CHAPTER 24
Budgetary Control and Responsibility Accounting
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
B
Problems
1. Describe budgetary
control and static budget
reports.
1, 2, 3, 4, 5
1, 2
1, 2, 8,4, 9
3B
2. Prepare flexible budget
reports.
6, 7, 8, 9, 10,
11, 12
3, 4, 5
1, 2
1, 3, 4, 5,
6, 7, 8, 9,
10, 11, 12
1B, 2B, 3B
3. Apply responsibility
accounting and to cost
and profit centers.
13, 14, 15, 16,
17, 18, 19, 20,
21, 24
6, 7
3
10, 11, 13,
14, 15, 16
4B, 6B
4. Evaluate performance in
investment centers.
22, 23, 24
8, 9, 10
4
16, 17,
18, 19
5B
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Prepare flexible budget and budget report for manufacturing
overhead.
Simple
20–30
2A
Prepare flexible budget, budget report, and graph for
manufacturing overhead.
Moderate
30–40
3A
State total budgeted cost formula, and prepare flexible
budget reports for two time periods.
Simple
20–30
4A
Prepare responsibility report for a profit center.
Moderate
20–30
5A
Prepare responsibility report for an investment center,
and compute ROI.
Moderate
40–50
6A
Prepare reports for cost centers under responsibility
accounting, and comment on performance of managers.
Moderate
40–50
BLOOM’ S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Describe budgetary control
and static budget reports.
E24-1
Q24-1
Q24-2
Q24-3
Q24-4
Q24-5
BE24-1 E24-2
BE24-2 E24-9
P24-3A
E24-8
2. Prepare flexible budget
reports.
Q24-9
Q24-12
E24-1
Q24-6
Q24-7
Q24-8
Q24-10
Q24-11
BE24-4
DI24-1
DI24-2
E24-3
E24-5
E24-7
E24-9
E24-10
E24-11
E24-12
BE24-5
E24-4
E24-6
P24-1A
P24-3A
P24-1B
BE24-3
E24-8
P24-2A
3. Describe responsibility
accounting and apply it to
cost centres and profit
centres.
Q24-19
Q24-13
Q24-14
Q24-15
Q24-16
Q24-17
Q24-18
Q24-20
Q24-21
Q24-24
BE24-6
BE24-7
DI24-3
E24-10
E24-11
E24-13
E24-16
P24-6A
E24-14
E24-15
P24-4A
4. Evaluate performance in
investment centers.
Q24-22
Q24-23
Q24-24
BE24-8
BE24-9
BE24-10
DI24-4
E24-16
E24-17
E24-18
E24-19
P24-5A
Broadening Your Perspective
BYP24-4
BYP24-3
BYP24-5
BYP24-6
BYP24-1
BYP24-2
BYP24-7
BYP24-8
ANSWERS TO QUESTIONS
1. (a) Budgetary control is the use of budgets in controlling operations.
(b) The steps in budgetary control are:
(1) Develop the planned objectives (budget).
(2) Analyze differences between actual and budgeted results.
(3) Take corrective action.
(4) Modify future plans, if necessary.
2.
Purpose
Name of Report
Frequency
Primary Recipient(s)
(a)
Scrap
Daily
Production manager
4. There is no justification for Ken’s concern. The sales budget is derived from the sales forecast
and it represents management’s best estimate of sales. Thus, it is a useful basis for evaluating
sales performance.
5. A static budget is an appropriate basis for evaluating a manager’s effectiveness in controlling
costs when:
7. The performance is unfavorable. The budgeted indirect labor cost in the static budget is $1.35 per
direct labor hour ($54,000 ÷ 40,000). At 45,000 direct labor hours, budgeted costs are $60,750
(45,000 X $1.35). Thus, indirect labor is $3,250 over budget ($64,000 – $60,750).
10. Cali Company can say that total budgeted costs are $20,000 fixed plus $6.50 per direct labor
hour [($85,000 – $20,000) ÷ 10,000].
Questions Chapter 24 (Continued)
12. Management by exception means that top management’s review of a budget report is focused
either entirely or primarily on differences between actual results and planned objectives. The
criteria for identifying exceptions are materiality and controllability of the item.
13. Responsibility accounting is a method of controlling operations that 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. The purpose of responsibility accounting is to
evaluate a manager’s performance on the basis of matters directly under that manager’s control.
14. Eve should know that the following conditions contribute to the effective use of responsibility
accounting:
15. A cost is controllable at a given level of managerial responsibility if the manager has the power to
incur the cost within a given period of time. Most costs incurred directly are controllable, whereas costs
incurred indirectly and allocated to a responsibility level are noncontrollable at that level.
