Chapter 7Budgetary Control and Responsibility Accounting

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Budgetary Control and Responsibility Accounting
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Management Functions

• Planning
• Directing and Motivating
• Controlling

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Budgetary Control

• One of the three main functions of management is
  to control.
• Budgets are useful in controlling operations.

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Budgetary Control

• The use of budgets to control operations.
  Compare actual results with planned
  objectives.

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Budgetary Control
Illustration 7-1
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Budgetary Control Reporting System
Illustration 7-2
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Static Budget
Illustration 7-6

• A projection of budget data at one level of
  activity.

Budgeted Production in units (steel
ingots) 10,000 Budgeted Costs Indirect
materials 250,000 Indirect labor 260,000
Utilities 190,000 Depreciation 280,000
Property taxes 70,000 Supervision
50,000 1,100,000
Barton Steel (Forging Department)Manufacturing
Overhead Budget (Static) For the Year Ended
December 31, 2002
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Static Budget
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Flexible Budget

• A projection of budget data for various levels of
  activity.

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Flexible Budget
Illustration 7-13
Fox Manufacturing Company (Finishing
Department)Flexible Monthly Manufacturing
Overhead BudgetFor the Month Ended January 31,
2002
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Flexible Budget at 10,000 and 12,000 Levels
Illustration 7-15
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Management by Exception

• The review of budget reports by management
  focused entirely or primarily on differences
  between actual results and planned objectives.

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Responsibility Reporting System
Illustration 7-17

• The preparation of reports for each level of
  responsibility in the companys organization
  chart.

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Controllable Costs

• Costs that a manager has the authority to incur
  within a given period of time.

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Responsibility for Controlling Costs
Illustration 7-17
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Decentralization

• Control of operations is delegated to many
  managers throughout the organization.

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Segment

• An area of responsibility in decentralized
  operations.

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Responsibility Accounting

• 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.

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Illustration 7-20
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Direct Fixed Costs

• Costs that relate specifically to a
  responsibility center and are incurred for the
  sole benefit of the center.

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Indirect Fixed Costs

• Costs that are incurred for the benefit of more
  than one profit center.

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Cost Center

• A responsibility center that incurs costs but
  does not directly generate revenues.

Warranty Dept
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Profit Center

• A responsibility center that incurs costs but
  also generates revenue.

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Investment Center

• A responsibility center that incurs costs,
  generates revenues, and has control over the
  investment funds available for use.

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Illustration 7-18
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Responsibility Report
Illustration 7-22

• Contribution margin less controllable fixed
  costsControllable Margin.

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Residual Income

• The income that remains after subtracting from
  the controllable margin the minimum rate of
  return on a companys operating assets.

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Return on Investment (ROI)

• A measure of managements effectiveness in
  utilizing assets at its disposal in an investment
  center.

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Principles of Performance Evaluation

• 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.

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