ch24 account priciple

8/15/2019 ch24 Account Priciple

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Prepared byCoby Harmon

University of California, Santa BarbaraWestmont College


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24

Budgetary Control and

Responsibility Accounting

Learning b!e"tives

After studying this chapter, you should be able to:

#1$ Describe the concept of budgetary control.#2$ Evaluate the usefulness of static budget reports.

#%$ Explain the development of flexible budgets and the usefulness of flexible

budget reports.

#4$ Describe the concept of responsibility accounting.

#&$ Indicate the features of responsibility reports for cost centers.

#'$ Identify the content of responsibility reports for profit centers.

#($ Explain the basis and formula used in evaluating performance in investment

centers.


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Preview of Chapter 24

Accounting Principles

Eleventh EditionWeygandt Kimmel Kieso


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The use of budgets in controlling operations is known asb)dgetary "ontrol.

Takes place by means of b)dget reports which compare

a"t)al results with planned objectives.

Provides management with feedba"* on operations.

udget reports can be prepared as fre!uently as needed.

"anagement analy+es differen"es between actual and

planned results and determines causes.

L 1 es"ribe te "on"ept of b)dgetary "ontrol.

B)dgetary Control


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udgetary control involves the following activities.

/ll)stration 24-1


B)dgetary Control


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#orks best when a company has a formali$ed reportingsystem which%

Identifies the name of the budget report.

&tates the fre0)en"y of the report.

&pecifies the p)rpose of the report.

Indicates the primary re"ipients of the report.


B)dgetary Control


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Partial budgetary control system for manufacturing company./ll)stration 24-2


B)dgetary Control


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udgetary control involves all but one of the following%

a. "odifying future plans.

b. 'naly$ing differences.

c. (sing static budgets.

d. Determining differences between actual and planned

results.


B)dgetary Control

)estion


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Stati" b)dget is a projection of budget data at one level ofa"tivity.

#hen used in budgetary control) each budget included in

the master budget is considered to be static.

Ignores data for different levels of activity.

*ompares actual results with budget data at the activity

level used in the master budget.

L 2 6val)ate te )sef)lness of stati" b)dget reports.

Stati" B)dget 7eports


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/ll)stration 24-%


/ll)stration9 udget and actual sales data for the +ightrideproduct in the first and second !uarters of ,-/ are as follows.



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/ll)stration9 &ales budget report for 0ayes *ompany1s first!uarter.

/ll)stration 24-%

/ll)stration 24-4


H:;6S C


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24-12 L 2 6val)ate te )sef)lness of stati" b)dget reports.

/ll)stration9 udget report for the second !uarter contains onenew feature% cumulative year2to2date information.

/ll)stration 24-%

/ll)stration 24-&


H:;6S Cor te )arter 6nded ?)ne %8, 2814


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:ppropriate for evaluating a manager@s effe"tiveness

in controlling costs when%

3 'ctual level of activity closely

approAimates master b)dget

activity level) and4or

3 ehavior of "osts is fiAed in

response to changes in activity.

:ppropriate for fixed costs.

=ot appropriate for variable costs.

Uses and Limitations




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' static budget is useful in controlling costs when cost

behavior is%

a. "ixed.b. 5ixed.

c. 6ariable.

d. 7inear.



)estion


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>leAible b)dget projects budget data for various levels ofactivity.

L % 6Aplain te development of fleAible b)dgets andte )sef)lness of fleAible b)dget reports.

Essentially a series of stati" b)dgets at

different activity levels.

udgetary process more )sef)l if it is

adaptable to changes in operating

conditions.

*an be prepared for ea" type of b)dget in the master budget.

>leAible B)dgets


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/ll)stration9 arton +obotics) static budget based on a production

volume of -)--- units of robotic controls.

Wy >leAible B)dgets

/ll)stration 24-'

>leAible B)dgets

B:7= 7B/CSB:7= 7B/CS


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/ll)stration9 8verhead &tatic udget report assuming ,)---units were actually produced) rather than -)--- units.

/ll)stration 24-(

>leAible B)dgets

L %


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8ver budget in three of six overhead costs.3 Unfavorable difference of 9:,)--- ; ,< over budget.

*omparison based on budget data for -)--- units 2 the

original activity level which is not relevant.

3 leAible B)dgets

L % 6Aplain te development of fleAible b)dgets and te)sef)lness of fleAible b)dget reports.


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/ll)stration9 'naly$ing the budget data for these costs at 18,888units) you arrive at the following per unit results.

/ll)stration 24-3Dariable "ostsper )nit

/ll)stration 24-5

B)dgetedvariable "osts,12,888 )nits

L %

>leAible B)dgets


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Identify the activity index and the relevant range of activity.

Identify the variable costs and determine the budgeted

variable cost per unit of activity for each cost.

Identify the fixed costs and determine the budgeted

amount for each cost.

