Professional Documents
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Learning Objectives
1 Describe budgetary control and static budget reports.
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LEARNING Describe budgetary control and static
1
OBJECTIVE budget reports.
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Budgetary Control
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Budgetary Control
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Budgetary Control
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Budgetary Control
Question
Budgetary control involves all but one of the following:
a. Modifying future plans.
b. Analyzing differences.
c. Using static budgets.
d. Determining differences between actual and planned
results.
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Static Budget Reports
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Static Budget Reports
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Static Budget Reports
Illustration 10-3
Illustration 10-4
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Static Budget Reports
Illustration 10-3
Illustration 10-5
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Static Budget Reports
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Static Budget Reports
Question
A static budget is useful in controlling costs when cost
behavior is:
a. Mixed.
b. Fixed.
c. Variable.
d. Linear.
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DO IT! 1 Static Budget Report
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DO IT! 1 Static Budget Report
Solution
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LEARNING
OBJECTIVE
2 Prepare flexible budget reports.
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Why Flexible Budgets?
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Illustration: Overhead Static Budget report assuming 12,000
units were actually produced, rather than 10,000 units.
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Why Flexible Budgets?
Illustration 10-8
Variable costs
per unit
Illustration 10-9
Budgeted variable
costs, 12,000
units
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Illustration: Prepare the budget report based on the flexible budget
for 12,000 units of production.
Illustration 10-10
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Developing the Flexible Budget
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Service Company Insight NBC Universal
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Flexible Budget – A Case Study
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Flexible Budget – A Case Study
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Flexible Budget – A Case Study
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Monthly overhead flexible budget
Illustration 10-13
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Flexible Budget – A Case Study
Illustration 10-15
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Flexible Budget Reports
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10-31 Illustration 10-16 LO 2
Service Company Insight San Diego Zoo
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Flexible Budgets
Question
At 9,000 direct labor hours, the flexible budget for indirect
materials is $27,000. If $28,000 of indirect materials costs are
incurred at 9,200 direct labor hours, the flexible budget report
should show the following difference for indirect materials:
a. $1,000 unfavorable.
b. $1,000 favorable.
c. $400 favorable.
d. $400 unfavorable.
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DO IT! 2 Flexible Budgets
In Strassel Company’s
flexible budget graph,
the fixed cost line and
the total budgeted cost
line intersect the
vertical axis at $36,000.
The total budgeted cost
line is $186,000 at an
activity level of 50,000
direct labor hours.
Compute total
budgeted costs at
30,000 direct labor
hours.
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DO IT! 2 Flexible Budgets
In Strassel Company’s flexible budget graph, the fixed cost line and the
total budgeted cost line intersect the vertical axis at $36,000. The total
budgeted cost line is $186,000 at an activity level of 50,000 direct labor
hours. Compute total budgeted costs at 30,000 direct labor hours.
Variable costs:
Total budgeted cost line $ 186,000
Fixed costs - 36,000
Variable costs at 50,000 hours 150,000
Activity level at intersect (hours) ÷ 50,000
Variable costs per direct labor hour $3
Direct labor hours x 30,000
Total variable costs 90,000
Total fixed costs + 36,000
Total budgeted costs $ 126,000
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LEARNING Apply responsibility accounting to cost
3
OBJECTIVE and profit centers.
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Responsibility Accounting
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Responsibility Accounting
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Management Insight Proctor & Gamble
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Principles of Performance Evaluations
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Principles of Performance Evaluation
MANAGEMENT BY EXCEPTION
Management by exception means that top management’s
review of a budget report is focused primarily on differences
between actual results and planned objectives.
MATERIALITY - Without quantitative guidelines,
management would have to investigate every budget
difference regardless of the amount.
CONTROLLABILITY OF THE ITEM - Exception guidelines
are more restrictive for controllable items than for items the
manager cannot control.
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Principles of Performance Evaluation
BEHAVIORAL PRINCIPLES
1. Managers of responsibility centers should have direct input
into the process of establishing budget goals of their area of
responsibility.
2. The evaluation of performance should be based entirely on
matters that are controllable by the manager being
evaluated.
3. Top management should support the evaluation process.
4. The evaluation process must allow managers to respond to
their evaluations.
5. The evaluation should identify both good and poor
performance.
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Principles of Performance Evaluation
REPORTING PRINCIPLES
1. Contain only data controllable by manager of responsibility
center.
2. Provide accurate and reliable budget data to measure
performance.
3. Highlight significant differences between actual results and
budget goals.
4. Be tailor-made for intended evaluation.
5. Be prepared at reasonable intervals.
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Management Insight Honda
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Responsibility Reporting System
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Illustration 10-18
Partial organization chart
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Responsibility Report A
Illustration 10-19
Responsibility reporting system Report B
Vice president sees
summary of controllable
costs in his/her functional
Permits comparative area.
evaluations.
