Accounting principles, 13th edition ch25

Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso

Chapter 25

Budgetary Control and
Responsibility Accounting
Prepared by

Coby Harmon

University of California, Santa Barbara
Westmont College


Chapter Outline
Learning Objectives
LO 1 Describe budgetary control and static budget
reports.
LO 2 Prepare flexible budget reports.
LO 3 Apply responsibility accounting to cost and profit
centers.
LO 4 Evaluate performance in investment centers.

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Budgetary Control and Static Budget

Reports

Use of budgets in controlling operations is known as
budgetary control.
a. Budget reports compare actual results with planned
objectives
b. Provides management with feedback on operations
c. Budget reports prepared as frequently as needed
d. Management analyzes differences between actual
and planned results and determines causes
LO 1

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Budgetary Control

Develop budget

Analyze differences
between actual and budget

Modify future plans

Take corrective action

ILLUSTRATION 25.1
Budgetary control activities

LO 1

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Budgetary Control
Works best when a company has a formalized
reporting system which:
1. Identifies the name of the budget report
2. States the frequency of the report
3. Specifies the purpose of the report
4. Indicates the primary recipient(s) of the report

LO 1

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Budgetary Control

ILLUSTRATION 25.2
Budgetary control reporting system

Name of Report
Sales

Frequency
Weekly

Purpose
Primary Recipient(s)
Determine whether sales Top management and sales
goals are met
manager

Labor

Weekly

Control direct and
indirect labor costs

Scrap

Daily

Determine efficient use of Production manager
materials

Departmental
overhead costs

Weekly

Control overhead costs

Department manager

Selling expenses

Monthly

Control selling expenses

Sales manager

Income statement Monthly and Determine whether
quarterly
income goals are met

LO 1

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Vice president of
production and production
department managers

Top management

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Budgetary Control
Budgetary control involves all but one of the

following:
a. Modifying future plans
b. Analyzing differences
c. Using static budgets
d. Determining differences between actual and
planned results
LO 1

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Static Budget Reports
A Static budget is a projection of budget data at one level
of activity
a. When used in budgetary control, each budget
included in the master budget is considered to be
static
b. Ignores data for different levels of activity
c. Compares actual results with budget data at the
activity level used in the master budget

LO 1

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Static Budget Reports
Illustration: Budget and actual sales data for the
Rightride product in the first and second quarters of
2020 are as follows.
Sales
Budgeted
Actual

First
Quarter
$180,000
179,000

Second
Quarter
$210,000
199,500

Total
$390,000
378,500

Difference

$ 1,000

$ 10,500

$ 11,500

ILLUSTRATION 25.3
Budget and actual sales data

LO 1

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Static Budget Reports

ILLUSTRATION 25.3
Budget and actual sales data

Sales
Budgeted

First
Quarter
$180,000

Second
Quarter
$210,000

Total
$390,000

Actual

Difference

179,000
$ 1,000

199,500
$ 10,500

378,500
$ 11,500

Sales Budget Report
For the Quarter Ended March 31, 2020
Product Line
Rightride
LO 1

Budget
$180,000

Actual
$179,000

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ILLUSTRATION 25.4

Difference
Favorable F
Unfavorable U

$1,000 U
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Static Budget Reports

ILLUSTRATION 25.3
Budget and actual sales data

Sales
Budgeted

First
Quarter
$180,000

Second
Quarter
$210,000

Total
$390,000

Actual
Difference

179,000
$ 1,000

199,500

$ 10,500

378,500
$ 11,500

Sales Budget Report
For the Quarter Ended June 30, 2020
Second Quarter
Year-to-Date
Difference
Difference
Favorable F
Favorable F
Budget
Actual Unfavorable U Budget
Actual
Unfavorable U
$210,000 $199,500
$10,500 U $390,000 $378,500
$11,500 U

ILLUSTRATION 25.5

Product Line
Rightride

LO 1

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Static Budget Reports
Uses and Limitations
Appropriate for evaluating a manager’s
effectiveness in controlling costs when:


Actual level of activity closely approximates
master budget activity level, and/or



Behavior of costs is fixed in response to changes
in activity

Appropriate for fixed costs
Not appropriate for variable costs
LO 1

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Static Budget Reports
A static budget is useful in controlling costs when cost
behavior is:
a. Mixed

b. Fixed
c. Variable
d. Linear

LO 1

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DO IT! 1 Static Budget Reports (1 of 2)
Lawler Company expects to produce 5,000 units of product
CV93 during the current month. Budgeted variable
manufacturing costs per unit are direct materials $6, direct
labor $15, and overhead $24. Monthly budgeted fixed
manufacturing overhead costs are $10,000 for depreciation
and $5,000 for supervision. In the current month, Lawler
actually produced 5,500 units and incurred the following
costs: direct materials $33,900, direct labor $74,200, variable
overhead $120,500, depreciation $10,000, and supervision
$5,000.
Prepare a static budget report.
LO 1

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DO IT! 1 Static Budget Reports (2 of 2)
Production in units
Variable costs
Direct materials ($6)
Direct labor ($15)
Overhead ($24)
Total variable costs
Fixed costs
Depreciation
Supervision
Total fixed costs
Total costs
LO 1

