CHAPTER 10

Budgetary Control and Responsibility Accounting

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief
Exercises

Exercises

A
Problems

B
Problems

1. Describe the concept of

budgetary control.

1, 2

2. Evaluate the usefulness

of static budget reports.

3, 4, 5

1, 2

1, 2, 8

3A

3B

3. Explain the development

of flexible budgets and
the usefulness of flexible
budget reports.

6, 7, 8, 9,
10, 11, 12

3, 4, 5

1, 3, 4, 5,
6, 7, 8, 9,
10

1A, 2A, 3A

1B, 2B, 3B

4. Describe the concept of

responsibility accounting.

13, 14, 15, 16,

17, 18, 24

11

6A

5. Indicate the features of

responsibility reports
for cost centers.

19

7, 9, 12

6. Identify the content of

responsibility reports
for profit centers.

20, 21

13, 14

4A

4B

7. Explain the basis and

formula used in evaluating
performance in
investment centers.

22, 23, 24

8, 9, 10

14, 15, 16,

17

5A

5B

25, 26

11, 12

18, 19

7A

*8. Explain the difference

between ROI and
residual income.

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix
to the chapter.

10-1

ASSIGNMENT CHARACTERISTICS TABLE

Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

Simple

2030

Moderate

3040

Simple

2030

1A

Prepare flexible budget and budget report for manufacturing

overhead.

2A

Prepare flexible budget, budget report, and graph for

manufacturing overhead.

3A

State total budgeted cost formula, and prepare flexible

budget reports for two time periods.

4A

Prepare responsibility report for a profit center.

Moderate

2030

5A

Prepare responsibility report for an investment center,

and compute ROI.

Moderate

4050

6A

Prepare reports for cost centers under responsibility

accounting, and comment on performance of managers.

Moderate

4050

Compare ROI and residual income.

Moderate

3545

Simple

2030

Moderate

3040

Simple

2030

*7A
1B

Prepare flexible budget and budget report for manufacturing

overhead.

2B

Prepare flexible budget, budget report, and graph for

manufacturing overhead.

3B

State total budgeted cost formula, and prepare flexible

budget reports for two time periods.

4B

Prepare responsibility report for a profit center.

Moderate

2030

5B

Prepare responsibility report for an investment center,

and compute ROI.

Moderate

4050

10-2

10-3

Broadening Your Perspective

E10-18
E10-19
P10-7A

E10-15 E10-17
E10-16
E10-17

E10-13
P10-4A
P10-4B

P10-3A
P10-1B
P10-3B

Synthesis

P10-5A
P10-5B

BE10-3
E10-8
P10-2A
P10-2B

E10-8

Evaluation

Exploring the Web Real-World Focus Communication All About You

Manag. Analysis Decision Making
Ethics Case
Decision Making Across the
Communication
Organization
Across the
Ethics Case
Organization
Manag. Analysis
Real-World Focus

BE10-11
BE10-12

BE10-8
BE10-9
BE10-10
E10-14

Q10-22
Q10-23
Q10-24

7. Explain the basis and

formula used in evaluating
performance in investment
centers.

*8. Explain the difference

between ROI and
residual income.

BE10-7
E10-14

Q10-20
Q10-21

Q10-25
Q10-26

P10-6A

Q10-17 E10-11
Q10-18
Q10-24
E10-12

E10-7 BE10-5
E10-9 E10-4
E10-10 E10-6
P10-1A

Q10-11
BE10-4
E10-3
E10-5

BE10-6
E10-7
E10-9

E10-2 P10-3A
P10-3B

Analysis

Q10-5 BE10-1
BE10-2

Application

6. Identify the content of

responsibility reports
for profit centers.

5. Indicate the features of

responsibility reports
for cost centers.

Q10-19

Q10-6
Q10-7
Q10-8
Q10-10

Q10-9
Q10-12
E10-1

3. Explain the development

of flexible budgets and
the usefulness of flexible
budget reports.
Q10-13
Q10-14
Q10-15
Q10-16

Q10-3
Q10-4

E10-1

2. Evaluate the usefulness

of static budget reports.

4. Describe the concept of

responsibility accounting.

Q10-1
Q10-2

E10-1

Knowledge Comprehension

1. Describe the concept

of budgetary control.

