HAPTER

Budgetary
7
Control
Static Budgets Managerial Accounting
Flexible Budgets
Responsibility
Second Edition
Accounting Weygandt / Kieso / Kimmel
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment Prepared by:
Centers

Ellen L. Sweatt
Georgia Perimeter College
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S
EL
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7-1
 Budgetary Control and
HAPTER
Responsibility
Budgetary
7
Control
Accounting
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7-2
HAPTER
Budgetary
Management Functions
7
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
HAPTER Budgetary Control
Budgetary
7
Control
One of the three main
Static Budgets
Flexible Budgets
Responsibility
functions of management
Accounting
Responsibility
is to control.
Reports/Cost
Responsibility
Budgets are useful in
controlling operations.
Reports -Profit
Investment
Centers

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

EN L
TS
EM IA

BU
AT NC
Investment

ST INA

DG
Centers

TE
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7-5
 Illustration 7-1

HAPTERBudgetary Control
Budgetary
Control
7
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
HAPTER
Name of
Budgetary Frequency Purpose Primary Recipient(s)

Sales
7 Weekly
Control
Report
Determine whether sales Top management and sales
Static Budgets
goals are being met manager
Flexible
Labor Budgets Weekly Control direct and indirect Vice president of production
Responsibility labor costs and production department
Accounting managers
Scrap Daily Determine efficient use of Production manager
Responsibility materials
Reports/Cost
Department Monthly Control overhead costs Department manager
Overhead costs
Responsibility
Selling expenses
Reports -Profit Monthly Control selling expenses Sales manager
Income
Investment Monthly Determine whether Top manager
Statement
Centers and income objectives are
quarterly being met

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7-7
 Illustration 7-6

HAPTER Static Budget

Budgetary
7
Control
A projection of budget data
Static Budgets
Flexible Budgets
Responsibility
at one level of activity.
Accounting Barton Steel (Forging Department)
Responsibility Manufacturing Overhead Budget (Static)
Reports/Cost For the Year Ended December 31, 2002
Responsibility Budgeted
Reports -Profit BudgetedProduction
Productionin
inunits
units(steel
(steelingots)
ingots) 10,000
10,000
Budgeted
BudgetedCostsCosts
Investment Indirect materials
Indirect materials $$250,000
250,000
Centers Indirect
Indirectlabor
labor 260,000
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
HAPTER Static Budget
Budgetary
7
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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

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7 - 10
 Illustration 7-13

HAPTER Flexible Budget

Budgetary
7
Control Fox Manufacturing Company (Finishing Department)
Flexible Monthly Manufacturing Overhead Budget
Static Budgets
For the Month Ended January 31, 2002
Flexible Budgets
Activity
Activitylevel
Responsibility
level
Direct
Direct laborhours
Accounting 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
Responsibility
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
Reports/Cost
Indirect
Indirectlabor
labor($2.00)
($2.00) 16,000
16,000 18,000
18,000 20,000
20,000 22,000
22,000 24,000
24,000
Responsibility
Utilities
Utilities($.50)
($.50) 4,000
4,000 4,500
4,500 5,000
5,000 5,500
5,500 6,000
6,000
Reports
Total-Profit
variable 32,000 36,000 40,000 44,000 48,000
Total variable 32,000 36,000 40,000 44,000 48,000
Fixed
Fixedcosts
Investmentcosts
Depreciation
Depreciation
Centers 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
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7 - 11
 Illustration 7-15

Flexible
HAPTER Budget at 10,000 and 12,000 Levels
Budgetary
7
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 12
HAPTER Management by Exception
Budgetary
7
Control
The review of budget reports
Static Budgets
Flexible Budgets
Responsibility
by management focused
Accounting
Responsibility
entirely or primarily on
Reports/Cost
Responsibility
differences between actual
Reports -Profit
Investment
results and planned
objectives.
Centers

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7 - 13
 Illustration 7-17

HAPTER Responsibility Reporting System

Budgetary
7
Control The preparation of reports for
Static Budgets
Flexible Budgets
each level of responsibility
Responsibility
Accounting
in the companys
Responsibility organization chart.
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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

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7 - 15
 Illustration 7-17

HAPTER Responsibility for Controlling Costs

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

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

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

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7 - 18
HAPTER Responsibility Accounting
Budgetary
7
Control
A part of management
Static Budgets
Flexible Budgets
Responsibility
accounting that involves
Accounting
Responsibility
accumulating and reporting
Reports/Cost
Responsibility
revenues and costs on the
Reports -Profit
Investment
basis of the manager who
has the authority to make
Centers

the day-to-day decisions

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7 - 19
 Illustration 7-20

HAPTER
Budgetary
7
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 20
HAPTER Direct Fixed Costs
Budgetary
7
Control
Costs that relate specifically
Static Budgets
Flexible Budgets
Responsibility
to a responsibility center
Accounting
Responsibility
and are incurred for the sole
Reports/Cost
Responsibility
benefit of the center.
Reports -Profit
Investment
Centers

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

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

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

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

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7 - 25
 Illustration 7-18

HAPTER
Budgetary
7
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
Responsibility
Reports/Cost
Responsibility
Reports -Profit
Investment
Centers

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7 - 26
 Illustration 7-22

HAPTER Responsibility Report

Budgetary
7
Control
Contribution margin less controllable
Static Budgets
Flexible Budgets
fixed costs=Controllable Margin.
Responsibility Mantel Manufacturing Company (Marine Division)
Accounting
Responsibility Report
Responsibility For the Year Ended December 31, 2002
Reports/Cost
Responsibility Difference
Difference
Reports -Profit Favorable
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
Previous Next Controllable
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
HAPTER Residual Income
Budgetary
7
Control
The income that remains after
Static Budgets
Flexible Budgets subtracting from the
Responsibility
Accounting controllable margin the
Responsibility
Reports/Cost
minimum rate of return on a
Responsibility companys operating assets.
Reports -Profit
Investment
Centers

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

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7 - 29
 Principles of Performance Evaluation
HAPTER
Budgetary
7
Control Managers of responsibility centers
should have direct input into the
Static Budgets
Flexible Budgets process of establishing budget goals of
Responsibility their area of responsibility.
Accounting
The evaluation of performance should
Responsibility
Reports/Cost
be based entirely on matters that are
Responsibility
controllable by the manager being
Reports -Profit evaluated.
Investment Top management should support the
Centers
evaluation process.
The evaluation process must allow
managers to respond to their
Previous Next evaluations.
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The evaluation should identify both
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Show good and poor performance.
7 - 30
HAPTER
Budgetary
COPYRIGHT
7
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
Reports -Profit
Permissions Department, John Wiley & Sons, Inc. The purchaser
Investment
may make back-up copies for his/her own use only and not for
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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7 - 31