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7-2
Budgetary
Management Functions
Control
Static Budgets
Flexible Budgets
• Planning
Responsibility
Accounting • Directing and Motivating
Responsibility
Reports/Cost
Responsibility
• Controlling
Reports -Profit
Investment
Centers

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7-3
 Budgetary Control
Budgetary
Control
Static Budgets
• One of the three main
Flexible Budgets functions of management
Responsibility
Accounting is to control.
Responsibility
Reports/Cost
Responsibility
• Budgets are useful in
Reports -Profit
Investment
controlling operations.
Centers

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7-4
 Budgetary Control
Budgetary
Control
Static Budgets
The use of budgets to
Flexible Budgets
Responsibility
control operations.
Accounting
Compare actual results
Responsibility
Reports/Cost
with planned objectives.
Responsibility
Reports -Profit

TS
EN L
EMCIA

BU
AT N
ST INA

D
Investment

GE
F

T
Centers

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7-5
 Illustration 7-1

Budgetary Control
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7-6
 Illustration 7-2

Budgetary Control Reporting System

 Illustration 7-6

Static Budget
Budgetary
Control
Static Budgets
A projection of budget data
Flexible Budgets
Responsibility
at one level of activity.
Accounting Barton Steel (Forging Department)
Manufacturing Overhead Budget (Static)
Responsibility
Reports/Cost
For the Year Ended December 31, 2002

Responsibility Budgeted
BudgetedProduction
Productionin
inunits
units(steel
(steelingots)
ingots) 10,000
10,000
Reports -Profit Budgeted Costs
Budgeted Costs
Indirect
Indirectmaterials
materials $$250,000
250,000
Investment Indirect labor 260,000
Centers Indirect labor 260,000
Utilities
Utilities 190,000
190,000
Depreciation
Depreciation 280,000
280,000
Property
Propertytaxes
taxes 70,000
70,000
Supervision
Supervision 50,000
50,000
Previous Next $1,100,000
$1,100,000
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7-8
 Static Budget
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7-9
 Flexible Budget
Budgetary
Control
Static Budgets
A projection
Flexible Budgets of budget
Responsibility
Accounting data for
Responsibility
Reports/Cost
various
Responsibility
Reports -Profit
levels of
Investment activity.
Centers

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7 - 10
 Illustration 7-13

Flexible Budget
Fox Manufacturing Company (Finishing Department)
Flexible Monthly Manufacturing Overhead Budget
For the Month Ended January 31, 2002

Activity
Activitylevel
level
Direct
Direct laborhours
labor hours 8,000
8,000 9,000
9,000 10,000
10,000 11,000
11,000 12,000
12,000
Variable costs
Variable costs
Indirect
Indirectmaterials
materials($1.50)
($1.50) $12,000
$12,000 $13,500
$13,500 $15,000
$15,000 $16,500
$16,500 $18,000
$18,000
Indirect
Indirectlabor
labor($2.00)
($2.00) 16,000
16,000 18,000
18,000 20,000
20,000 22,000
22,000 24,000
24,000
Utilities ($.50)
Utilities ($.50) 4,000
4,000 4,500
4,500 5,000
5,000 5,500
5,500 6,000
6,000
Total
Totalvariable
variable 32,000
32,000 36,000
36,000 40,000
40,000 44,000
44,000 48,000
48,000
Fixed costs
Fixed costs
Depreciation
Depreciation 15,000
15,000 15,000
15,000 15,000
15,000 15,000
15,000 15,000
15,000
Supervision
Supervision 10,000
10,000 10,000
10,000 10,000
10,000 10,000
10,000 10,000
10,000
Property
Propertytaxes
taxes 5,000
5,000 5,000
5,000 5,000
5,000 5,000
5,000 5,000
5,000
Total fixed
Total fixed 30,000
30,000 30,000
30,000 30,000
30,000 30,000
30,000 30,000
30,000
Total
Totalcosts
costs $62,000
$62,000 $66,000
$66,000 $70,000
$70,000 $74,000
$74,000 $78,000
$78,000
 Illustration 7-15

Flexible Budget at 10,000 and 12,000 Levels

 Management by Exception
Budgetary
Control
Static Budgets
The review of budget reports
Flexible Budgets
Responsibility
by management focused
Accounting
entirely or primarily on
Responsibility
Reports/Cost
differences between actual
Responsibility
Reports -Profit
results and planned
Investment
Centers objectives.

