STRATEGIC PLANNING

AND BUDGETING

MODULE 8-D
Reporting and Evaluation
(From Managerial Accounting by Garrison and Noreen, 11th Edition)
 Key Success Factors

Key success factors (KSFs) – a limited

number of factors that must be monitored
closely because they are crucial to achieving
the objectives of the organization or the
responsibility center.
Key performance indicators (KPIs) – the
quantitative measures related to KSFs.

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 Characteristics of KSF

It has important impact on performance

of the responsibility center.
It is volatile, i.e., it can change quickly.
If a change does occur, prompt action
should be taken.
The change can be measured by a
related KPI.

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 Types of Management Reports

Information reports – are designed to tell the

management what is going on (sources: from
the accounting system, from external info.
such as news summaries, stock prices, etc.)
Economic performance reports – are
prepared to show the net income of a
responsibility center.

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 Types of Management Reports

Managerial performance (control) reports –

are designed to tell the management how well
the manager did compared with some
standard of what the manager was expected
to do. The main difference between economic
performance and control reports is that the
latter exclude non-controllable items.

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 Period of Control Reports

Daily
Weekly
Monthly
Quarterly
Semi-annually
Yearly

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 Contents of Control Reports

Actual performance
Expected performance
Reasons for the difference between
actual and expected performance.

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 Characteristics of Good Control
Reports

Reports should be related to personal

responsibility.
Actual performance should be compared with
the best available standard e.g., budgets,
historical performance, or external standards
(benchmarking).
Significant information should be highlighted.

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 Steps in the Control Process

2. Investigate these
1. Identify areas that
areas to ascertain
require investigation
if action is warranted.

3. Act when
there is need for action.

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 Static Budgets and
Performance Reports
Hmm! Comparing
static budgets with
Static budgets are actual costs is like
prepared for a single, comparing apples
planned level of and oranges.
activity.
Performance
evaluation is difficult
when actual activity
differs from the
planned level of
activity.
Let’s look at CheeseCo.
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 Static Budgets and
Performance Reports
CheeseCo

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 Static Budgets and
Performance Reports
CheeseCo

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 Static Budgets and
Performance Reports
CheeseCo

U = Unfavorable variance
CheeseCo was unable to achieve
the budgeted level of activity.

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 Static Budgets and
Performance Reports
CheeseCo

F = Favorable variance that occurs when

actual costs are less than budgeted costs.

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 Static Budgets and
Performance Reports
CheeseCo

Since cost variances are favorable, have

we done a good job controlling costs?

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 Static Budgets and
Performance Reports
I don’t think I
can answer the Actual activity is below
question using budgeted activity.
a static budget. So, shouldn’t variable costs
be lower if actual activity
is lower?

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 Static Budgets and
Performance Reports

 The relevant question is . . .

“How much of the favorable cost variance is
due to lower activity, and how much is due to
good cost control?”
 To answer the question,
we must
the budget to the
actual level of activity.

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 Flexible Budgets
Show revenues and expenses
that should have occurred at the
actual level of activity.

May be prepared for any activity

level in the relevant range.

Reveal variances due to good cost

control or lack of cost control.

Improve performance evaluation.

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 Flexible Budgets

Central Concept

If you can tell me what your activity was

for the period, I will tell you what your costs
and revenue should have been.

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 Preparing a Flexible Budget

To a budget we need to know that:

 Total variable costs change
in direct proportion to
changes in activity.
 Total fixed costs remain ble
unchanged within the ar ia
V
relevant range. Fixed

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 Preparing a Flexible Budget

Let’s prepare
budgets
for CheeseCo.

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 Preparing a Flexible Budget
CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Variable costs are expressed as
Indirect labor 4.00 a constant
$ 32,000 amount per hour.
Indirect material 3.00 24,000
Power 0.50 $40,000
4,000÷ 10,000 hours is
Total variable cost $ 7.50 $4.00 per hour.
$ 60,000

Fixed costs
Fixed costs are
Depreciation $12,000
Insurance 2,000 expressed as a
Total fixed cost total amount.
Total overhead costs

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 Preparing a Flexible Budget
CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 $ 32,000
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost $ 7.50 $ 60,000

Fixed costs
Depreciation $4.00 per hour × 8,000 hours = $32,000
$12,000
Insurance 2,000
Total fixed cost
Total overhead costs

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 Preparing a Flexible Budget
CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 $ 32,000
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost $ 7.50 $ 60,000

Fixed costs
Depreciation $12,000 $ 12,000
Insurance 2,000 2,000
Total fixed cost $ 14,000
Total overhead costs $ 74,000 ?