Study Objective

Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems

BLOOMS TAXONOMY TABLE

STUDY OBJECTIVES
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.
6. IDENTIFY THE CONTENT OF RESPONSIBILITY
REPORTS FOR PROFIT CENTERS.
7. EXPLAIN THE BASIS AND FORMULA USED
IN EVALUATING PERFORMANCE IN INVESTMENT
CENTERS.
*8. EXPLAIN THE DIFFERENCE BETWEEN ROI AND
RESIDUAL INCOME.

10-4

CHAPTER REVIEW
Budgetary Control
1.

(S.O. 1) The use of budgets in controlling operations is known as budgetary control. Such
control takes place by means of budget reports that compare actual results with planned
objectives. The budget reports provide management with feedback on operations.

2.

Budgetary control involves:

a. Developing budgets.
b. Analyzing the differences between actual and budgeted results.
c. Taking corrective action.
d. Modifying future plans, if necessary.

3.

Budgetary control works best when a company has a formalized reporting system. The system
should
a. Identify the name of the budget report such as the sales budget or the manufacturing
overhead budget.
b. State the frequency of the report such as weekly, or monthly.
c. Specify the purpose of the report.
d. Indicate the primary recipient(s) of the report.

Static Budget Reports

4.

(S.O. 2) A static budget does not modify or adjust data regardless of changes in activity during
the year. As a result, actual results are always compared with the budget data at the activity level
used in developing the master budget.

5.

A static budget is appropriate in evaluating a managers effectiveness in controlling costs when

(a) the actual level of activity closely approximates the master budget activity level, and/or (b) the
behavior of the costs in response to changes in activity is fixed.

Flexible Budgets
6.

(S.O. 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. This type of budget permits a comparison of actual and planned results at the level of
activity actually achieved.

7.

To develop the flexible budget, the following steps are taken:

a. Identify the activity index and the relevant range of activity.
b. Identify the variable costs, and determine the budgeted variable cost per unit of activity for
each cost.
c. Identify the fixed costs, and determine the budgeted amount for each cost.
d. Prepare the budget for selected increments of activity within the relevant range.

8.

For manufacturing overhead costs, the activity index is usually the same as the index used in
developing the predetermined overhead rate; that is, direct labor hours or machine hours. For
selling and administrative expenses, the activity index usually is sales or net sales.

10-5

9.

The following formula may be used to determine total budgeted costs at any level of activity:
Total budgeted costs = Fixed costs + (Total variable cost per unit X activity level)

10.

Total budgeted costs at each level of activity can be shown graphically.

a. In a graph, the activity index is shown on the horizontal axis and costs are shown on the
vertical axis.
b. The total budgeted costs for each level of activity are then identified from the total budgeted
cost line.

11.

Flexible budget reports are another type of internal report produced by managerial accounting.
The flexible budget report consists of two sections: (a) production data such as direct labor hours
and (b) cost data for variable and fixed costs. It also shows differences between budget and
actual results.

12.

Management by exception means that top managements review of a budget report is focused
either entirely or primarily to differences between actual results and planned objectives. The
guidelines for identifying an exception are based on materiality and controllability.

Responsibility Accounting
13.

(S.O. 4) Responsibility accounting involves accumulating and reporting costs (and revenues,
where relevant) on the basis of the manager who has the authority to make the day-to-day
decisions about the items. A managers performance is evaluated on matters directly under that
managers control.

14.

Responsibility accounting can be used at every level of management in which the following
conditions exist:
a. Costs and revenues can be directly associated with the specific level of management
responsibility.
b. The costs and revenues are controllable at the level of responsibility with which they are
associated.
c. Budget data can be developed for evaluating the managers effectiveness in controlling the
costs and revenues.

15.

Responsibility accounting is especially valuable in a decentralized company. Decentralization

means that the control of operations is delegated to many managers throughout the organization.
A segment is an identified area of responsibility in decentralized operations.

16.

Responsibility accounting is an essential part of any effective system of budgetary control. It

differs from budgeting in two respects:
a. A distinction is made between controllable and noncontrollable items.
b. Performance reports either emphasize or include only items controllable by the individual
manager.

17.

