Professional Documents
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Chapter
21-1
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CHAPTER 21
BUDGETARY
CONTROL AND
RESPONSIBILITY
ACCOUNTING
Accounting, Fourth Edition
Chapter
21-2
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Chapter Preview
Chapter
21-3
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Study Objectives
Chapter
21-4
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Study Objectives
Chapter
21-5
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Preview of Chapter
Chapter
21-6
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Why flexible
budgets? Flexible Reports
Development Budgets Management
Case study by exception
Chapter
21-7
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Illustration 21-1
Chapter
21-10 LO 1: Describe the concept of budgetary control.
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Review Question
Chapter
21-12 LO 1: Describe the concept of budgetary control.
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Illustration 21-3
Chapter
21-14 LO 2: Evaluate the usefulness of static budget reports.
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Illustration 21-4
Illustration 21-5
Chapter
21-16 LO 2: Evaluate the usefulness of static budget reorts.
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Review Question
a. Mixed.
b. Fixed.
c. Variable.
d. Linear.
Chapter
21-18 LO 2: Evaluate the usefulness of static budget reports.
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Flexible Budgets
Flexible Budgets
Illustration 21-6
Chapter
21-20
LO 3: Explain the development of flexible budgets and the
usefulness of flexible budget reports.
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Flexible Budgets
Example – Continued
Demand increases – produce 12,000 units rather than 10,000.
Illustration 21-7
Flexible Budgets
Example – Continued
Very large variances in budget report due to increased
demand for steel ingots.
Total unfavorable difference of $132,000 – 12% over
budget
Comparison based on budget data for 10,000 units - the
original activity level which is not relevant.
Meaningless to compare actual variable costs for 12,000
units with budgeted variable costs for 10,000 units.
Variable cost increase with production.
Flexible Budgets
Example – Continued
Budget data for variable costs at 10,000 units:
Illustration 21-8
Calculate variable costs at the 12,000 unit level:
Illustration 21-9
Chapter
21-23
LO 3: Explain the development of flexible budgets and the
usefulness of flexible budget reports.
[Open]
Flexible Budgets
Example – Continued:
New budget report (no change in fixed costs):
Illustration 21-10
Chapter
21-24
LO 3: Explain the development of flexible budgets and the
usefulness of flexible budget reports.
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Steps:
1. Identify the activity index and the relevant
range of activity.
2. Identify the variable costs and determine the
budgeted variable cost per unit of activity for
each cost.
3. Identify the fixed costs and determine the
budgeted amount for each cost.
4. Prepare the budget for selected increments of
activity within the relevant range.
Illustration 21-11
Chapter
21-26
LO 3: Explain the development of flexible budgets and the
usefulness of flexible budget reports.
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Illustration 21-12
Chapter
21-27
LO 3: Explain the development of flexible budgets and the
usefulness of flexible budget reports.
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Illustration 21-13
Chapter
21-29
LO 3: Explain the development of flexible budgets and the
usefulness of flexible budget reports.
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Illustration 21-14
Illustration 21-15
Chapter
21-31
LO 3: Explain the development of flexible budgets and the
usefulness of flexible budget reports.
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Illustration 21-16
Chapter
21-33
LO 3: Explain the development of flexible budgets and the
usefulness of flexible budget reports.
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Management by Exception
Review Question
Chapter
21-36 LO 4: Describe the concept of responsibility accounting.
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Chapter
21-37 LO 4: Describe the concept of responsibility accounting.
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Illustration 21-17
Chapter
21-38 LO 4: Describe the concept of responsibility accounting.
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Chapter
21-39 LO 4: Describe the concept of responsibility accounting.
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Chapter
21-41 LO 4: Describe the concept of responsibility accounting.
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Illustration 21-18
Chapter
21-44 LO 4: Describe the concept of responsibility accounting.
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Responsibility Reporting
System Illustrated
Chapter
21-45 Illustration 21-19
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Investment Center
Incurs costs, generates revenues, and has
investment funds available for use.
Manager evaluated on profitability of center and
rate of return earned on funds.
Often a subsidiary company or a product line.
Manager able to control or significantly influence
investment decisions such as plant expansion.
Illustration 21-20
Review Question
a. Directly controls.
b. Directly and indirectly controls.
c. Indirectly controls.
d. Has shared responsibility for with another
manager.
Chapter
21-51 LO 4: Describe the concept of responsibility accounting.
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Illustration 21-21
Chapter
21-53 LO 5: Indicate the features of responsibility reports for cost centers.
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Responsibility Report
Shows budgeted and actual controllable revenues
and costs.
Prepared using the cost-volume-profit income
statement format:
Deduct controllable fixed costs from the contribution
margin.
Controllable margin - excess of contribution margin over
controllable fixed costs.
Best measure of manager’s performance in controlling
revenues and costs.
Do not report noncontrollable fixed costs.
Illustration
21-22
Chapter
21-57 LO 6: Identify the content of responsibility reports for profit centers.
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Review Question
Chapter
21-58 LO 6: Identify the content of responsibility reports for profit centers.
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Illustration 10-23
Operating assets include current assets and plant
assets used in operations by the center and
controlled by manager.
Exclude nonoperating assets such as idle plant
assets and land held for future use.
Base average operating assets on the beginning and
ending cost or book values of the assets.
Chapter LO 7: Explain the basis and formula used in evaluating
21-60
performance in investment centers.
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Responsibility Report:
Scope of manager’s responsibility affects
content.
Investment center is an independent entity
for operating purposes.
All fixed costs controllable by center
manager.
Shows budgeted and actual ROI below
controllable margin.
Chapter
LO 7: Explain the basis and formula used in
21-61 evaluating performance in investment centers.
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Illustration 21-24
Chapter
21-62
LO 7: Explain the basis and formula used in
evaluating performance in investment centers.
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Illustration 21-25
Chapter
21-64
LO 7: Explain the basis and formula used in evaluating
performance in investment centers.
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Illustration 21-26
Improving ROI –
Reducing Average Operating Assets
Illustration 21-28
Review Question
Chapter
21-68
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Chapter
21-70
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Chapter
21-71
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Chapter
21-72
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Favorable – F
Unfavorable - U
Chapter
21-73
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Copyright
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
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use of these programs or from the use of the information
contained herein.
Chapter
21-74