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 Quick Check 

What should be the total overhead costs for the

Flexible Budget at 10,000 hours?
a. $92,500.
b. $74,000.
c. $89,000.
d. $94,000.

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 Quick Check 

What should be the total overhead costs for the

Flexible Budget at 10,000 hours?
a. $92,500.
b. $74,000.
c. $89,000.
d. $94,000.
Total overhead cost
= $14,000 + $7.50 per hour  10,000 hours
= $14,000 + $75,000 = $89,000
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 Preparing a Flexible Budget
CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 $ 32,000 $ 40,000
Indirect material Total
3.00 fixed costs
24,000 30,000
Power 0.50not change 4,000
do in 5,000
Total variable cost $ 7.50 $ 60,000 $ 75,000
the relevant range.
Fixed costs
Depreciation $12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000

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 Quick Check 

What should be the total overhead costs for the

Flexible Budget at 12,000 hours?
a. $92,500.
b. $89,000.
c. $106,800.
d. $104,000.

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 Quick Check 

What should be the total overhead costs for the

Flexible Budget at 12,000 hours?
a. $92,500.
b. $89,000.
c. $106,800.
d. $104,000.
Total overhead cost
= $14,000 + $7.50 per hour  12,000 hours
= $14,000 + $90,000 = $104,000
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 Preparing a Flexible Budget
CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 $ 32,000 $ 40,000 $ 48,000
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost $ 7.50 $ 60,000 $ 75,000 $ 90,000

Fixed costs
Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000 $ 104,000

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 Flexible Budget
Performance Report

Let’s prepare a
budget performance
report
for CheeseCo.

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 Flexible Budget
Performance Report
Flexible budget is CheeseCo
prepared for the Cost Total
same activity level
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
(8,000 hours) as
actually
Machine hoursachieved. 8,000 8,000 0
Variable costs
Indirect labor $ 4.00 $ 34,000
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable costs $ 7.50 $ 63,300
Fixed Expenses
Depreciation $ 12,000 $ 12,000
Insurance 2,000 2,050
Total fixed costs $ 14,050
Total overhead costs $ 77,350

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 Quick Check 

What is the variance for indirect labor when the

flexible budget for 8,000 hours is compared to
the actual results?
a. $2,000 U
b. $2,000 F
c. $6,000 U
d. $6,000 F

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 Quick Check 

What is the variance for indirect labor when the

flexible budget for 8,000 hours is compared to
the actual results?
a. $2,000 U
b. $2,000 F
c. $6,000 U
d. $6,000 F

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 Flexible Budget
Performance Report
CheeseCo
Cost Total
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 34,000 $ 2,000 U
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable costs $ 7.50 $ 60,000
Fixed Expenses
Depreciation $ 12,000 $ 12,000
Insurance 2,000 2,000
Total fixed costs $ 14,000
Total overhead costs $ 74,000

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 Quick Check 

What is the variance for indirect materials when

the flexible budget for 8,000 hours is compared
to the actual results?
a. $1,500 U
b. $1,500 F
c. $4,500 U
d. $4,500 F

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 Quick Check 

What is the variance for indirect materials when

the flexible budget for 8,000 hours is compared
to the actual results?
a. $1,500 U
b. $1,500 F
c. $4,500 U
d. $4,500 F

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 Flexible Budget
Performance Report
CheeseCo
Cost Total
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 34,000 $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000
Total variable costs $ 7.50 $ 60,000
Fixed Expenses
Depreciation $ 12,000 $ 12,000
Insurance 2,000 2,000
Total fixed costs $ 14,000
Total overhead costs $ 74,000

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 Quick Check 

What is the variance for depreciation when the

flexible budget for 8,000 hours is compared to
the actual results?
a. $0
b. $1,000 F
c. $2,000 U
d. $2,000 F

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 Quick Check 

What is the variance for depreciation when the

flexible budget for 8,000 hours is compared to
the actual results?
a. $0
b. $1,000 F
c. $2,000 U
d. $2,000 F

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 Flexible Budget
Performance Report
CheeseCo
Cost Total
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 34,000 $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000 3,800 200 F
Total variable costs $ 7.50 $ 60,000 $ 63,300 $ 3,300 U
Fixed Expenses
Depreciation $ 12,000 $ 12,000 $ 12,000 0
Insurance 2,000 2,000 2,050 50 U
Total fixed costs $ 14,000 $ 14,050 50 U
Total overhead costs $ 74,000 $ 77,350 $ 3,350 U

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 End of Module 8-D

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