Lecture Accounting principles (7th Edition): Chapter 25 – Weygandt, Kieso, Kimmel

Accounting Principles, 7th Edition
Weygandt • Kieso • Kimmel

Chapter 25

Budgetary Control and
Responsibility Accounting
Prepared by Naomi Karolinski
Monroe Community College
 and
Marianne Bradford
Bryant College

 

 

John Wiley & Sons, Inc. © 2005


CHAPTER 25
Budgetary Control and
Responsibility Accounting
After studying this chapter, you should be able to:

1  Describe the concept of budgetary control.
2  Evaluate the usefulness of static budget reports.
3  Explain the development of flexible budgets and 
the usefulness of flexible budget reports.
4  Describe the concept of responsibility 
accounting.

5  Indicate the features of responsibility reports 
for cost centers.
 

 


After studying this chapter, you should be able to:

6  Identify the content of responsibility 
reports for profit centers.
7  Explain the basis and formula used in 
evaluating performance in investment 
centers.
 

 


Budgetary Control
STUDY OBJECTIVE 1

• Budget reports compare actual results with planned 
objectives. 
• Provides management with feedback on operations.

 

 

Budgetary Control

 

 


Budgetary Control
A formalized reporting system should :
•

Identify the name of the budget report:
–

•

such as the sales budget or the manufacturing   
overhead budget

Frequency of the report 
–

•
•

 

weekly or monthly

Purpose of the report
Recipient(s) of the report

 


Budgetary Control Reporting
System

The schedule above illustrates a partial budgetary control
system for a manufacturing company. Note the frequency of
 
 
reports and their emphasis on control


Static Budget Reports
STUDY OBJECTIVE 2

• Projection of budget data at one level of activity. 
• Data for different levels of activity are ignored.
• Actual results are always compared with the 
budget data at the activity level in the master 
budget.

 

 

Budget and Actual Sales Data
To illustrate the role of a static budget in budgetary
control, we will use selected data for Hayes
Company prepared in Chapter 24.
Budget and actual sales data for the Kitchen-mate
product in the first and second quarters of 2005 are as
follows:

   $1,000                 $10,500            $11,500 

 

 


Sales Budget Report:
First Quarter
The sales budget report for Hayes Company’s 1st quarter is
shown below.

$1,000 U
The report shows that sales are $1,000 under budget - an
unfavorable result. This difference is less that 1% of budgeted
sales ($1,000/$180,000 =.0056), we will assume that top
management of Hayes Company will view the difference as
 
 
immaterial and take no specific action.

Sales Budget Report:
Second Quarter

    $10,500 U

 

The second quarter shows that sales were $10,500
below budget, which is 5% of budgeted sales
($10,500/$210,000). Top management may conclude
that the difference between budgeted and actual sales
in the second quarter merits investigation and will
begin by asking the sales manager the cause(s).

 


Uses and Limitations
    A static budget evaluates a manager’s effectiveness 
in controlling costs when:
• Actual level of activity closely approximates the master 
budget activity level, and/or
• Behavior of the costs in response to changes in activity is 
fixed.

 

 

A static budget is useful in controlling
costs when cost behavior is:
a. mixed.
b. fixed.
c. variable.
d. linear.
 

 


A static budget is useful in controlling
costs when cost behavior is:
a. mixed.
b. fixed.
c. variable.
d. linear.

 

 


Flexible Budgets
STUDY OBJECTIVE 3

• A flexible budget projects budget data for 
various levels of activity.  
• The flexible budget recognizes that the 
budgetary process is more useful if it is 

adaptable to changed operating conditions.  

 

 


Static Overhead Budget

(Budget based on 10,000 units of production)

 

Barton Steel prepares the above static budget for manufacturing overhead
 
 based on a production volume of 10,000 units of steel ingots. 


Static Overhead Budget Report
If demand for steel
ingots has increased
and 12,000 units are
produced during the
year, rather than 
10,000, the budget
report will show 
very large variances.
This is because the
comparison is based
on budget data 

based
on the original 
activity level (10,000 
steel ingots). 
Variable
budget allowances
have increased with
production. 

 

$   45,000 U 
     52,000 U
     35,000 U
        ­0­
        ­0­
        ­0­

    $132,000

 


Variable Costs per Unit

/10,000 units     $25
/10,000 units       26
/10,000 units       19
                           $70

Comparing actual variable costs with budgeted costs
is meaningless (due to different levels of activity),
variable per unit costs must be isolated, so the budget
can be adjusted. An analysis of the budget data for
these costs at 10,000 units produces the above
  per unit results:  


Illustration 25-9
Budgeted Variable Costs
(12,000 units)

$300,000
  312,000
  228,000
$840,000

 

The budgeted variable costs at 12,000
units, therefore, are shown above.
Because FIXED costs do not change in
total as activity changes, the budgeted
amounts for these costs remain the same.
 


Flexible Overhead Budget Report
This budget
report based

on the flexible
budget for
12,000 units
of production
shows that
the Forging
Department
is below
budgeta favorable
difference.
 

  $ 5,000 F
       ­0­
     3,000 F
     8,000 F

 

        
­0­     
                   
 
­0­     
        ­0­     
      ­0­


Developing the Flexible Budget
• 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.

 

 


Flexible Budget -A Case Study
Master Budget Data
Fox Company wants to use a flexible budget for monthly
comparisons of actual and budgeted manufacturing
overhead costs. The master budget for the year ended
December 31, 2005 is prepared using 120,000 direct
labor hours and the following overhead costs.

     STEP 1: Identify the activity index and the relevant range of activity:

The activity index is direct labor hours and management concludes 
that the relevant range is 8,000­12,000 direct labor hours.
 
 

Flexible Budget-A Case Study

Computation of variable costs per direct labor hour

STEP 2: Identify the variable costs and determine the budgeted variable 
cost per unit of activity for each cost.
     There are 3 variable costs and the per unit variable cost is found   by 
dividing each total budgeted cost by the direct labor hours used in 
preparing the master budget (120,000 hours).

 

 


Flexible Budget
A Case Study
• Step 3: Identify the fixed costs and determine the 
budgeted amount for each cost.
• There are three fixed costs and since Fox desires monthly 
budget data, the budgeted amount is found by dividing 
each annual budgeted cost by 12 ($180,000/12 =$15,000).

 

 


Flexible Budget - A Case Study
Flexible Monthly Overhead Budget

     Step 4: Prepare the budget for selected increments of activity within 
  the relevant range.