Uploaded by Burr Kevin Ramos


1. Describe budgetary control and static budget reports. Budgetary control consists of (a)
preparing periodic budget reports that compare actual results with planned objectives, (b)
analyzing the differences to determine their causes, (c) taking appropriate corrective action,
and (d) modifying future plans, if necessary.
Static budget reports are useful in evaluating the progress toward planned sales and profit
goals. They are also appropriate in assessing a manager’s effectiveness in controlling costs
when (a) actual activity closely approximates the master budget activity level, and/or (b) the
behavior of the costs in response to changes in activity is fixed.
2. Prepare flexible budget reports. To develop the flexible budget it is necessary to: (a) Identify
the activity index and the relevant range of activity. (b) Identify the variable costs, and
determine the budgeted variable cost per unit of activity for each cost. (c) Identify the fixed
costs, and determine the budgeted amount for each cost. (d) Prepare the budget for selected
increments of activity within the relevant range. Flexible budget reports permit an evaluation
of a manager’s performance in controlling production and costs.
3. Apply responsibility accounting to cost and profit centers. Responsibility accounting
involves accumulating and reporting revenues and costs on the basis of the individual
manager who has the authority to make the day-to-day decisions about the items. The
evaluation of a manager’s performance is based on the matters directly under the manager’s
control. In responsibility accounting, it is necessary to distinguish between controllable and
noncontrollable fixed costs and to identify three types of responsibility centers: cost, profit,
and investment.
Responsibility reports for cost centers compare actual costs with flexible budget data. The
reports show only controllable costs, and no distinction is made between variable and fixed
Responsibility reports show contribution margin, controllable fixed costs, and controllable
margin for each profit center.
4. Evaluate performance in investment centers. The primary basis for evaluating
performance in investment centers is return on investment (ROI). The formula for computing
ROI for investment centers is Controllable margin ÷ Average operating assets.
5. Explain the difference between ROI and residual income. ROI is controllable margin
divided by average operating assets. Residual income is the income that remains after
subtracting the minimum rate of return on a company’s average operating assets. ROI
sometimes provides misleading results because profitable investments are often rejected
when the investment reduces ROI but increases overall profitability.