A cost is considered controllable at a given level of managerial responsibility if that manager has
the power to incur it within a given period of time. Costs incurred indirectly and allocated to a
responsibility level are considered to be noncontrollable at that level.

18.

A responsibility reporting system involves the preparation of a report for each level of
responsibility shown in the companys organization chart. A responsibility reporting system
permits management by exception at each level of responsibility within the organization.

10-6

19.

Responsibility centers may be classified into one of three types. A cost center incurs costs
(and expenses) but does not directly generate revenues. A profit center incurs costs (and
expenses) but also generates revenues. An investment center incurs costs (and expenses),
generates revenues, and has control over investment funds available for use.

Cost Centers
20.

(S.O. 5) A responsibility report for cost centers compares actual controllable costs with
flexible budget data. Only controllable costs are included in the report, and no distinction is made
between variable and fixed costs.

21.

Direct fixed costs or traceable costs are costs that relate specifically to a responsibility center
and are incurred for the sole benefit of the center. Indirect fixed costs or common costs pertain
to a companys overall operating activities and are incurred for the benefit of more than one profit
center.

Profit Centers
22.

(S.O. 6) A responsibility report for a profit center shows budgeted and actual controllable
revenues and costs. The report is prepared using the cost-volume-profit income statement format.

23.

In the responsibility report for a profit center:

a. Controllable fixed costs are deducted from contribution margin.
b. The excess of contribution margin over controllable fixed costs is identified as controllable
margin.
c. Noncontrollable fixed costs are not reported.

24.

Controllable margin is considered to be the best measure of the managers performance in

controlling revenues and costs.

Investment Centers
25.

(S.O. 7) The primary basis for evaluating the performance of a manger of an investment center is
return on investment (ROI). The formula for computing return on investment is: Investment
Center Controllable Margin (in dollars) Average Investment Center Operating Assets = Return
on Investment.
a. Operating assets consist of current assets and plant assets used in operations by the
center. Nonoperating assets such as idle plant assets and land held for future use are
excluded.
b. Average operating assets are usually based on the beginning and ending cost or book
values of the assets.

26.

A manager can improve ROI by (a) increasing controllable margin or (b) reducing average
operating assets.

27.

The return on investment approach includes two judgmental factors:

a. Valuation of operating assetscost, book value, appraised value, or market value.
b
Margin (income) measurecontrollable margin, income from operations, or net income.

28.

Performance evaluation is a management function that compares actual results with budget
goals. Performance evaluation includes both behavioral and reporting principles.

10-7

*Residual Income
*29. (S.O. 8) To evaluate performance using the minimum rate of return, companies use the residual
income approach. Residual income is the income that remains after subtracting from the
controllable margin the minimum rate of return on a companys average operating assets.
The residual income would be computed as follows:
Controllable
Margin

Minimum Rate of Return

X
Average Operating Assets

10-8

Residual
Income

LECTURE OUTLINE
A.

The Concept of Budgetary Control.

1. The use of budgets in controlling operations is known as budgetary control.
Such control takes place by means of budget reports that compare actual
results with planned objectives.
2. Budgetary control consists of:
a.

Preparing periodic budget reports that compare actual results with

planned objectives.

b.

Analyzing the differences to determine their causes.

c.

Taking appropriate corrective action.

d.

Modifying future plans, if necessary.

3. Budgetary control works best when a company has a formalized reporting

system. This system does the following:

TEACHING TIP

Use ILLUSTRATION 10-1 to emphasize the importance of a formalized reporting

system for effective budgetary control. Point out that different activities need to
be monitored at different times by those who are responsible for the activities.
a.

Identifies the name of the budget report (i.e. sales budget).

b.

States the frequency of the report, such as weekly or monthly.

c.

Specifies the purpose of the report.

d.

Indicates the primary recipient(s) of the report.

10-9

4. A static budget is a projection of budget data at one level of activity.

These budgets do not consider data for different levels of activity. As a
result, companies always compare actual results with budget data at the
activity level that was used in developing the master budget.
5. A static budget is appropriate in evaluating a managers effectiveness in
controlling costs when:
a.

The actual level of activity closely approximates the master budget

activity level, and/or

b.

The behavior of the costs in response to changes in activity is fixed.

6. A static budget report is appropriate for fixed manufacturing costs and

for fixed selling and administrative expenses.