16. Responsibility reports differ from budget reports in two respects: (1) a distinction is made between
controllable and noncontrollable items and (2) performance reports either emphasize, or only
include, items controllable by the individual manager.
17. Usually there is a relationship between a responsibility reporting system and a company’s organization
chart. In a responsibility reporting system, reports are prepared for each level of responsibility in the
organization chart.
20. Direct fixed costs relate specifically to one center and are incurred for the sole benefit of that
center. An indirect fixed cost relates to the company’s overall activities and is incurred for the
benefit of more than one profit center. Both types of fixed costs are controllable. A direct fixed
Questions Chapter 24 (Continued)
22. The primary basis for evaluating the performance of the manager of an investment center is
return on investment (ROI). The formula is: Controllable Margin divided by Average Operating Assets.
23. ROI can be improved by: (1) increasing controllable margin and (2) reducing average operating
assets. Controllable margin can be increased by increasing sales or by reducing variable and
controllable fixed costs.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 24-1
CROIX COMPANY
Sales Budget Report
For the Quarter Ended March 31, 2017
Product Line
Budget
Actual
Difference
Garden-Tools
BRIEF EXERCISE 24-2
CROIX COMPANY
Sales Budget Report
For the Quarter Ended June 30, 2017
Second Quarter
Year to Date
Product Line
Budget
Actual
Difference
Budget
Actual
Difference
BRIEF EXERCISE 24-3
(a) ROONEY COMPANY
Static Direct Labor Budget Report
For the Month Ended January 31, 2017
Budget
Actual
Difference
(b) ROONEY COMPANY
Flexible Direct Labor Budget Report
For the Month Ended January 31, 2017
Budget
Actual
Difference
BRIEF EXERCISE 24-3 (Continued)
The static budget does not provide a proper basis for evaluating performance
because the budget is not based on the hours actually worked. In contrast,
BRIEF EXERCISE 24-4
GUNDY COMPANY
Monthly Flexible Manufacturing Budget
For the Year 2017
Activity level
Finished units
Variable costs
Direct materials ($5)
Direct labor ($6)
80,000
$ 400,000
480,000
100,000
$ 500,000
600,000
120,000
$ 600,000
720,000
BRIEF EXERCISE 24-5
GUNDY COMPANY
Manufacturing Flexible Budget Report
For the Month Ended March 31, 2017
Budget
Actual
Difference
Units produced
Variable costs
Direct materials
100,000
$ 500,000
100,000
$ 520,000
Favorable F
Unfavorable U
$20,000 U
BRIEF EXERCISE 24-6
HANNON COMPANY
Assembly Department
Manufacturing Overhead Cost Responsibility Report
For the Month Ended April 30, 2017
Controllable Cost
Budget
Actual
Difference
Indirect materials
Indirect labor
$16,000
20,000
$14,300
20,600
Favorable F
Unfavorable U
$1,700 F
600 U
BRIEF EXERCISE 24-7
TORRES COMPANY
Water Division
Responsibility Report
For the Year Ended December 31, 2017
Budget
Actual
Difference
Sales
Variable costs
$2,000,000
1,000,000
$2,080,000
1,050,000
Favorable F
Unfavorable U
$80,000 F
50,000 U
BRIEF EXERCISE 24-8
COBB COMPANY
Plastics Division
Responsibility Report
For the Year Ended December 31, 2017
Budget
Actual
Difference
Contribution margin
$700,000
$710,000
Favorable F
Unfavorable U
$10,000 F
BRIEF EXERCISE 24-9
III 28% ($1,400,000 ÷ $5,000,000)
BRIEF EXERCISE 24–10
III A $300,000 ($2,000,000 X .15) increase in sales will increase contribution
margin and controllable margin $210,000 ($300,000 X 70%). The new
ROI is 32.2% ($1,610,000 ÷ $5,000,000).
SOLUTIONS FOR DO IT! EXERCISES
DO IT! 24-1
Difference
Favorable F
Unfavorable U
Budget
Actual
Units produced
Variable costs
Direct materials ($7)
$ 42,000
$ 38,850
$3,150 F
Direct labor ($13)
78,000
76,440
1,560 F
Overhead ($18)
108,000
116,640
8,640 U
Total variable costs
Fixed costs
Depreciation*
Supervision**
3,800
200 U
Total fixed costs
Total costs
$239,800
$243,930
$4,130 U
The static budget indicates that actual variable costs exceeded budgeted
amounts by $3,930. Fixed costs were unfavorable by $200. The static
budget gives the impression that the company did not control its variable
DO IT! 24-2
Using the graph data, fixed costs are $90,000, and variable costs are $5.20
DO IT! 24-3
ROCKIES DIVISION
Responsibility Report
For the Year Ended December 31, 2017
Difference
Favorable F
Budget Actual Unfavorable U
Sales $2,000,000 $1,890,000 $110,000 U
Variable costs 800,000 760,000 40,000 F
DO IT! 24-4
(a) Controllable margin for 2017:
Sales ……………………………………………..
