Budgetary Control Static Budgets

Managerial Accounting
Second Edition

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

Weygandt / Kieso / Kimmel

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Budgetary Control Static Budgets

Budgetary Control and Responsibility Accounting

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

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Budgetary Control Static Budgets

Management Functions
Planning Directing and Motivating Controlling

Flexible Budgets
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Budgetary Control
Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

One of the three main functions of management is to control. Budgets are useful in controlling operations.

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Budgetary Control
Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

The use of budgets to control operations. Compare actual results with planned objectives.

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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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Illustration 7-2

Budgetary Control Reporting System

Name of Report
Sales Labor

Frequency
Weekly Weekly

Purpose

Primary Recipient(s)

Scrap

Daily

Department Monthly Overhead costs Selling expenses Monthly Income Statement Monthly and quarterly

Determine whether sales Top management and sales goals are being met manager Control direct and indirect Vice president of production labor costs and production department managers Determine efficient use of Production manager materials Control overhead costs Department manager Control selling expenses Determine whether income objectives are being met Sales manager Top manager

Illustration 7-6

Static Budget
Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

A projection of budget data at one level of activity.

Barton Steel (Forging Department) Manufacturing Overhead Budget (Static) For the Year Ended December 31, 2002
Budgeted Production in units (steel ingots) Budgeted Costs Indirect materials Indirect labor Utilities Depreciation Property taxes Supervision 10,000
$ 250,000 260,000 190,000 280,000 70,000 50,000 $1,100,000

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Static Budget
Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

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Flexible Budget
Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

A projection of budget data for various levels of activity.

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Illustration 7-13

Flexible Budget
Fox Manufacturing Company (Finishing Department) Flexible Monthly Manufacturing Overhead Budget For the Month Ended January 31, 2002
Activity level Direct labor hours Variable costs Indirect materials ($1.50) Indirect labor ($2.00) Utilities ($.50) Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs

8,000 $12,000 16,000 4,000 32,000 15,000 10,000 5,000 30,000 $62,000

9,000 $13,500 18,000 4,500 36,000 15,000 10,000 5,000 30,000 $66,000

10,000 $15,000 20,000 5,000 40,000 15,000 10,000 5,000 30,000 $70,000

11,000 $16,500 22,000 5,500 44,000 15,000 10,000 5,000 30,000 $74,000

12,000 $18,000 24,000 6,000 48,000 15,000 10,000 5,000 30,000 $78,000

Illustration 7-15

Flexible Budget at 10,000 and 12,000 Levels

Management by Exception
Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

The review of budget reports by management focused entirely or primarily on differences between actual results and planned objectives.

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Illustration 7-17

Responsibility Reporting System

Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

The preparation of reports for each level of responsibility in the companys organization chart.

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Controllable Costs
Budgetary Control Static Budgets

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Costs that a manager has the authority to incur within a given period of time.

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Responsibility for Controlling Costs

Budgetary Control Static Budgets

Illustration 717

Flexible Budgets
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Decentralization
Budgetary Control Static Budgets

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Control of operations is delegated to many managers throughout the organization.

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Segment
Budgetary Control Static Budgets

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An area of responsibility in decentralized operations.

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Responsibility Accounting
Budgetary Control Static Budgets

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Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

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A part of management accounting that involves accumulating and reporting revenues and costs on the basis of the manager who has the authority to make the day-to-day decisions about the items.

Illustration 7-20

Direct Fixed Costs

Budgetary Control Static Budgets

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Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.

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Indirect Fixed Costs

Budgetary Control Static Budgets

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Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

Costs that are incurred for the benefit of more than one profit center.

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Cost Center
Budgetary Control Static Budgets

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A responsibility center that incurs costs but does not directly generate revenues.

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Warranty Dept

Profit Center
Budgetary Control Static Budgets

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A responsibility center that incurs costs but also generates revenue.

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Investment Center
Budgetary Control Static Budgets

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A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use.

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Illustration 718 Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

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Illustration 7-22

Responsibility Report
Budgetary Control Static Budgets

Contribution margin less controllable fixed costs=Controllable Margin.

Mantel Manufacturing Company (Marine Division) Responsibility Report For the Year Ended December 31, 2002
Difference Favorable F Budget Actual Unfavorable U $1,200,000 $1,150,000 $50,000 U 490,000 156,000 646,000 504,000 100,000 80,000 180,000 $ 324,000 10,000 F 4,000 F 14,000 F 36,000 U -0-0-0$36,000 U

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

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Sales Variable Costs Cost of goods sold 500,000 Selling & administrative 160,000 Total 660,000 Contribution margin 540,000 Controllable fixed costs Cost of goods sold 100,000 Selling & administrative 80,000 Total 180,000 Controllable margin $ 360,000

Budgetary Control Static Budgets

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Residual Income The income that remains after subtracting from the controllable margin the minimum rate of return on a companys operating assets.

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Return on Investment (ROI)

Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

A measure of managements effectiveness in utilizing assets at its disposal in an investment center.

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Principles of Performance Evaluation

Budgetary Control Static Budgets

Flexible Budgets
Responsibility Accounting Responsibility Reports/Cost Responsibility Reports -Profit Investment Centers

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Managers of responsibility centers should have direct input into the process of establishing budget goals of their area of responsibility. The evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated. Top management should support the evaluation process. The evaluation process must allow managers to respond to their evaluations. The evaluation should identify both good and poor performance.

Budgetary Control Static Budgets

COPYRIGHT

Flexible Budgets Copyright

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