B.

The Flexible Budget.

1. A flexible budget projects budget data for various levels of activity. In
essence, the flexible budget is a series of static budgets at different levels
of activity.

TEACHING TIP

Use ILLUSTRATION 10-2 to demonstrate the preparation of a flexible budget.

Point out that once a flexible budget formula is developed, a flexible budget can be
prepared for any level of activity. Emphasize that fixed costs are not calculated
on a per unit basis because they are not expected to change in total with changes
in activity within the relevant range.
2. To develop the flexible budget, management should:
a.

Identify the activity index and the relevant range of activity.

10-10

b.

Identify the variable costs, and determine the budgeted variable cost
per unit of activity for each cost.

c.

Identify the fixed costs, and determine the budgeted amount for
each cost.

d.

Prepare the budget for selected increments of activity within the

relevant range.

3. Flexible budget reports are another type of internal report. The flexible
budget report consists of two sections:
a.

Production data for a selected activity index, such as direct labor

hours.

b.

Cost data for variable and fixed costs.

TEACHING TIP

ILLUSTRATION 10-3 provides an example of a flexible budget report. Emphasize

that the actual costs are reported as incurred at the actual activity level achieved,
and the flexible budget is developed at the same actual level of activity.
4. The flexible budget report provides a basis for evaluating a managers
performance in two areas:
a.

Production control.

b.

Cost control.

5. Flexible budget reports are appropriate for evaluating performance since

both actual and budgeted costs are based on the actual activity level
achieved.

10-11

C.

Management by Exception.
1. Management by exception means that top managements review of
a budget report is focused either entirely or primarily on differences
between actual results and planned objectives.
2. For management by exception to be effective, there must be guidelines
for identifying an exception. The usual criteria are:

D.

a.

Materialityusually expressed as a percentage difference from

budget.

b.

Controllability of the itemexception guidelines are more restrictive

for controllable items than for items the manager cannot control.

The Concept of Responsibility Accounting.

1. Responsibility accounting involves accumulating and reporting costs
(and revenues) on the basis of the manager who has the authority to
make the day-to-day decisions about the items.
2. Under responsibility accounting, a managers performance is evaluated
on matters directly under that managers control.
3. Responsibility accounting can be used at every level of management in
which the following conditions exist:
a.

Costs and revenues can be directly associated with the specific

level of management responsibility.

b.

The costs and revenues can be controlled by employees at the level

of responsibility with which they are associated.

c.

Budget data can be developed for evaluating the managers effectiveness in controlling the costs and revenues.

10-12

4. The reporting of costs and revenues under responsibility accounting

differs from budgeting in two respects:
a.

A distinction is made between controllable and noncontrollable

items.

b.

Performance reports either emphasize or include only items controllable by the individual manager.

5. A cost over which a manager has control is called a controllable cost. It

follows that:
a.

All costs are controllable by top management because of the broad

range of its activity.

b.

Fewer costs are controllable as one moves down to each lower level
of managerial responsibility because of the managers decreasing
authority.

6. Noncontrollable costs are costs incurred indirectly and allocated to a

responsibility level.
7. A responsibility reporting system involves the preparation of a report for
each level of responsibility in the companys organization chart.
8. Responsibility reports for cost centers compare actual controllable costs
with flexible budget data. The reports show only controllable costs and
no distinction is made between variable and fixed costs.
9. There are three basic types of responsibility centers: cost centers, profit
centers, and investment centers.

TEACHING TIP

ILLUSTRATION 10-4 identifies the three types of responsibility centers, the

bases for evaluating the managers performance in the centers, and the type of
performance report prepared for each center.
10-13

a.

A cost center incurs costs (and expenses) but does not directly
generate revenues.

b.

A profit center incurs costs (and expenses) and also generates

revenues.

c.

Like a profit center, an investment center incurs costs (and expenses)

and generates revenues. In addition, an investment center has control
over decisions regarding the assets available for use.

10. Responsibility Reports.

a.

The evaluation of a managers performance for cost centers is based

on his or her ability to meet budgeted goals for controllable costs.

b.

