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Static Budgets
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Managerial Accounting
Second Edition
Weygandt / Kieso / Kimmel
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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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Static Budgets
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Budgetary Control


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

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Static Budgets
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Budgetary Control


Illustration 7-1
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
Vice president of production
and production department
managers
Scrap Daily Determine efficient use of
materials
Production manager
Department
Overhead costs
Monthly Control overhead costs Department manager
Selling expenses Monthly Control selling expenses Sales manager
Income
Statement
Monthly
and
quarterly
Determine whether
income objectives are
being met
Top manager
Budgetary Control Reporting System






Illustration 7-2
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Static Budgets
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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 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
Illustration 7-6
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Static Budget
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Flexible Budget
A projection
of budget
data for
various
levels of
activity.


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 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

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

Illustration 7-17
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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.

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
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 sold 500,000 490,000 10,000 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 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
Mantel Manufacturing Company (Marine Division)
Responsibility Report
For the Year Ended December 31, 2002
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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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