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Comm 305: Managerial Accounting > chapter 11: budgetary control and responsibility accounting > Flashcards

chapter 11: budgetary control and responsibility accounting Flashcards

1
Q

budgetary control

A

the use of budgets in controlling operations

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2
Q

what do budget reports do?

A

give management feedback on operations

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3
Q

why are budget reports used?

A

because planned objectives often lose much of their potential value if progress is not monitored along the way

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4
Q

Budgetary control activities

A
  1. develop budget
  2. analyze differences between actual and budget
  3. take corrective action
  4. modify future plans
  5. develop budget
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5
Q

when does a budget control work best?

A

when a company has a formalized reporting system

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6
Q

what does a a formalized reporting system do?

A
  1. Identifies the name of the budget report (ex: sales budget)
  2. States the frequency of the report (ex: weekly or monthly)
  3. Specifies the purpose of the report
  4. Indicates the primary recipient(s) of the report
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7
Q

what does a master budget do?

A

formalizes management’s planned objectives for the coming year

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8
Q

how is each budget in the master budget viewed when used in budgetary control?

A

as being static

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9
Q

static budget

A

A projection of budget data at one level of activity

do not consider data for different levels of activity

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10
Q

why do companies always compare actual results with budget data at the activity level that was used in developing the master budget?

A

because of the static budget

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11
Q

budget variance

A

The difference between budgeted numbers and actual results

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12
Q

when is a static budget appropriate in evaluating how well a manager controls costs?

A

(1) the actual level of activity closely approximates the master budget activity level

and/or

(2) the behaviour of the costs in response to changes in activity is fixed

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13
Q

flexible budget

A

projects budget data for various levels of activity

basically a series of static budgets at different levels of activity

recognizes that the budgetary process is more useful if it can be adapted to changes in operating conditions

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14
Q

true or false

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

A

true

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15
Q

why are flexible budgets more relevant with more variable costs?

A

because as production increases, the budget allowances for variable costs should increase both directly and proportionately

flexible budget indicates whether cost changes resulting from different production volumes are reasonable

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16
Q

when a static budget useless for performance evaluation?

A

when a company has substantial variable costs

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17
Q

what does flexible budget use as basis?

A

the master budget

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18
Q

steps to develop flexible budget

A
  1. Identify the activity index and the relevant range of activity.
  2. Identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost.
  3. Identify the fixed costs, and determine the budgeted amount for each cost.
  4. Prepare the budget for selected increments of activity within the relevant range
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19
Q

Formula for total budgeted costs

A

fixed costs + variable costs

= total budgeted costs

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20
Q

Flexible budget reports

A

a type of internal report

provides a basis for evaluating a manager’s performance in two areas:

production control and cost control

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21
Q

the two sections from flexible budget reports

A

(1) production data for a selected activity index, such as direct labour hours,
(2) cost data for variable and fixed cost

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22
Q

where are flexible budget reports widely used?

A

in production and service departments

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23
Q

Responsibility accounting

A

involves accumulating and reporting costs (and revenues, where relevant) that involve the manager who has the authority to make the day-to-day decisions about the cost items

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24
Q

do all companies use responsibility accounting?

A

ye bruv

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25
Q

how is the manager’s performance evaluated under responsibility accounting?

A

based on matters that are directly under that manager’s control

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26
Q

what conditions are needed so that responsibility accounting can be used at every level of management?

A
  1. Costs and revenues can be directly associated with the specific level of management responsibility
  2. The costs and revenues are controllable at the level of responsibility that they are associated with
  3. Budget data can be developed for evaluating the manager’s effectiveness in controlling the costs and revenues
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27
Q

when is responsibility accounting especially valuable?

A

in a decentralized company

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28
Q

Decentralization

A

the control of operations is given to many managers throughout the organization

segmentation of power

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29
Q

Under responsibility accounting, how often are segment reports prepared? why?

A

periodically

monthly, quarterly, and annually

to evaluate a manager’s performance

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30
Q

in which ways do the reporting of costs and revenues under responsibility accounting differ from budgeting?

A
  1. A distinction is made between controllable and non controllable items.
  2. Performance reports either emphasize or include only the items that the individual manager can control
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31
Q

controllable cost at a particular level of managerial responsibility

A

the manager has the power to incur it in a specific period of time

32
Q

to whom are all costs controllable?

A

top management

33
Q

when do costs becomes lesser and lesser controllable?

A

as one moves down to each lower level of managerial responsibility because the manager’s authority decreases at each level

34
Q

non controllable costs at a certain level

A

costs that are incurred indirectly and allocated to a responsibility level

35
Q

Performance evaluation

A

at the centre of responsibility accounting

management function that compares actual results with budget goals

36
Q

Management by exception

A

top management’s review of a budget report is focused either entirely or mostly on differences between actual results and planned objectives

helps top management focus on problem areas

37
Q

criteria so that management by exception be effective?

A

materiality and controllability

38
Q

materiality

A

usually expressed as a percentage difference from the budget

quantitative guideline

39
Q

Behavioural principles in evaluating performance

A
  1. Managers of responsibility centres should be directly involved in setting budget goals for their areas of responsibility
  2. The evaluation of performance should be based entirely on matters that can be controlled by the manager being evaluated
  3. Top management should support the evaluation process
  4. The evaluation process must allow managers to respond to their evaluations
  5. The evaluation should identify both good and poor performance
40
Q

reporting principles for performance evaluation

A
  1. Performance reports should contain only data that are controllable by the manager of the responsibility centre
  2. Performance reports should provide accurate and reliable budget data to measure performance
  3. Performance reports should highlight significant differences between actual results and budget goals
  4. Performance reports should be tailor-made for the intended evaluation
  5. Performance reports should be prepared at reasonable intervals
41
Q

responsibility reporting system

A

preparing a report for each level of responsibility in the company’s organization chart

help to hold individual managers accountable for the costs and revenues under their control

42
Q

where does responsibility reporting system start?

