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use of bdgts in cntrlng ops - takes place by means of bdgt rprts that cmpre actl rslts w/plnd objctvs -preprd frqntly as needed
Budgetary control system
- 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.
- Data not modified or adj - appropriate in evaluating a manager's effectiveness in controlling costs when:
- 1.Actual level acvty closely aprx master bdgt actvty level
- 2.Behavior of costs in response to changes in actvty is fixed.
- S. bdgt rprt good 4 fxd mfg csts & 4 fxd sllng and admin exp
- Series of static budgets at different levels of activity - can
- be prepared for each of the types of budgets
Flexible bdgt uses mstr bdgt as basis. Dvl FB use flwng steps.
- 1.Id the activity index (DL hrs) & the relevant range of activity. 2.Id var csts, detrmne bdgtd var cst pu of actvty 4 ea cost.
- 3.Id fixed costs, and determine the bdgtd amt for each cost.
- 4.Prepare bdgt 4 selctd increments of actvty in relevant range.
Flexible Budget Example
- 8000 units $16000 var $20000 fixed
- 8200 actual $40000 total Cost
- SOLVE: 16000/8000=2
- 40000-36400=3600 diff
Total Budgeted Costs
Fixed costs + Variable costs (Ttl var cost pu × Activity level)
Flexible budget reports (type of internal report). 2 Sections
- 1. prdctn data 4 slctd actvty indx, ex: direct labor hours
- 2. cost data for variable and fixed costs.
- Basis 4 evltng mngr's prfrmnce in 2 areas: prdctn/cost cntrl
- FBR widely used in production and service departments.
Management by Exception
- Review of budget report focused on diffncs btwn actl rslts & plnd objctvs.
- Materiality - Controllability
Responsibility Accounting accmltng & reprtng csts & rvnues
- manager's performance evaluated on directly under manager's control. can beused at every level of mangmnt in which the following conditions exist.
- 1.Costs and revenues can be directly associated with the specific level of management responsibility.
- 2.The costs and revenues can be controlled by employees at the level of responsibility with which they are associated.
- 3.Budget data can be developed for evaluating the manager's effectiveness in controlling the costs and revenues.
- **valuable in a decentralized company**
- *applies to profit / not-for-profit entities.*
Responsibility accounting differs from budgeting in 2
- 1.distinction made btwn controllable and noncontrollable items.
- 2.Perfrmnce rprts either emphasize or include only items controllable by the individual manager.
- Cost over which a manager has control
- In general, costs incurred directly by a level of responsibility are controllable at that level. Incontrast, costs incurred indirectly and allocated to a responsibility level arenoncontrollable costs at that level.
Responsibility reporting system
Preparation of report for ea level of rspnsblty in co's org chart
Three basic types of responsibility centers
Cost centers Profit centers Investment centers
- incurs costs & expenses but does not dirctly generate revenues
- either production departments or service departments
- Incurs costs & exp & generates revenues.
- Ex: Iindividual departments of a retail store, such asclothing, furniture, and automotive products, and branch offices of banks.
- Incurs costs, exp & gen rev -has control over decisions regarding the assets available for use.
- ex:.Utility Duke Energy
Direct fixed costs
- relate to1cntr & are incurred for the sole bnft of that
- cntr.Ex:sal estblshd by the prft cntr manager for sprvsr prsnel
- also called traceable costs. Most DFC are controllable by the profit center manager.
Indirect Fixed costs
- co's overall oprting actvtes are incrd 4 bnfit of more thn 1PC
- Allocates IFC2profit cntrs on type of equitable basis.
- ex: property taxes on sq ft of floor space used by ea cntr.
- Also calld cmn costs. not controllable by the prft cntr mnge.
Responsibility report 4profit cntr shows bdgtd & actual controllable revenues and costs.
- In the report: 1Controllable fixed costs are deducted from contribution margin.
- 2The excess of contribution margin over controllable fixed costs is identified as controllable margin.
- 3Noncontrollable fixed costs are not reported.
Return on Investmen (ROI)
- Controllable Margin ÷ Average Opertaing Assets
- Contribution M=Sales-VC
- Controllable M=CM-Controllable fixed costs
- CM % = CM ÷ Sales
ROI two judgmental factors:
1.Caluation of operating assets. 2.Margin (income) measure.
Increase controllable margin, and/or reducing avg oprtng assets
Controllable Margin - (Min Rate Return x Ave Oper Assets)