f&a ch.6 summary

Budgetary Control = ____ comparison of actual results vs. budgeted goals to monitor and improve performance.

1. Prepare periodic budget ___ (actual vs. planned).

2. Analyze ___ (find causes).

3. Take ___ action.

4. Modify future plans if necessary.

continuous, report variances corrective

Static Budget Reports

• Show results for one level of activity (the master budget level).

• Useful for evaluating:

  1. ___ & profit goals (progress check).

  2. ___ effectiveness in controlling ____ costs.

• Works best when:

  1. Actual activity ≈ planned activity, and/or

  2. Costs are mostly ___ (don’t vary with activity).

sales, manager, fixed, fixed

How to Develop a Flexible Budget:

1. Identify the activity ___ (units produced, labour hours) and relevant range.

2. Identify ___ → find budgeted variable cost per unit.

3. Identify ___ costs → find total budgeted amount.

Prepare budgets for different activity levels within the relevant range.

index, variable, fixed

flexible budget - Why It’s Useful:

• Helps evaluate a manager’s ability to control ___ at various output levels.

• Allows fair __ between actual and budgeted results, even when activity changes.

Distinguishes between ___ changes and efficiency issues.

costs, comparisons, volume

Responsibility Accounting = Reporting ____and costs that relate to managers who have ____over those items.
Evaluation is based only on what’s ___by that manager.

revenues, authority, controllable 

responsibility accounting (cost and ___ centres) Key Features:

• Accumulates and reports controllable revenues/costs.

• Distinguishes controllable vs. noncontrollable fixed costs.

• Classifies centres as:

  1. Cost Centre → control over costs only.

  2. Profit Centre → control over ___

Investment Centre → control over___

profit, costs + revenues, costs revenues assets

Responsibility Reports:

• Cost Centre:

  • Compare actual vs. flexible budget.

  • Show only controllable costs (no variable/fixed ____).

• Profit Centre:

Show sales, variable costs, contribution margin, controllable fixed costs, and controllable margin.

distinction

Performance Evaluation in Investment Centres

Key Measure: ➡

return on investment

ROI

controllable margin / average operating assets

ROI Purpose:

• Measures how ___the manager uses ___to generate __.

The higher the ROI, the better the __.

efficiently, assets, profit, performance 

ROI

Controllable Margin ÷

Shows percentage return on __ used.

average operating assets, assets

Residual Income

___

Shows income left after earning the required return.

controllable margin - (minimum rate of return x average operating assets)

• ROI may cause managers to reject profitable projects if it lowers average __.

Residual income avoids this issue → focuses on overall __, not percentages.

ROI, profitability

1. Are increased costs from higher production reasonable?

___ costs at different activity levels

___ Budget

Results are favourable if actual expenses < budgeted amounts for the activity level.

variable flexible

2. Have managers been held accountable for controllable items?

Relevant controllable __and _

____ Reports (for cost, profit, investment centres)

Compare actual vs. budget for controllable items only.

revenues, costs, responsibility

3. Has the investment centre met expectations?

____& Average Operating Assets

___

Compare actual ROI vs. expected ROI.

controllable margin, ROI

Budgetary Control

Compare ___ → take corrective action

actual vs budget 

Static Budget

Good for ____costs and stable activity levels

fixed 

Responsibility Accounting

Managers evaluated only on __items

controllable 

ROI

controllable margin / average operating assets

residual income

controllable margin - (min rate x assets)

“B–F–R–R–R” →
Budgetary control
Flexible budget
Responsibility accounting
ROI
__

residual income