Dutchess Community College
ACC 204 – Managerial Accounting
Quiz Prep Chapter 10
Budgetary Control and Responsibility Accounting
Peter Rivera
March 2007
Disclaimer
This Quiz Prep is provided as an outline of
the key concepts from the chapter.
It is not intended to be comprehensive or
exhaustive.
Quizzes may include material from the
classroom lectures, the text or the homework
assignments.
ACC 204 Chapter 10
1
Static Budgets
A Static Budget is based on one activity level
assumption and is unchanged throughout the year. A
static budget is best suited to situations where the
actual levels are close to the budgeted levels.
Activity Units
Static
Budget
100
Variable Costs
Fixed Costs
Total Costs
1,000
500
1,500
Flexible Budgets
A Flexible Budget is a series of static budgets for
different levels of activity.
ACC 204 Chapter 10
2
4 Steps for Developing Flexible Budgets
The 4 steps for developing a flexible budget are:
1. Identify the activity index and the relevant
range of activity
2. Identify the variable cost and determine the
budgeted variable cost per unit of activity for
each cost
3. Identify the fixed cost and determine the
budgeted amount for each cost
4. Prepare the budget for selected increments of
activity within the relevant range
Flexible Budgets
A Flexible Budget is a series of static budgets for
different levels of activity.
Variable Costs = $10 per Activity Unit
Activity Units
Variable Costs
Fixed Costs
Total Costs
ACC 204 Chapter 10
Flexible Budget
100
150
1,000
500
1,500
1,500
500
2,000
200
2,000
500
2,500
3
Management By Exception
Management By Exception means that management
reviews and investigates budget vs. actual variances
when:
• the variance is material
It must be large enough to be important.
• the cost is controllable
The person responsible must have control
over the cost.
Favorable & Unfavorable Variances
ACC 204 Chapter 10
Favorable
Unfavorable
Revenue
Actual > Budget
Actual < Budget
Expenses
Actual <Budget
Actual > Budget
4
Flexible Budgets & Variance Analysis
Activity Units
Static
Budget
100
Actual
150
Variable Costs
Fixed Costs
Total Costs
1,000
500
1,500
1,250
500
1,750
250
250
Flexible
Budget
150
Actual
150
Variance
-
1,500
500
2,000
1,250
500
1,750
Activity Units
Variable Costs
Fixed Costs
Total Costs
Variance
50
U
U
Note
(250)
(250)
F
F
3 Types of Responsibility Centers
There are 3 types of Responsibility Centers:
1. Cost Center
Has costs but does not generate revenue
2. Profit Center
Has costs and revenues
3. Investment Center
Has costs and revnues and control over the
investment of funds. Managers are
evaluated based on return on investment.
ACC 204 Chapter 10
5
Direct and Indirect Fixed Costs
Direct Fixed Costs are incurred solely for the use
and/or benefit of a single center. These costs are
typically controllable by the manager.
Indirect Fixed Costs are incurred for the use and/or
benefit of two or more centers. These costs are
typically not controllable by the manager.
Controllable Margin
Sales
- Variable Costs
- Controllable Fixed Costs
= Controllable Margin
ACC 204 Chapter 10
Fixed Costs
must be
controllable by
the manager,
e.g., Selling &
Administrative
Costs
6
Return On Investment ( ROI )
Return On Investment =
ACC 204 Chapter 10
Controllable Margin
Average Operating Assets
7