Chapter 10

Seite 1

The use of budgets in controlling operations is known as budgetary control.

Takes place by means of budget reports which compare actual results with planned objectives.

Budgetary control:

1. Develop Budget

2. Analyze differences between actual and budget

3. Take corrective action

4. Modify future plans

Static Budget Reports:

A static budget is a projection of budget data at one level of activity.

Ignores data for different levels of activity

compares actual results with budget data at the activity level used in the master budget. (only at 1 level of activity)

F = favorable

U = unfavorable

For sales: F if Actual > Budget

For VC &FC: F if Budget > Actual

Limitations:

Appropriate for fixed costs.

Not appropriate for variable costs.

Flexible Budget Reports:

Flexible budget projects budget data for various levels of activity.

Essentially a series of static budgets at different activity levels.

Four Steps for developing the flexible budget.

1. Identify the activity index and the relevant range of activity.

Activity index:

Relevant range:

2. Identify variable costs and determine the budgeted variable cost per unit of activity for each costs.

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.

Prepare budget in activity increments.

Fixed costs + Variable costs (varies) = Target budgeted costs

FC: (constant at all activity levels) VC: (varies)

*Total variable costs per unit of activity

Responsibility Accounting:

Conditions:

1. Costs and revenues can be directly associated with the specific level of management responsibility.

2. Costs and revenues can be controlled by employees at the level of responsibility with which they are associated.

(Only include items controllable by the individual manager)

3. Budget data can be developed for evaluating the manager's effectiveness in controlling the costs and revenues.

Types of Responsibility Centers:

Responsibility Accounting for Cost Centers:

Results in responsibility reports which compare actual controllable costs with flexible budget data.

Include only controllable costs in reports.

No distinction between variable and fixed costs.

Responsibility Accounting for Profit Centers:

Direct fixed costs:

Called traceable costs since they can be traced directly to one center.

Most direct fixed costs are controllable by the profit center manager.

Indirect fixed costs:

Called common costs since they apply to more than one center.

Most are not controllable by the profit center manager.

Responsibility Report Recall: CM = Sales -VC

Deduct controllable fixed costs from the contribution margin.

Controllable margin -excess of contribution margin over controllable fixed costs.

Controllable Margin = Sales - Controllable Costs

Non-controllable fixed costs are not reported.

Responsibility Accounting for Invest Centers:

Return on Investment (ROI) is the primary basis for evaluating the performance of a manager of an investment center.

Shoes the effectiveness of the manager in using the assets at his/her disposal.

ROI = Controllable margin / Average Operating Assets

Operating assets include current assets and plant assets used in operations by the center and controlled by the manager.

Responsibility Report:

All fixed costs are controllable by center manager.

Judgmental Factors in ROI:

Only controllable margin is a valid basis for evaluating performance of investment center manager.

Improving ROI:

Improve ROI by:

Increasing Sales

Decreasing Variable costs

Decreasing controllable fixed costs

Increasing Controllable margin

Decreasing Average operating assets