1. 7 - 1 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show

2. 7 - 2 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Budgetary Control and Responsibility Accounting

3. 7 - 3 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Management Functions Planning Directing and Motivating Controlling

4. 7 - 4 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Budgetary Control One of the three main functions of management is to control. Budgets are useful in controlling operations.

5. 7 - 5 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Budgetary Control The use of budgets to control operations. Compare actual results with planned objectives. BUDGET FINANCIAL STATEMENTS

6. 7 - 6 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Budgetary Control Illustration 7-1

7. Budgetary Control Reporting System Illustration 7-2

8. 7 - 8 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Static Budget 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 labor260,000 Utilities190,000 Depreciation280,000 Property taxes70,000 Supervision 50,000 $1,100,000 Budgeted Production in units (steel ingots)10,000 Budgeted Costs Indirect materials$ 250,000 Indirect labor260,000 Utilities190,000 Depreciation280,000 Property taxes70,000 Supervision 50,000 $1,100,000 Barton Steel (Forging Department) Manufacturing Overhead Budget (Static) For the Year Ended December 31, 2002 Illustration 7-6

9. 7 - 9 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Static Budget

10. 7 - 10 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Flexible Budget A projection of budget data for various levels of activity.

11. Flexible Budget Illustration 7-13 Fox Manufacturing Company (Finishing Department) Flexible Monthly Manufacturing Overhead Budget For the Month Ended January 31, 2002 Activity level Direct labor hours8,0009,00010,00011,00012,000 Variable costs Indirect materials ($1.50)$12,000$13,500$15,000$16,500$18,000 Indirect labor ($2.00)16,00018,00020,00022,00024,000 Utilities ($.50) 4,000 4,500 5,000 5,500 6,000 Total variable 32,000 36,000 40,000 44,00048,000 Fixed costs Depreciation15,00015,00015,00015,00015,000 Supervision10,00010,00010,00010,00010,000 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 Activity level Direct labor hours8,0009,00010,00011,00012,000 Variable costs Indirect materials ($1.50)$12,000$13,500$15,000$16,500$18,000 Indirect labor ($2.00)16,00018,00020,00022,00024,000 Utilities ($.50) 4,000 4,500 5,000 5,500 6,000 Total variable 32,000 36,000 40,000 44,00048,000 Fixed costs Depreciation15,00015,00015,00015,00015,000 Supervision10,00010,00010,00010,00010,000 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

12. Flexible Budget at 10,000 and 12,000 Levels Illustration 7-15

13. 7 - 13 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Management by Exception The review of budget reports by management focused entirely or primarily on differences between actual results and planned objectives.

14. 7 - 14 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Responsibility Reporting System The preparation of reports for each level of responsibility in the company’s organization chart. Illustration 7-17

15. 7 - 15 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Controllable Costs Costs that a manager has the authority to incur within a given period of time.

16. 7 - 16 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Responsibility for Controlling Costs Illustration 7- 17

17. 7 - 17 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Decentralization Control of operations is delegated to many managers throughout the organization.

18. 7 - 18 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Segment An area of responsibility in decentralized operations.

19. 7 - 19 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show 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.

20. Illustration 7-20

21. 7 - 21 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Direct Fixed Costs Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.

22. 7 - 22 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Indirect Fixed Costs Costs that are incurred for the benefit of more than one profit center.

23. 7 - 23 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Cost Center A responsibility center that incurs costs but does not directly generate revenues. Warranty Dept

24. 7 - 24 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Profit Center A responsibility center that incurs costs but also generates revenue.

25. 7 - 25 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Investment Center A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use.

26. 7 - 26 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Illustration 7- 18

27. 7 - 27 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Responsibility Report Contribution margin less controllable fixed costs=Controllable Margin. Illustration 7-22 Difference Favorable F Budget Actual Unfavorable U Sales$1,200,000$1,150,000$50,000 U Variable Costs Cost of goods sold500,000490,00010,000 F Selling & administrative 160,000 156,000 4,000 F Total 660,000 646,000 14,000 F Contribution margin 540,000 504,000 36,000 U Controllable fixed costs Cost of goods sold100,000100,000 -0- Selling & administrative 80,000 80,000 -0- Total 180,000 180,000 -0- Controllable margin$ 360,000$ 324,000$36,000 U Difference Favorable F Budget Actual Unfavorable U Sales$1,200,000$1,150,000$50,000 U Variable Costs Cost of goods sold500,000490,00010,000 F Selling & administrative 160,000 156,000 4,000 F Total 660,000 646,000 14,000 F Contribution margin 540,000 504,000 36,000 U Controllable fixed costs Cost of goods sold100,000100,000 -0- Selling & administrative 80,000 80,000 -0- Total 180,000 180,000 -0- Controllable margin$ 360,000$ 324,000$36,000 U Mantel Manufacturing Company (Marine Division) Responsibility Report For the Year Ended December 31, 2002

28. 7 - 28 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Residual Income The income that remains after subtracting from the controllable margin the minimum rate of return on a company’s operating assets.

29. 7 - 29 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show Return on Investment (ROI) A measure of management’s effectiveness in utilizing assets at its disposal in an investment center.

30. 7 - 30 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show 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.

31. 7 - 31 Budgetary Budgetary Control StaticStatic Budgets FlexibleFlexible Budgets Responsibility Responsibility Accounting Responsibility Reports/Cost Responsibility Responsibility Reports -Profit Investment Investment Centers Next Slide Previous Slide End Show