$500,000
Variable costs ………………………………..
300,000
Contribution margin ……………………….
Controllable fixed costs ………………….
75,000
Controllable margin ………………………..
(b) Expected return on investment for alternative 1:
$125,000*
DO IT! 24-4 (Continued)
Controllable margin for alternative 2:
Sales ($500,000 + 100,000) ……………………….
$600,000
Contribution margin ………………………………..
Variable costs
SOLUTIONS TO EXERCISES
EXERCISE 24-1
1. True.
2. False. Budget reports are prepared as frequently as needed.
3. True.
EXERCISE 24-2
(a) CREDE COMPANY
Selling Expense Report
For the Quarter Ending March 31
By Month
Year–to–Date
Month
Budget
Actual
Difference
Budget
Actual
Difference
January
$30,000
$31,200
$1,200 U
$ 30,000
$ 31,200
$1,200 U
February
$35,000
$34,525
$ 475 F
$ 65,000
$ 65,725
$ 725 U
March
$40,000
$46,000
$6,000 U
$105,000
$111,725
$6,725 U
EXERCISE 24-3
MYERS COMPANY
Monthly Manufacturing Overhead Flexible Budget
For the Year 2017
Activity level
Direct labor hours
Variable costs
Indirect labor ($1)
Indirect materials ($.70)
7,000
$ 7,000
4,900
8,000
$ 8,000
5,600
9,000
$ 9,000
6,300
10,000
$10,000
7,000
EXERCISE 24-4
(a) MYERS COMPANY
Manufacturing Overhead Flexible Budget Report
For the Month Ended July 31, 2017
Difference
Direct labor hours (DLH)
Variable costs
Indirect labor
Budget at
9,000 DLH
$ 9,000
Actual Costs
9,000 DLH
$ 8,800
Favorable F
Unfavorable U
$200 F
EXERCISE 24-4 (Continued)
(b) MYERS COMPANY
Manufacturing Overhead Flexible Budget Report
For the Month Ended July 31, 2017
Difference
Direct labor hours (DLH)
Variable costs
Indirect labor ($1.00)
Indirect materials ($0.70)
Budget at
8,500 DLH
$ 8,500
5,950
Actual Costs
8,500 DLH
$ 8,800
5,800
Favorable F
Unfavorable U
$300 U
150 F
(c) In case (a) the performance for the month was satisfactory. In case
(b) management may need to determine the causes of the differences
EXERCISE 24-5
FALLON COMPANY
Monthly Selling Expense Flexible Budget
For the Year 2017
Activity level
Sales
Variable expenses
Sales commissions (6%)
Advertising (4%)
Fixed expenses
Sales salaries
$170,000
$ 10,200
6,800
35,000
$180,000
$ 10,800
7,200
35,000
$190,000
$ 11,400
7,600
35,000
$200,000
$ 12,000
8,000
35,000
EXERCISE 24-6
(a) FALLON COMPANY
Selling Expense Flexible Budget Report
For the Month Ended March 31, 2017
Difference
Sales
Variable expenses
Sales commissions
Advertising
Budget
$170,000
$ 10,200
6,800
Actual
$170,000
$ 11,000
6,900
Favorable F
Unfavorable U
$800 U
100 U
EXERCISE 24-6 (Continued)
(b) FALLON COMPANY
Selling Expense Flexible Budget Report
For the Month Ended March 31, 2017
Difference
Sales
Variable expenses
Sales commissions
Advertising
Fixed costs
Sales salaries
Depreciation
Budget
$180,000
$ 10,800
7,200
35,000
7,000
Actual
$180,000
$ 11,000
6,900
35,000
7,000
Favorable F
Unfavorable U
$200 U
300 F
0 U
0 U
(c) Flexible budgets are essential in evaluating a manager’s performance
in controlling variable expenses because the budget allowance varies
EXERCISE 24-7
(a) APPLIANCE POSSIBLE INC.
Flexible Production Cost Budget
Activity level
Production levels 90,000 100,000 110,000
Variable costs:
Manufacturing ($6) $ 540,000 $ 600,000 $ 660,000
(b) Let (X) represent number of units
Sales price(X) = Variable costs(X) + Fixed costs + Profit
Sales price(X) = Variable costs(X) + $240,000 + $60,000