Difference
Favorable - F
Unfavorable - U

Budget
5,000

Actual
5,500

$ 30,000
75,000
120,000
225,000

$ 33,900

74,200
120,500
228,600

$ 3,900
800
500
3,600

U
F
U
U

10,000
5,000
15,000
$240,000

10,000
5,000
15,000
$243,600

0
0
0
$ 3,600

U

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Flexible Budget Reports
Flexible budget projects budget data for various levels
of activity.
a. Essentially a series of static budgets at different
activity levels
b. Budgetary process more useful if it is adaptable to
changes in operating conditions
c. Can be prepared for each type of budget in the
master budget

LO 2

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Why Flexible Budgets?
Illustration: Barton Robotics static overhead budget.
Manufacturing Overhead Budget (Static)
Assembly Department
For the Year Ended December 31, 2020

Budgeted production in units (robotic controls)
Budgeted costs
Indirect materials
Indirect labor
Utilities
Depreciation
Property taxes
Supervision
ILLUSTRATION 25.6
LO 2

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10,000
$ 250,000
260,000
190,000
280,000
70,000
50,000
$1,100,000
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Why Flexible Budgets?
Overhead Static Budget report assuming 12,000 units were
actually produced, rather than 10,000 units.
ILLUSTRATION 25.7

Production in units

Costs
Indirect materials
Indirect labor
Utilities
Depreciation
Property taxes
Supervision

LO 2

Budget
10,000

Actual
12,000

$ 250,000
260,000
190,000
280,000
70,000
50,000
$1,100,000

$ 295,000
312,000
225,000
280,000
70,000
50,000

$1,232,000

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Difference
Favorable - F
Unfavorable - U

$ 45,000
52,000
35,000
0
0
0
$132,000

 
U
U
U

U
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Why Flexible Budgets?
Over budget in three of six overhead costs


Unfavorable difference of $132,000 – 12% over

budget

Budget data for 10,000 units, not relevant

LO 2



Meaningless to compare actual variable costs for
12,000 units with budgeted variable costs for 10,000
units



Variable cost increase with production

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Why Flexible Budgets?
Analyzing budget data for costs at 10,000 units, you arrive at
the following per unit results.

LO 2

Item
Indirect materials
Indirect labor

Utilities

Total Cost
$250,000
260,000
190,000
$700,000

Per Unit
$25
26
19
$70

Item
Indirect materials
Indirect labor
Utilities

Computation
$25 x 12,000
26 x 12,000
19 x 12,000

Total
$300,000
312,000
228,000
$840,000

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ILLUSTRATION 25.8
Variable costs per
unit

ILLUSTRATION 25.9
Budgeted variable
costs, 12,000 units

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Prepare the budget report based on the
flexible budget for 12,000 units of
production.
Production in units
Variable costs
Indirect materials ($25)
Indirect labor ($26)
Utilities ($19)
Total variable costs
Fixed costs
Depreciation
Property taxes
Supervision
Total fixed costs
Total costs
LO 2

ILLUSTRATION 25.10
Overhead flexible budget report

Difference
Favorable - F
Unfavorable - U
 

Budget
12,000

Actual
12,000

$ 300,000
312,000
228,000
840,000

$ 295,000
312,000
225,000
832,000

$ 5,000
0
3,000
8,000

280,000

70,000
70,000
400,000
$1,240,000

280,000
70,000
50,000
400,000
$1,232,000

0
0
0
0
$ 8,000

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F
F
F

F
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Developing the Flexible Budget
1. Identify activity index and relevant range of
activity

2. Identify variable costs, and determine budgeted
variable cost per unit of activity for each cost
3. Identify fixed costs, and determine budgeted
amount for each cost
4. Prepare budget for selected increments of
activity within relevant range
LO 2

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Flexible Budget—A Case Study (1 of 7)
Fox Company’s management uses a flexible budget for monthly
comparisons of actual and budgeted manufacturing overhead costs
of the Finishing Department. The master budget for the year
ending December 31, 2020, shows expected annual operating
capacity of 120,000 direct labor hours and the overhead costs.
Variable Costs
Indirect materials
$180,000
Indirect labor
240,000
Utilities
60,000
Total
$480,000
LO 2

ILLUSTRATION 25.11
Master budget data

Fixed Costs
Depreciation
$180,000
Supervision
120,000
Property taxes
60,000
Total
$360,000

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Flexible Budget—A Case Study (2 of 7)
Four steps for developing the flexible budget.

1. Identify activity index and relevant range of activity.
• Activity index is direct labor hours
• Relevant range is 8,000 – 12,000 direct labor hours per
month

LO 2

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Flexible Budget—A Case Study (3 of 7)
Four steps for developing the flexible budget.

2. Identify variable costs and determine budgeted
variable cost per unit of activity for each cost.
Computation

Variable Cost per
Direct Labor Hour

Indirect materials

$180,000 ÷ 120,000

$1.50

Indirect labor

$240,000 ÷ 120,000

2.00

Utilities

$ 60,000 ÷ 120,000

0.50

Variable Costs

Total

$4.00

ILLUSTRATION 25.12
Computation of variable cost per direct labor hour
LO 2

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