Chapter 11: Budgetary Control Flashcards
how are budgets used for controlling
ONGOING PROCESS
o Compare actual results with planned objectives
o Provide management with feedback on operations
o Prepared as often as needed, typically monthly
what does management do based on report results?
o Analyzes the differences between actual and planned
o Determines the causes for the differences
o Decides or determines if and when corrective action is needed
o If the budget needs to be adjusted for the following period(s_
budgetary control: STEPS
- develop budget
- analyze goals vs reality
- take corrective action
- modify future plans
fformalized
reporting system
o Identifies the name of the budget report (such as the
sales budget or the manufacturing overhead budget)
o States the frequency of the report (weekly or monthly)
o Specifies the purpose of the report
o Indicates recipient (s) of the report
static budget report
!!! on a single level of activity
Typically uses the activity level from the master
budget
o Ignores data for different levels of activity
static budget report goals
compare
actual results
with budget data from static/master budget
what is variance
diffrence between. budgeted and actual
it is noted as favourale or undavourable
A variance is considered unfavourable if the difference between
actual and budgeted reduces operating income
- When actual sales are less than budgeted sales
- When actual costs or expenses are greater than budgeted
after determinig variances what should ocmpanies do
determine via cost/benefit analyiss if action must be taken!
statis budget reports cant be sued for
variable costs/data
static budget ereports are appropraite when
o Actual level of activity closely approximates the master
budget activity level
o Behaviour of the costs is fixed in response to changes in
activity
* Appropriate for fixed manufacturing and SG&A costs
if we cant use static reports for variable/multiple l evels of activtiy…. what do we do?
create flexbile budgets!!!!
what are flexible budgets
series of static fixed reprots at multiple activity levels
flexible budgets!
Budgetary process more useful if it is adaptable to
changes in operating conditions
* Can be prepared for each type of budget in the master
budget
* Assists management is analyzing and controlling
variable costs
basically in flexible budgets u use the per unit fixed costs of variable costs!@
fixed costs dont ened per unit as long as you are in the relevant range!!
steps in budgeting
- Identify the activity index and the relevant range of
activity. - Identify the variable costs and determine the
budgeted variable cost per unit of activity for each
cost. - Identify the fixed costs and determine the budgeted
amount for each cost. - Prepare the budget for selected increments of activity
within the relevant range.
activity index: what activity is being used as a basis of calc (dm, dl, ?)
relevant range: provided
for flexible budgets it is literally just incrementally increasing activity index and calculating variable costs based on that + adding fixed csots
why is relevant range important?
at any level outside of the bounds fo relevnat range fixed csots will change!
flexible budget reports summary
o Production data for a selected activity index, such as
direct labour hours
o Cost data for variable and fixed costs
- Widely used in production and service departments
to evaluate a manager’s performance in production
control and cost control - A budget report for the January Fox Manufacturing,
Finishing Department follows
dm
- Std material price:
purchase price + delivery cost-purchase discounts - Std. DM quantity:
quantity required to produce on unit of output
+ a normal waste allowance
managmeent by exception, when to ivnestaigate variances
Size or variance-large dollar value or
relative dollar value.
Recurring variance (not in textbook)
Trends (not in textbook
Controllability (not in textbook)
Favorable (not in textbook)
Cost benefit (not in textbook)
Nature of the item (not in textbook)