A

begins with the lowest level of responsibility for controlling costs and moves upward to each higher level

43
Q

Types of Responsibility Centres

A

cost centres

profit centres

investment centres

44
Q

cost centre

A

incurs costs (and expenses) but does not directly generate revenues

usually either production departments or service departments

45
Q

Managers of cost centres

A

have the authority to incur costs

are evaluated on their ability to control costs

evaluated on ability to meet budgeted goals for controllable costs

46
Q

profit centre

A

incurs costs (and expenses) and also generates revenues

Ex: departments of a retail store, such as clothing, furniture, and automotive products, and branch offices of banks

47
Q

Managers of profit centres

A

are judged on the profitability of their centres

to better evaluate, we have to see the direct and indirect fixed costs

48
Q

investment centre

A

incurs costs (and expenses) and generates revenues

has control over the investment funds that are available for use

often associated with product lines and subsidiary companies

49
Q

Managers of investment centres

A

evaluated on both the profitability of the centre and the rate of return earned on the funds invested

50
Q

what are the only costs included in the cost centre reports? what distinction is made between variable and fixed costs

A

only controllable costs are included in the report

no distinction is made between variable and fixed costs

51
Q

direct fixed costs

A

costs that are specifically for one centre and are incurred for the benefit of that centre alone

also called traceable costs

Most direct fixed costs are controllable by the profit centre manager

52
Q

indirect fixed costs

A

are for a company’s overall operating activities

are incurred for the benefit of more than one profit centre

also called common costs

Most indirect fixed costs cannot be controlled by the profit centre manager

53
Q

how are indirect fixed costs allocated in profit centres?

A

according to some type of equitable basis

54
Q

managers in profit centres control better direct or indirect fixed costs?

A

direct fixed costs

55
Q

responsibility report for a profit centre

A

shows the budgeted and actual controllable revenues and costs

56
Q

how is the responsibility report for a profit centre prepared?

what are its features?

A

prepared using the cost-volume-profit income statement

  1. Controllable fixed costs are deducted from the contribution margin
  2. The amount by which the contribution margin is greater than the controllable fixed costs is identified as the controllable margin
  3. Noncontrollable fixed costs are not reported
57
Q

controllable margin

A

The amount by which the contribution margin is greater than the controllable fixed costs

considered to be the best measure of the manager’s performance in controlling revenues and costs

58
Q

the main basis for evaluating the performance of a manager of an investment centre

why?

A

return on investment (ROI)

it shows how effectively the manager uses the assets at his or her disposal

59
Q

ROI formulas

A

Controllable Margin / Average Operating Assets

= Return on Investment (ROI)

(Operating Income / Sales) · (Sales / Operating Assets)

= Return on Investment (ROI)

Operating Income / Sales = Profit Margin

Sales / Operating Assets = Investment Turnover

60
Q

in an investment centre, are all fixed costs controllable by its manager?

A

yeeee

61
Q

difference between profit centre and investment centre responsibility reports?

A

compared to performance reports for profit centre managers, more fixed costs are classified as controllable in performance reports for investment centre managers

62
Q

The return on investment approach includes which two judgemental factors’

A
  1. Valuation of operating assets

2. Margin (income) measure

63
Q

profit margin

A

focuses on profitability

shows how the operating margin can be improved by increasing the margin on each dollar of sales

measures managers’ abilities to control the operating expenses that are related to sales during a specific period

64
Q

investment turnover

A

focuses on efficiency

shows how investment turnover can be improved by generating more sales for each dollar invested

65
Q

DuPont profitability analysis

A

expanded formula for ROI

(Operating Income / Sales) · (Sales / Operating Assets)

= Return on Investment (ROI)

Operating Income / Sales = Profit Margin

Sales / Operating Assets = Investment Turnover

66
Q

in which two ways can a manager of an investment centre improve the ROI?

A

(1) increase the controllable margin

and/or

(2) reduce the average operating assets

67
Q

how to increase the controllable margin?

A

increasing sales

reducing the variable and controllable fixed costs

68
Q

benefits and dangers of reducing the average operating assets?

A

It is good to eliminate excessive inventories and to dispose of unneeded plant assets

it is unwise to reduce inventories below expected needs or to dispose of essential plant assets

69
Q

The problem with some ROI analysis

A

the minimum rate of return on a company’s operating assets is ignored

70
Q

the minimum rate of return

A

the rate at which one can cover their costs and earn a profit

71
Q

Residual income approach

A

used to evaluate performance using the minimum rate of return

72
Q

Residual income

A

the income that remains after subtracting from the controllable margin the minimum rate of return on a company’s average operating assets

73
Q

Economic Value Added (EVA)

A

similar to residual income

unlike residual income, EVA uses the weighted-average cost of capital instead of the minimum rate of return on the invested assets

unlike residual income, EVA calculates an investment centre’s profit after tax

Basically, the EVA is calculated by deducting the total cost of capital (equity and borrowing) from the net income after tax

74
Q

Economic Value Added (EVA) formula

A

Investment Centre’s Operating Profit after Tax - (Weighted-Average Cost of Capital · Total Capital Used)

= Economic Value Added (EVA)

75
Q

positive EVA result

A

the company has added economic value

76
Q

negative EVA result

A

the company has lost capital

Comm 305: Managerial Accounting (32 decks)

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