Prepare the budget for selected increments of activity

within the relevant range.

eveloping te >leAible B)dget


>leAible B)dgets


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/ll)stration9 Prepare the budget report based on the flexible budgetfor 12,888 units of production./ll)stration 24-18

L % 'dvance slide in presentation mode to reveal answers.

>leAible B)dgets


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/ll)stration9 5ox *ompany1s management uses a fleAible b)dget for

montly "omparisons of actual and budgeted manufacturing overhead

costs of the 5inishing Department. The master budget for the year

ending December :) ,-/) shows expected ann)al operating capacityof ,-)--- direct labor hours and the following overhead costs.

>leAible B)dget E : Case St)dy

/ll)stration 24-11

>leAible B)dgets

L %


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>o)r steps for developing the flexible budget.. Identify the activity index and the relevant range of activity.

3 'ctivity index% direct labor hours.

3 +elevant range% =)--- ; ,)--- direct labor hours per month.

,. Identify variable costs and determine the budgeted variable

cost per unit of activity for each cost./ll)stration 24-12

L %

>leAible B)dgets


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>o)r steps for developing the flexible budget.:. Identify the fixed costs and determine the budgeted amount

for each cost.

3 Three fixed costs per month%

Depreciation 9>)---.

&upervision 9-)---.

Property taxes 9>)---.

/. Prepare the budget for selected increments of activity within

the relevant range.

3 Prepared in increments of )--- direct labor hours.

L %

>leAible B)dgets


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"onthly overhead flexible budget /ll)stration 24-1%

>leAible B)dgets

L %


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Determine total budgeted costs for 5ox "anufacturing *ompany with

fixed costs of 9:-)--- and total variable cost 9/ per direct labor hour%

?)--- direct labor hours % 9:-)--- @ A9/ x ?)---B C F'',888

=),, direct labor hours% 9:-)--- @ A9/ x =),,B C F'4,433

>oA uses the formula below to determine total budgeted costs atany level of activity./ll)stration 24-14


>leAible B)dgets


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In &trassel *ompany1s flexible budget graph) the fixed cost line and the

total budgeted cost line intersect the vertical axis at 9:)---. The total

budgeted cost line is 9=)--- at an activity level of >-)--- direct labor

hours. *ompute total budgeted costs at :-)--- direct labor hours.

/G


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6ariable costs%

Total budgeted cost line 9 =)---

5ixed costs 2 :)---

6ariable costs at >-)--- hours >-)---

'ctivity level at intersect AhoursB F >-)---

6ariable costs per direct labor hour 9 :Direct labor hours x :-)---

Total variable costs ?-)---

Total fixed costs @ :)---

Total budgeted costs F 12',888

L %

/GIn &trassel *ompany1s flexible budget graph) the fixed cost line and the

total budgeted cost line intersect the vertical axis at 9:)---. The total

budgeted cost line is 9=)--- at an activity level of >-)--- direct labor

hours. *ompute total budgeted costs at :-)--- direct labor hours.


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Widely )sed in production and service departments.

' type of internal report.

Consists of tIo se"tions%

3 Prod)"tion data for a selected activity index) such as

direct labor hours.

3 Cost data for variable and fixed costs.

#idely used in production and service departments to

eval)ate a manager@s performan"e.

>leAible B)dget 7eports

L %

>leAible B)dgets


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/ll)stration 24-1'

>leAible B)dgets


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't ?)--- direct labor hours) the flexible budget for indirect

materials is 9,G)---. If 9,=)--- of indirect materials costs are

incurred at ?),-- direct labor hours) the flexible budget report

should show the following difference for indirect materials%

a. 9)--- unfavorable.

b. 9)--- favorable.

c. 9/-- favorable.

d. 9/-- unfavorable.

)estion

>leAible B)dgets

L %


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7awler *ompany expects to produce /-)--- units of product

*6?: during the current year. udgeted variable manufacturing

costs per unit are direct materials 9) direct labor 9>) and

overhead 9,/. 'nnual budgeted fixed manufacturing overhead

costs are 9,-)--- for depreciation and 9-)--- for supervision.

In the current month) 7awler produced >)--- units and incurred

the following costs% direct materials 9::)?--) direct labor 9G/),--)

variable overhead 9,-)>--) depreciation 9-)---) and

supervision 9>)---.Prepare a flexible budget report. #ere costs controlledH

/G


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Prepare a fleAible b)dget report.

/G


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The report indicates that actual direct labor was only about

< different from the budget) and overhead was less than

half a percent different. oth appear to have been well2

controlled. The direct materials :< unfavorable difference should

probably be investigated.

'ctual fixed costs had no difference from budget and were

well2controlled.

Were "osts "ontrolled

/G


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'ccumulating and reporting costs Aand revenues) whererelevantB on the basis of the manager who has the a)tority to

make the day2to2day decisions about the items.