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7 - 13
 Illustration 7-17

Responsibility Reporting System

Budgetary
Control The preparation of reports
Static Budgets for each level of
Flexible Budgets
Responsibility
responsibility in the
Accounting company’s organization
Responsibility
Reports/Cost chart.
Responsibility
Reports -Profit
Investment
Centers

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7 - 14
 Controllable Costs
Budgetary
Control
Static Budgets
Costs that a manager has the
Flexible Budgets
Responsibility
authority to incur within a
Accounting
given period of time.
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 15
 Illustration 7-17

Responsibility for Controlling Costs

Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 16
 Decentralization
Budgetary
Control
Static Budgets
Control of operations is
Flexible Budgets
Responsibility
delegated to many managers
Accounting
throughout the organization.
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 17
 Segment
Budgetary
Control
Static Budgets
An area of responsibility in
Flexible Budgets
Responsibility
decentralized operations.
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 18
 Responsibility Accounting
Budgetary
Control
Static Budgets
A part of management
Flexible Budgets
Responsibility
accounting that involves
Accounting
accumulating and reporting
Responsibility
Reports/Cost
revenues and costs on the
Responsibility
Reports -Profit
basis of the manager who
Investment
Centers has the authority to make
the day-to-day decisions
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7 - 19
Illustration 7-20
 Direct Fixed Costs
Budgetary
Control
Static Budgets
Costs that relate specifically
Flexible Budgets
Responsibility
to a responsibility center
Accounting
and are incurred for the
Responsibility
Reports/Cost
sole benefit of the center.
Responsibility
Reports -Profit
Investment
Centers

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7 - 21
 Indirect Fixed Costs
Budgetary
Control
Static Budgets
Costs that are incurred for
Flexible Budgets
Responsibility
the benefit of more than one
Accounting
profit center.
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 22
 Cost Center
Budgetary
Control
Static Budgets
A responsibility center that
Flexible Budgets incurs costs but does not
Responsibility
Accounting directly generate revenues.
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 23
 Profit Center
Budgetary
Control
Static Budgets
A responsibility center that
Flexible Budgets incurs costs but also
Responsibility
Accounting generates revenue.
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 24
 Investment Center
Budgetary
Control
Static Budgets
A responsibility center that
Flexible Budgets
Responsibility
incurs costs, generates
Accounting
revenues, and has control
Responsibility
Reports/Cost
over the investment funds
Responsibility
Reports -Profit
available for use.
Investment
Centers

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7 - 25
 Illustration 7-18

Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 26
 Illustration 7-22

Responsibility Report
Budgetary
Control Contribution margin less controllable
Static Budgets fixed costs=Controllable Margin.
Flexible Budgets
Responsibility Mantel Manufacturing Company (Marine Division)
Accounting Responsibility Report
Responsibility For the Year Ended December 31, 2002
Reports/Cost
Difference
Difference
Responsibility Favorable
Reports -Profit FavorableFF
Budget
Budget Actual
Actual Unfavorable
UnfavorableUU
Investment Sales
Sales $1,200,000
$1,200,000 $1,150,000
$1,150,000 $50,000
$50,000UU
Centers Variable
VariableCosts
Costs
Cost
Costofofgoods
goodssold
sold 500,000
500,000 490,000
490,000 10,000
10,000FF
Selling & administrative
Selling & administrative 160,000
160,000 156,000
156,000 4,000
4,000FF
Total
Total 660,000
660,000 646,000
646,000 14,000
14,000FF
Contribution margin
Contribution margin 540,000
540,000 504,000
504,000 36,000
36,000UU
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Slide Slide Controllablefixed
fixedcosts
costs
Cost
Costofofgoods
goodssold
sold 100,000
100,000 100,000
100,000 -0-
-0-
End Selling & administrative
Selling & administrative 80,000
80,000 80,000
80,000 -0-
-0-
Show Total
Total 180,000
180,000 180,000
180,000 -0-
-0-
7 - 27 Controllable margin
Controllable margin $ 360,000 $ 324,000
$ 360,000 $ 324,000 $36,000
$36,000UU
 Residual Income
Budgetary
Control
The income that remains after
Static Budgets
Flexible Budgets
subtracting from the
Responsibility controllable margin the
Accounting
Responsibility
minimum rate of return on a
Reports/Cost
company’s operating assets.
Responsibility
Reports -Profit
Investment
Centers

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7 - 28
 Return on Investment (ROI)
Budgetary
Control
A measure of management’s
Static Budgets effectiveness in utilizing assets
Flexible Budgets at its disposal in an investment
Responsibility
Accounting
center.
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 29
 Principles of Performance Evaluation
Budgetary • Managers of responsibility centers should have direct
Control input into the process of establishing budget goals of
Static Budgets
their area of responsibility.
• The evaluation of performance should be based entirely
Flexible Budgets on matters that are controllable by the manager being
Responsibility evaluated.
Accounting • Top management should support the evaluation process.
Responsibility • The evaluation process must allow managers to respond
Reports/Cost to their evaluations.
• The evaluation should identify both good and poor
Responsibility
performance.
Reports -Profit
Investment
Centers

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7 - 30
Budgetary
COPYRIGHT
Control
Static Budgets
Copyright
Flexible Budgets© 2002, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Responsibility
Accounting
Section 117 of the 1976 United States Copyright Act without the
Responsibility
express written permission of the copyright owner is unlawful.
Reports/Cost
Request for further information should be addressed to the
Responsibility
Permissions
Reports -Profit Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
Investment
Centers
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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