chapter 11: budgetary control and responsibility accounting

Question 1

budgetary control

Answer 1

the use of budgets in controlling operations

Question 2

what do budget reports do?

Answer 2

give management feedback on operations

Question 3

why are budget reports used?

Answer 3

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

Question 4

Budgetary control activities

Answer 4

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

Question 5

when does a budget control work best?

Answer 5

when a company has a formalized reporting system

Question 6

what does a a formalized reporting system do?

Answer 6

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

Question 7

what does a master budget do?

Answer 7

formalizes management’s planned objectives for the coming year

Question 8

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

Answer 8

as being static

Question 9

static budget

Answer 9

A projection of budget data at one level of activity

do not consider data for different levels of activity

Question 10

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

Answer 10

because of the static budget

Question 11

budget variance

Answer 11

The difference between budgeted numbers and actual results

Question 12

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

Answer 12

(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

Question 13

flexible budget

Answer 13

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

Question 14

true or false

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

Answer 14

true

Question 15

why are flexible budgets more relevant with more variable costs?

Answer 15

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

Question 16

when a static budget useless for performance evaluation?

Answer 16

when a company has substantial variable costs

Question 17

what does flexible budget use as basis?

Answer 17

the master budget

Question 18

steps to develop flexible budget

Answer 18

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

Question 19

Formula for total budgeted costs

Answer 19

fixed costs + variable costs

= total budgeted costs

Question 20

Flexible budget reports

Answer 20

a type of internal report

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

production control and cost control

Question 21

the two sections from flexible budget reports

Answer 21

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

Question 22

where are flexible budget reports widely used?

Answer 22

in production and service departments

Question 23

Responsibility accounting

Answer 23

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

Question 24

do all companies use responsibility accounting?

Answer 24

ye bruv

Question 25

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

Answer 25

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

Question 26

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

Answer 26

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

Question 27

when is responsibility accounting especially valuable?

Answer 27

in a decentralized company

Question 28

Decentralization

Answer 28

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

Question 29

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

Answer 29

periodically monthly, quarterly, and annually to evaluate a manager's performance

Question 30

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

Answer 30

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

Question 31

controllable cost at a particular level of managerial responsibility

Answer 31

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

Question 32

to whom are all costs controllable?

Answer 32

top management

Question 33

when do costs becomes lesser and lesser controllable?

Answer 33

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

Question 34

non controllable costs at a certain level

Answer 34

costs that are incurred indirectly and allocated to a responsibility level

Question 35

Performance evaluation

Answer 35

at the centre of responsibility accounting management function that compares actual results with budget goals

Question 36

Management by exception

Answer 36

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

Question 37

criteria so that management by exception be effective?

Answer 37

materiality and controllability

Question 38

materiality

Answer 38

usually expressed as a percentage difference from the budget quantitative guideline

Question 39

Behavioural principles in evaluating performance

Answer 39

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

Question 40

reporting principles for performance evaluation

Answer 40

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

Question 41

responsibility reporting system

Answer 41

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

Question 42

where does responsibility reporting system start?

Answer 42

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

Question 43

Types of Responsibility Centres

Answer 43

cost centres profit centres investment centres

Question 44

cost centre

Answer 44

incurs costs (and expenses) but does not directly generate revenues usually either production departments or service departments

Question 45

Managers of cost centres

Answer 45

have the authority to incur costs are evaluated on their ability to control costs evaluated on ability to meet budgeted goals for controllable costs

Question 46

profit centre

Answer 46

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

Question 47

Managers of profit centres

Answer 47

are judged on the profitability of their centres to better evaluate, we have to see the direct and indirect fixed costs

Question 48

investment centre

Answer 48

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

Question 49

Managers of investment centres

Answer 49

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

Question 50

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

Answer 50

only controllable costs are included in the report no distinction is made between variable and fixed costs

Question 51

direct fixed costs

Answer 51

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

Question 52

indirect fixed costs

Answer 52

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

Question 53

how are indirect fixed costs allocated in profit centres?

Answer 53

according to some type of equitable basis

Question 54

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

Answer 54

direct fixed costs

Question 55

responsibility report for a profit centre

Answer 55

shows the budgeted and actual controllable revenues and costs

Question 56

how is the responsibility report for a profit centre prepared? what are its features?

Answer 56

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

Question 57

controllable margin

Answer 57

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

Question 58

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

Answer 58

return on investment (ROI) it shows how effectively the manager uses the assets at his or her disposal

Question 59

ROI formulas

Answer 59

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

Question 60

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

Answer 60

yeeee

Question 61

difference between profit centre and investment centre responsibility reports?

Answer 61

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

Question 62

The return on investment approach includes which two judgemental factors'

Answer 62

1. Valuation of operating assets | 2. Margin (income) measure

Question 63

profit margin

Answer 63

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

Question 64

investment turnover

Answer 64

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

Question 65

DuPont profitability analysis

Answer 65

expanded formula for ROI (Operating Income / Sales) · (Sales / Operating Assets) = Return on Investment (ROI) Operating Income / Sales = Profit Margin Sales / Operating Assets = Investment Turnover

Question 66

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

Answer 66

(1) increase the controllable margin and/or (2) reduce the average operating assets

Question 67

how to increase the controllable margin?

Answer 67

increasing sales reducing the variable and controllable fixed costs

Question 68

benefits and dangers of reducing the average operating assets?

Answer 68

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

Question 69

The problem with some ROI analysis

Answer 69

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

Question 70

the minimum rate of return

Answer 70

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

Question 71

Residual income approach

Answer 71

used to evaluate performance using the minimum rate of return

Question 72

Residual income

Answer 72

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

Question 73

Economic Value Added (EVA)

Answer 73

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

Question 74

Economic Value Added (EVA) formula

Answer 74

Investment Centre's Operating Profit after Tax - (Weighted-Average Cost of Capital · Total Capital Used) = Economic Value Added (EVA)

Question 75

positive EVA result

Answer 75

the company has added economic value

Question 76

negative EVA result

Answer 76

the company has lost capital