Conditions9

. *osts and revenues can be directly associated with the specific

level of management responsibility.

,. *osts and revenues can be "ontrolled by employees at the

level of responsibility with which they are associated.

:. udget data can be developed for eval)ating the manager1s

effectiveness in controlling the costs and revenues.

L 4 es"ribe te "on"ept of responsibility a""o)nting.

7esponsibility :""o)nting


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7evels of responsibility for controlling costs.

/ll)stration 24-1(

L 4



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+esponsibility center 2 any individual who has control and

is accountable for activities.

"ay extend to any level of management.

Especially valuable in a de"entrali+ed company.

3 *ontrol of operations delegated to many managers

throughout the organi$ation.

3 Segment ; area of responsibility for which reports are

prepared.




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Two differen"es from budgeting in reporting costs and

revenues%

. Distinguishes between "ontrollable and non"ontrollable

costs.

,. Emphasi$es or includes only items "ontrollable by the

individual manager in performance reports.

'pplies to bot profit and not2for2profit entities.

3 Profit entities9 maximi$e net income.

3 =ot-for-profit9 minimi$e cost of providing services.




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Criti"al iss)e is whether the cost or revenue is controllable at the

level of responsibility with which it is associated. ' cost over which a

manager has control is called a "ontrollable "ost.

. 'll costs are controllable by top management.

,. 5ewer costs are controllable as one moves down to each lower

level of managerial responsibility.

*osts incurred indirectly and allocated to a responsibility level are

non"ontrollable "osts.


Controllable Ders)s =on"ontrollable7even)es and Costs



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"anagement function that compares actual results

with budget goals.

Includes both behavioral and reporting principles.

Prin"iples of Performan"e 6val)ations




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. "anagers 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.

Beavioral Prin"iples


Prin"iples of Performan"e 6val)ation


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. *ontain only data controllable by manager of responsibility center.

,. Provide accurate and reliable budget data to measure

performance.

:. 0ighlight significant differences between actual results and budget

goals.

/. e tailor2made for intended evaluation.

>. e prepared at reasonable intervals.


7eporting Prin"iples

Prin"iples of Performan"e 6val)ation


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Involves preparation of a report for each level of

responsibility in the companys organi$ation chart.

egins with the lowest level of responsibility and moves

upward to higher levels.

Permits management by exception at each level of

responsibility.

Each higher level can obtain the detailed report for each

lower level.


7esponsibility 7eporting System



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/ll)stration 24-13Partial organi+ation "art



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7eport B6ice president seessummary of controllablecosts in his4her functionalarea.

7eport CPlant manager seessummary of controllablecosts for each departmentin the plant.

7eport Department manager seescontrollable costs of his4herdepartment.

/ll)stration 24-15+esponsibility reporting system

Permits comparative

evaluations.

Plant manager can rank

each department

manager1s effectiveness

in controlling

manufacturing costs.

*omparative rankings

provide incentive for a

manager to control costs.

7esponsibility:""o)nting

7eport :President seessummarydata of vicepresidents.


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ree basic types% Cost "enters

3 Incurs costs but does not directly generate revenues.

3 "anagers have authority to incur costs.

3 "anagers evaluated on ability to control costs.

3 (sually a production department or a service

department.

Profit "enters /nvestment "enters

ypes of 7esponsibility Centers

L & /ndi"ate te feat)res of responsibility reports for "ost "enters.


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Profit "enters

3 Incurs costs and generates revenues.

3 "anagers judged on profitability of center.

3 Examples include individual departments of a retail

store or branch bank offices.

/nvestment "enters




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Profit "enters

/nvestment "enters3 Incurs costs) generates revenues) and has investment

funds available for use.

3 "anager evaluated on profitability of the center and rate of

return earned on funds.3 8ften a subsidiary company or a product line.

3 "anager able to control or significantly influence

investment decisions such as plant expansion.

L &



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/ll)stration 24-28



f C


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(nder responsibility accounting) the evaluation of a

manager1s performance is based on matters that the

manager%

a. Directly controls.

b. Directly and indirectly controls.

c. Indirectly controls.

d. 0as shared responsibility for with another manager.

)estion



f 7 ibilit C t


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ased on a manager1s ability to meet budgeted goals

for controllable costs.

+esults in responsibility reports which compare actual

controllable costs with flexible budget data.

3 Include only controllable costs in reports.

3 Jo distinction between variable and fixed costs.


7esponsibility :""o)nting for Cost Centers


f 7 ibilit C t


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/ll)stration9 The following report is adapted from the flexible

budget report for 5ox "anufacturing *ompany in Illustration ,/2.


/ll)stration 24-21


f 7 ibilit C t


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/ll)stration9 This report assumes%

5inishing Department manager is able to control all

manufacturing overhead costs except depreciation) property

taxes) and his own monthly salary of 9)---.