To evaluate the performance of a profit center manager, upper

management needs detailed information about both controllable
revenues and controllable costs. The report is prepared using the
cost-volume-profit income statement. In the report:
(1) Controllable fixed costs are deducted from contribution margin.
(2) The excess of contribution margin over controllable fixed costs
is identified as controllable margin.
(3) Noncontrollable fixed costs are not reported.

c.

The primary basis for evaluating the performance of a manager of

an investment center is return on investment (ROI).

TEACHING TIP

ILLUSTRATION 10-5 provides the formula for calculating return on investment

(ROI). Since the performance of managers of investment centers are evaluated
by ROI, suggest ways that a manager might increase ROI.

10-14

E.

d.

Return on investment is computed by dividing controllable margin

by average operating assets.

e.

Judgmental factors in ROI are (1) valuation of operating assets and

(2) margin (income) measure.

Principles of Performance Evaluation.

1. The human factor is critical in evaluating performance. Behavioral principles
include:
a.

Managers of responsibility centers should have direct input into the

process of establishing budget goals of their area of responsibility.

b.

The evaluation of performance should be based entirely on matters

that are controllable by the manager being evaluated.

c.

Top management should support the evaluation process.

d.

The evaluation process must allow managers to respond to their

evaluations.

e.

The evaluation should identify both good and poor performance.

2. Performance evaluation under responsibility accounting should be based

on certain reporting principles. Performance reports should:
a.

Contain only data that are controllable by the manager of the responsibility center.

b.

Provide accurate and reliable budget data to measure performance.

c.

Highlight significant differences between actual results and budget

goals.

d.

Be tailor-made for the intended evaluation.

e.

Be prepared at reasonable intervals.

10-15

*F. Residual Income Compared To ROI.

1. Residual income is the income that remains after subtracting from the
controllable margin the minimum rate of return on a companys average
operating assets.
2. Residual income is computed as follows: Controllable Margin
(Minimum Rate of Return X Average Operating Assets).
3. ROI sometimes provides misleading results because profitable investments are often rejected when the investment reduces ROI but increases
overall profitability.

10-16

20 MINUTE QUIZ
Circle the correct answer.
True/False
1.

In a static budget, the data may be modified or adjusted if activity changes more than a
specified amount during the year.
True

2.

Flexible budgets can be prepared for each of the types of budgets included in the master
budget.
True

3.

False

There are three types of responsibility centers: cost, segment, and investment.
True

10.

False

A responsibility reporting system begins with the lowest level of responsibility in an

organization and moves upward to each higher level.
True

9.

False

Only controllable costs are included in a responsibility performance report, and there is
no distinction made between variable and fixed costs.
True

8.

False

The terms controllable costs and noncontrollable costs are synonymous with variable
costs and fixed costs, respectively.
True

7.

False

Under responsibility accounting, the evaluation of a managers performance is based on

the matters directly under that managers control.
True

6.

False

Flexible budget reports consist of two sections: production data and cost data.
True

5.

False

With a flexible budget, if production increases, budget allowances for variable costs
should increase both directly and proportionately.
True

4.

False

False

The primary basis for evaluating the performance of a manager of an investment center
is return on investment.
True

False
10-17

Multiple Choice
1.

A static budget report is appropriate for

a. evaluating a managers performance in controlling variable costs.
b. fixed manufacturing costs and fixed selling and administrative expenses.
c. variable costs and fixed costs.
d. none of the above.

2.

The manufacturing overhead budget (1) provides the basis for computing the predetermined overhead rate for the year, and (2) is used in costing work in process and finished
goods inventories. Is the above statement true for
a. (1) only.
b. (2) only.
c. both (1) and (2).
d. neither (1) nor (2).

3.

At 40,000 direct labor hours, the flexible budget for indirect labor is $160,000. If $172,000
of indirect labor costs are incurred at 44,000 direct labor hours, the flexible budget report
should show the following difference for indirect labor.
a. $12,000 favorable.
b. $4,000 unfavorable.
c. $4,000 favorable.
d. $12,000 unfavorable.

4.

Controllable fixed costs are deducted from the contribution margin to arrive at
a. income from operations.
b. net income.
c. controllable margin.
d. realized income.

5.

The numerator in computing return on investment is

a. controllable margin.
b. average operating assets.
c. contribution margin.
d. net assets.

