Managerial AccountingSecond EditionWeygandt / Kieso / Kimmel Prepared by: Ellen L. Sweatt Georgia Perimeter College ELS
Management Functions • Planning • Directing and Motivating • Controlling
Budgetary Control • One of the three main functions of management is to control. • Budgets are useful in controlling operations.
FINANCIAL STATEMENTS BUDGET Budgetary Control The use of budgets to control operations. Compare actual results with planned objectives.
Illustration 7-1 Budgetary Control
Illustration 7-2 Budgetary Control Reporting System
Illustration 7-6 Static Budget A projection of budget data at one level of activity. Barton Steel (Forging Department)Manufacturing Overhead Budget (Static) For the Year Ended December 31, 2002 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
Flexible Budget A projection of budget data for various levels of activity.
Activity level Direct labor hours 8,000 9,000 10,000 11,000 12,000 Variable costs Indirect materials ($1.50) $12,000 $13,500 $15,000 $16,500 $18,000 Indirect labor ($2.00) 16,000 18,000 20,000 22,000 24,000 Utilities ($.50) 4,000 4,500 5,000 5,500 6,000 Total variable 32,000 36,000 40,000 44,000 48,000 Fixed costs Depreciation 15,000 15,000 15,000 15,000 15,000 Supervision 10,000 10,000 10,000 10,000 10,000 Property taxes 5,000 5,000 5,000 5,000 5,000 Total fixed 30,000 30,000 30,000 30,000 30,000 Total costs $62,000 $66,000 $70,000 $74,000 $78,000 Illustration 7-13 Flexible Budget Fox Manufacturing Company (Finishing Department)Flexible Monthly Manufacturing Overhead BudgetFor the Month Ended January 31, 2002
Illustration 7-15 Flexible Budget at 10,000 and 12,000 Levels
Management by Exception The review of budget reports by management focused entirely or primarily on differences between actual results and planned objectives.
Illustration 7-17 Responsibility Reporting System The preparation of reports for each level of responsibility in the company’s organization chart.
Controllable Costs Costs that a manager has the authority to incur within a given period of time.
Illustration 7-17 Responsibility for Controlling Costs
Decentralization Control of operations is delegated to many managers throughout the organization.
Segment An area of responsibility in decentralized operations.
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.
Direct Fixed Costs Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.
Indirect Fixed Costs Costs that are incurred for the benefit of more than one profit center.
Cost Center A responsibility center that incurs costs but does not directly generate revenues. Warranty Dept
Profit Center A responsibility center that incurs costs but also generates revenue.
Investment Center A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use.
Illustration 7-22 Mantel Manufacturing Company (Marine Division) Responsibility Report For the Year Ended December 31, 2002 Difference Favorable F Budget Actual Unfavorable USales $1,200,000 $1,150,000 $50,000 U Variable Costs Cost of goods sold 500,000 490,000 10,000 F Selling & administrative 160,000 156,000 4,000 F Total 660,000 646,000 14,000 FContribution margin 540,000 504,000 36,000 UControllable fixed costs Cost of goods sold 100,000 100,000 -0- Selling & administrative 80,000 80,000 -0- Total 180,000 180,000 -0- Controllable margin$ 360,000 $ 324,000$36,000 U Responsibility Report Contribution margin less controllable fixed costs=Controllable Margin.
Residual Income The income that remains after subtracting from the controllable margin the minimum rate of return on a company’s operating assets.
Return on Investment (ROI) A measure of management’s effectiveness in utilizing assets at its disposal in an investment center.
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.