+emaining 9/)--- A9-)--- 2 9)---B of supervision costsare assumed to apply to other supervisory personnel within

the 5inishing Department) whose salaries are controllable by

the manager.



f 7 ibilit C t


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ased on detailed information about both controllable

revenues and controllable costs.

"anager controls operating revenues earned) such as

sales.

"anager controls all variable costs incurred by the

center because they vary with sales.

L ' /dentify te "ontent of responsibility reports for profit "enters.

7esponsibility :""o)nting for Profit Centers


f 7 ibilit C t


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ire"t fiAed "osts

3 +elate specifically to one responsibility center.

3Incurred for the sole benefit of the center.

3 *alled traceable costs since they can be traced directly

to one center.

3 "ost direct fixed costs are controllable by the profit

center manager.


ire"t and /ndire"t >iAed Costs


f 7 ibilit C t


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/ndire"t fiAed "osts

3 Pertain to a companys overall operating activities.

3Incurred for the benefit of more than one profit center.

3 *alled common costs since they apply to more than one

center.

3 "ost are not controllable by the profit center manager.


ire"t and /ndire"t >iAed Costs


f 7 ibilit C t


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udgeted and actual "ontrollable reven)es and "osts.

(ses cost2volume2profit income statement format%

3 Deduct controllable fixed costs from the contributionmargin.

3 Controllable margin 2 excess of contribution margin over

controllable fixed costs.

3 Joncontrollable fixed costs are not reported.


7esponsibility 7eport


f 7 ibilit C t


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The "arine Division also had 9-)--- of indirect fixed costs that were not

controllable by the profit center manager.

/ll)stration 24-22


pes of 7esponsibilit Centers


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In a responsibility report for a profit center) controllable fixed

costs are deducted from contribution margin to show%

a. Profit center margin

b. *ontrollable margin

c. Jet income

d. Income from operations


)estion



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"idwest Division operates as a profit center. It reports the following for

the year%

L '

Prepare a responsibility report for

December :) ,-/.

/G



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7et)rn on investment 7/ is the primary basis for evaluating

the performance of a manager of an investment center.

&hows the effectiveness of the manager in using the assets at

his4her disposal.

5actors in +8I formula are controllable by manager.

7esponsibility :""o)nting for /nvestmentCenters

L ( 6Aplain te basis and form)la )sed in eval)ating

performan"e in investment "enters.




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7et)rn on /nvestment 7/ /ll)stration 24-2%

8perating assets include current assets and plant assets

)sed in operations by the center and controlled by the

manager.

ase average operating assets on the beginning and ending

cost or book values of the assets.




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&cope of manager1s responsibility affects content.

Investment center is an independent entity for operating

purposes.

'll fixed costs are controllable by center manager.

&hows budgeted and actual +8I below controllable

margin.



7esponsibility 7eport




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/ll)stration9 The

"arine Division is an

investment center. It

has budgeted and

actual average

operating assets of

9,)---)---. The

manager can control

9-)--- of fixed costs.

/ll)stration 24-24

L (




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Dal)ation of operating assets.

3 'c!uisition cost) book value) appraised value) or fair value.

3 Each provides a reliable basis for evaluating performance.


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Improve +8I by increasing controllable margin) and4or reducing

average operating assets.



/mproving 7/

/ll)stration 24-2&:ss)med data for Laser ivision




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/n"reasing Controllable


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/n"reasing Controllable


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7ed)"ing :verage perating :ssets

3 'ssume that average operating assets are reduced -< or

9>--)--- A9>)---)--- x .-B.

3 'verage operating assets become 9/)>--)---.

3 *ontrollable margin remains unchanged at 9--)---.

3 Jew +8I is :.:


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In the formula for return on investment A+8IB) the factors forcontrollable margin and operating assets are) respectively%

a. *ontrollable margin percentage and total operating

assets.b. *ontrollable margin dollars and average operating

assets.

c. *ontrollable margin dollars and total assets.

d. *ontrollable margin percentage and average operatingassets.

L (

)estion



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/G


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The service division of "etro Industries reported the following results for

,-/.&ales 9/--)---

6ariable costs :,-)---

*ontrollable fixed costs /-)=--

'verage operating assets ,=-)---

"anagement is considering the following independent courses of action in,-> in order to maximi$e the return on investment.

. +educe average operating assets by 9=-)---) with no change in

controllable margin.

,. Increase sales 9=-)---) with no change in the contribution margin

percentage.

a. *ompute controllable margin and the return on investment for ,-/.

b. *ompute controllable margin and the expected return on investment.

L (

/G

/G


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a. *ompute controllable margin and the return on investment for ,-/.

L (

/G

/G


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b. *ompute controllable margin and the expected return on investment.

/G

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ch24 account priciple

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