Chapter 42
Managerial Accounting
Budgetary Control
Prepared by Diane Tanner
University of North Florida
Budgetary Control
 Managers are responsible for controlling
revenues and expenses
 Budgeted amounts are often called ‘benchmarks’

Against which actual results are compared
 Any difference between actual activity and
budgeted amounts is called a budget variance
 Variances are reported on performance reports
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Why Budget Variances Exist
 Variances have three causes
 Budget may have errors in creation
 Conditions may have changed
 Job performance – may have very good or
very poor managers
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Investigating Variances
 Management by exception approach
 Only ‘exceptional’ variances are investigated
 I.e., must be material in amount
 If the dollar amount is large enough to impact
someone's decision then it should be considered
significant
 Determining how much is ‘material’
 A designated amount or percentage of expected cost
 Such as
 All variances exceeding $800
 All variances that exceed budgeted cost by more
than 10%
 A materiality threshold is established and any
amount greater is investigated
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Static and Flexible Budgets
Not adjusted for actual
level of production
 Prepared for a single level of
activity
 Prepared at the beginning of the
period
 Based on the initial estimated
budget level
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Budget that can be adjusted
to various activity levels
 Prepared for the level of
activity actually achieved
 Prepared at the end of the
period
 Eliminates the problem
caused by comparing actual
costs at one activity level to
budgeted costs for a different
level
When comparing actual activity to budgeted activity, both activity levels
must be the same.
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Static Budget
 The initial budget prepared at the estimated level
of activity
 Prepared for a single level of activity
 Difficult to compare actual costs at a different
activity level to a static budget
 Why? Total variable costs change at different levels
of activity, while amounts on a static budget are for
one level of activity
All budgets in the master budget are static
budget, and flexible budgets can be
created for each of them.
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The Problem with Static Budgets
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Suppose the following report contains the variable
costs for West Division for May:
Static Budget
1,000 units
Actual Cost
900 units
Variance
$80,000
$78,000
$2,000
The amount allowed
at 1,000 units.
Per unit = $80,000/1,000
= $80 per unit
Favorable
The division should have
been allowed $80 times 900
units, totaling $72,000.
Flexible budget variance = $78,000$72,000 = $6,000 unfavorable
Flexible Budgets
 A budget that adjusts for changes in activity such
as sales volume
 Performance evaluation should always use a
flexible budget comparison to actual results
 Common flexible budgets for performance
evaluation
 Income statement
 Selected costs within the income statement
 Production costs
 Selling costs
 Various general and administration costs
 Costs of specific activities, such as maintenance or
purchasing
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The End