10-18

ANSWERS TO QUIZ
True/False
1.
2.
3.
4.
5.

False
True
True
True
True

6.
7.
8.
9.
10.

False
True
True
False
True

Multiple Choice
1.
2.
3.
4.
5.

b.
c.
c.
c.
a.

10-19

ILLUSTRATION 10-1
BUDGETARY CONTROL REPORTING SYSTEM

Name of
Report

Frequency

Purpose

Primary
Recipient(s)

Sales

Weekly

Determine whether
sales goals are being
met

Top management
and sales manager

Labor

Weekly

Control direct and

indirect labor costs

Scrap

Daily

Departmental
overhead costs
Selling
expenses
Income
statement

Monthly

Determine efficient
use of materials
Control overhead
costs
Control selling
expenses
Determine whether
income objectives
are being met

Vice president of
production and
production department managers
Production manager

Monthly
Monthly and
quarterly

10-20

Department
manager
Sales manager
Top management

ILLUSTRATION 10-2
THE FLEXIBLE BUDGET
EXAMPLE COMPANY

EXAMPLE COMPANY

Manufacturing Overhead Budget (Static)

For the Year Ended December 31, 2008

Flexible Manufacturing
Overhead Budget
Monthly

Per
Machine
Hour

Relevant Range

Machine hours
60,000
Variable costs:
Indirect materials
$120,000 $2.00
Indirect labor
360,000 6.00
.60
Supplies
36,000
Total variable costs 516,000 $8.60
Fixed costs:
Depreciation
Property taxes
Supervision
Total fixed costs
Total costs

4,000
$

5,000

6,000

8,000 $ 10,000 $ 12,000

24,000
30,000
36,000
2,400
3,000
3,600
34,400
43,000
51,600

300,000
60,000
480,000
840,000

25,000
5,000
40,000
70,000

25,000
5,000
40,000
70,000

25,000
5,000
40,000
70,000

$1,356,000

$104,400

$113,000

$121,600

Flexible Budget Formula

Fixed
Costs

Total Variable Cost

Per Unit of Activity

$70,000 + $8.60

10-21

Activity
Level

Total
Budgeted
Cost

4,000

$104,400

5,000

$113,000

6,000

$121,600

ILLUSTRATION 10-3
FLEXIBLE BUDGET REPORT

EXAMPLE COMPANY
Manufacturing Overhead Budget Report (Flexible)
For the Month Ended October 31, 2008
Budget at Actual Cost
6,000 MH 6,000 MH

Machine hours

Variable costs:
$ 12,000
Indirect materials
36,000
Indirect labor
3,600
Supplies
51,600
Total variable costs
Fixed costs:
25,000
Depreciation
5,000
Property taxes
40,000
Supervision
70,000
Total fixed costs
$121,600
Total costs

Difference
Favorable F
Unfavorable U

$ 14,000
31,000
2,800
47,800

$2,000
5,000
800
3,800

25,000
5,000
40,000
70,000
$117,800

$3,800 F

U
F
F
F

A Flexible Budget Report is appropriate

for evaluating a manager's performance
in cost control.

BUDGETARY CONTROL
Determine differences
between actual and
planned results
(Periodic budget reports)

Planned
Objectives
(Budget)

Modify future plans

Take corrective action

10-22

Analyze differences

ILLUSTRATION 10-4
RESPONSIBILITY CENTERS

TYPE

BASIS FOR
EVALUATION

Cost Center
Incurs costs but does
not directly generate
revenues

Ability to control
costs

Report compares
actual controllable
costs with flexible
budget data

Profitability of center

Report shows
budgeted and actual
controllable revenues
and costs in a
contribution margin
format

Profitability of center
and return on
investment (ROI)

Report shows
budgeted and actual
controllable revenues
and expenses and
budgeted and actual
return on investment

Profit Center
Incurs costs and also
generates revenues

Investment Center
Incurs costs,
generates revenues,
and has control over
investment funds

PERFORMANCE
REPORT

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ILLUSTRATION 10-5
RETURN ON INVESTMENT

ROI FORMULA

ROI =

Controllable Margin
Average Operating Assets

To Improve Return on Investment:

1. Increase sales. *
2. Reduce costs. *
3. Reduce average operating assets. *
* All other factors remaining constant

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