Plant manager can rank
each department
Report C
manager’s effectiveness Plant manager sees
summary of controllable
in controlling costs for each department
in the plant.
manufacturing costs.
Comparative rankings
provide incentive for a
manager to control costs. Report D
Department manager sees
controllable costs of his/her
department.
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Illustration 10-19
Responsibility reporting
system
Report A
President sees
summary data of
vice presidents.
Report B
Vice president sees
summary of
controllable costs in
his/her functional
area.
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Illustration 10-19
Responsibility reporting
system
Report B
Vice president
sees summary of
controllable costs
in his/her
functional area.
Report C
Plant manager sees
summary of
controllable costs
for each
department in the
plant.
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Illustration 10-19
Responsibility reporting
system
Report C
Plant manager
sees summary of
controllable costs
for each
department in the
plant.
Report D
Department
manager sees
controllable costs of
his/her department.
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Types of Responsibility Centers
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Types of Responsibility Centers
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Types of Responsibility Centers
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Types of Responsibility Centers
Question
Under responsibility accounting, the evaluation of a
manager’s performance is based on matters that the
manager:
a. Directly controls.
b. Directly and indirectly controls.
c. Indirectly controls.
d. Has shared responsibility for with another manager.
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Types of Responsibility Centers
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Types of Responsibility Centers
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Types of Responsibility Centers
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Types of Responsibility Centers
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RESPONSIBILITY ACCOUNTING FOR
PROFIT CENTERS
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RESPONSIBILITY ACCOUNTING FOR
PROFIT CENTERS
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RESPONSIBILITY ACCOUNTING FOR
PROFIT CENTERS
RESPONSIBILITY REPORT
Budgeted and actual controllable revenues and costs.
Uses cost-volume-profit income statement format:
► Deduct controllable fixed costs from the contribution
margin.
► Controllable margin - excess of contribution margin
over controllable fixed costs.
► Noncontrollable fixed costs are not reported.
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Illustration 10-22
Note the report does not show the noncontrollable fixed costs of $60,000. These
costs would be included in a report on the profitability of the profit center.
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Types of Responsibility Centers
Question
In a responsibility report for a profit center, controllable fixed
costs are deducted from contribution margin to show:
a. Profit center margin
b. Controllable margin
c. Net income
d. Income from operations
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DO IT! 3 Profit Center Responsibility Report
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LEARNING Evaluate performance in investment
4
OBJECTIVE centers.
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Return on Investment (ROI)
Illustration 10-23
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Responsibility Report
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Illustration 10-24
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Improving ROI
Illustration 10-25
Assumed data for Laser Division
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INCREASING CONTROLLABLE MARGIN
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INCREASING CONTROLLABLE MARGIN
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REDUCING AVERAGE OPERATING
ASSETS
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Improving ROI
Question
In the formula for return on investment (ROI), the factors for
controllable margin and operating assets are, respectively:
a. Controllable margin percentage and total operating
assets.
b. Controllable margin dollars and average operating
assets.
c. Controllable margin dollars and total assets.
d. Controllable margin percentage and average operating
assets.
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Accounting Across the Organization
Does Hollywood Look at ROI?
If Hollywood were run like a real business, where things like return on
investment mattered, there would be one unchallenged, sacred principle that
studio chieftains would never violate: Make lots of G-rated movies. No matter
how you slice the movie business—by star vehicles, by budget levels, or by
sequels or franchises—by far the best return on investment comes from the not-
so-glamorous world of G-rated films. The problem is, these movies represent
only 3% of the total films made in a typical year. On the flip side are the R-rated
films, which dominate the total releases and yet yield the worst return on
investment. A whopping 646 R-rated films were released in a recent year—69%
of the total output—but only four of the top-20 grossing movies of the year were
R-rated films. This trend—G-rated movies are good for business but
underproduced, R-rated movies are bad for business and yet overdone—is
something that has been driving economists batty for the past several years.
Source: David Grainger, “The Dysfunctional Family-Film Business,” Fortune (January 10,
2005), pp. 20–21.
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DO IT! 4 Performance Evaluation
The service division of Metro Industries reported the following results for
2017.
Sales $400,000
Variable costs 320,000
Controllable fixed costs 40,800
Average operating assets 280,000
Management is considering the following independent courses of action in
2015 in order to maximize the return on investment.
1. Reduce average operating assets by $80,000, with no change in
controllable margin.
2. Increase sales $80,000, with no change in the contribution margin
percentage.
a. Compute controllable margin and the return on investment for 2017.
b. Compute controllable margin and the expected return on investment.
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DO IT! 4 Performance Evaluation
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DO IT! 4 Performance Evaluation
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