Budgetary
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Static Budgets
Flexible Budgets
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Managerial Accounting
Second Edition
Weygandt / Kieso / Kimmel
Budgetary Control and
Responsibility Accounting
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
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Management Functions
Budgetary
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• Planning
• Directing and Motivating
• Controlling
Budgetary Control
Budgetary
Control
Static Budgets
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• One of the three main
functions of management
is to control.
• Budgets are useful in
controlling operations.
Budgetary Control
Budgetary
Control
Static Budgets
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The use of budgets to control
operations.
Compare actual results with
planned objectives.
Illustration 7-1
Budgetary Control
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
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Illustration 7-2
Budgetary Control Reporting System
Name of
Report
Frequency
Sales
Weekly
Labor
Weekly
Scrap
Daily
Department
Monthly
Overhead costs
Selling expenses Monthly
Income
Statement
Monthly
and
quarterly
Purpose
Primary Recipient(s)
Determine whether sales
Top management and sales
goals are being met
manager
Control direct and indirect Vice president of production
labor costs
and production department
managers
Determine efficient use of Production manager
materials
Control overhead costs
Department manager
Control selling expenses
Sales manager
Determine whether
income objectives are
being met
Top manager
Illustration 7-6
Static Budget
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
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A projection of budget data
at one level of activity.
Barton Steel (Forging Department)
Manufacturing Overhead Budget (Static)
For the Year Ended December 31, 2002
Budgeted Production in units (steel ingots)
Budgeted Costs
Indirect materials
Indirect labor
Utilities
Depreciation
Property taxes
Supervision
10,000
$ 250,000
260,000
190,000
280,000
70,000
50,000
$1,100,000
Static Budget
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
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Flexible Budget
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
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A projection
of budget
data for
various
levels of
activity.
Illustration 7-13
Flexible Budget
Fox Manufacturing Company (Finishing Department)
Flexible Monthly Manufacturing Overhead Budget
For the Month Ended January 31, 2002
Activity level
Direct labor hours
Variable costs
Indirect materials ($1.50)
Indirect labor ($2.00)
Utilities ($.50)
Total variable
Fixed costs
Depreciation
Supervision
Property taxes
Total fixed
Total costs
8,000
9,000
10,000
11,000
12,000
$12,000
16,000
4,000
32,000
$13,500
18,000
4,500
36,000
$15,000
20,000
5,000
40,000
$16,500
22,000
5,500
44,000
$18,000
24,000
6,000
48,000
15,000
10,000
5,000
30,000
$62,000
15,000
10,000
5,000
30,000
$66,000
15,000
10,000
5,000
30,000
$70,000
15,000
10,000
5,000
30,000
$74,000
15,000
10,000
5,000
30,000
$78,000
Illustration 7-15
Flexible Budget at 10,000 and 12,000 Levels
Management by Exception
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
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The review of budget reports
by management focused
entirely or primarily on
differences between actual
results and planned
objectives.
Illustration 7-17
Responsibility Reporting System
Budgetary
Control
Static Budgets
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The preparation of reports for
each level of responsibility
in the company’s
organization chart.
Controllable Costs
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
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Costs that a manager has the
authority to incur within a
given period of time.
Illustration 717
Responsibility for Controlling Costs
Budgetary
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Decentralization
Budgetary
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Control of operations is
delegated to many managers
throughout the organization.
Segment
Budgetary
Control
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An area of responsibility in
decentralized operations.
Responsibility Accounting
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
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A part of management
accounting that involves
accumulating and reporting
revenues and costs on the
basis of the manager who
has the authority to make
the day-to-day decisions
about the items.
Illustration 7-20
Direct Fixed Costs
Budgetary
Control
Static Budgets
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Costs that relate specifically
to a responsibility center
and are incurred for the sole
benefit of the center.
Indirect Fixed Costs
Budgetary
Control
Static Budgets
Flexible Budgets
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Costs that are incurred for the
benefit of more than one
profit center.
Cost Center
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
Accounting
A responsibility center that
incurs costs but does not
directly generate revenues.
Responsibility
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Warranty Dept
Profit Center
Budgetary
Control
Static Budgets
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A responsibility center that
incurs costs but also
generates revenue.
Investment Center
Budgetary
Control
Static Budgets
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Responsibility
Accounting
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A responsibility center that
incurs costs, generates
revenues, and has control
over the investment funds
available for use.
Illustration 718
Budgetary
Control
Static Budgets
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Illustration 7-22
Responsibility Report
Budgetary
Control
Static Budgets
Contribution margin less controllable
fixed costs=Controllable Margin.
Flexible Budgets
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Mantel Manufacturing Company (Marine Division)
Responsibility Report
For the Year Ended December 31, 2002
Difference
Favorable F
Budget
Actual Unfavorable U
$1,200,000 $1,150,000
$50,000 U
Sales
Variable Costs
Cost of goods sold
500,000
Selling & administrative
160,000
Total
660,000
Contribution margin
540,000
Controllable fixed costs
Cost of goods sold
100,000
Selling & administrative
80,000
Total
180,000
Controllable margin
$ 360,000
490,000
156,000
646,000
504,000
10,000 F
4,000 F
14,000 F
36,000 U
100,000
80,000
180,000
$ 324,000
-0-0-0$36,000 U
Budgetary
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Residual Income
The income that remains after
subtracting from the
controllable margin the
minimum rate of return on a
company’s operating assets.
Return on Investment (ROI)
Budgetary
Control
Static Budgets
Flexible Budgets
Responsibility
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A measure of management’s
effectiveness in utilizing assets
at its disposal in an investment
center.
Principles of Performance Evaluation
Budgetary
Control
Static Budgets
Flexible Budgets
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• Managers of responsibility centers
should have direct input into the
process of establishing budget goals of
their area of responsibility.
• The evaluation of performance should
be based entirely on matters that are
controllable by the manager being
evaluated.
• Top management should support the
evaluation process.
• The evaluation process must allow
managers to respond to their
evaluations.
• The evaluation should identify both
good and poor performance.
COPYRIGHT
Budgetary
Control
Static Budgets
Flexible
Budgets
Copyright
© 2002, John Wiley & Sons, Inc. All rights reserved.
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Reproduction or translation of this work beyond that permitted in
Accounting
Section 117 of the 1976 United States Copyright Act without the
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express written permission of the copyright owner is unlawful.
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for errors, omissions, or damages, caused by the use of these
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