Chapter Ten

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Chapter Ten

• Budgetary Control
• and
• Responsibility Accounting

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Static Budget

• Also called a master budget.
• Budget data at one level of production or
  activity.
• The level at which overhead rates are calculated.

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Flexible Budgets

• Budget data at various levels of production or
  activity.
• Includes variable and fixed manufacturing
  overhead, which are listed in separate
  categories.
• Overhead rates applied in flexible budgets are
  based on information in the static budget.

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Flexible Manufacturing Overhead Budget Report

• A comparison of budgeted and actual costs.
• The activity level will ALWAYS be the SAME to
  determine costs.
• This level will ALWAYS be the actual level of
  production or activity.
• Production or activity can be measured in units
  produced, direct labor hours, machine hours, etc.
• Report will show a difference column.
• Notes whether the cost is favorable (under
  budget) or unfavorable (over budget).

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Responsibility Accounting

• Cost control responsibility given to the managers
  at the level of authority over the specific
  production or activity.
• Certain costs are outside of the managers
  control.
• Performance evaluation should NOT include these
  costs.

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Types of Costs/Revenue

• Controllable
• Costs/revenues that a manager has the ability to
  regulate.
• Costs/revenues that a manager should be held
  accountable.

• Noncontrollable
• Costs/revenue that a manager does not have the
  ability to regulate.
• Costs/revenues that a manager should not be held
  accountable.

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Responsibility Report

• Includes only controllable costs.
• Includes both variable and fixed costs.
• Not listed in separate sections.
• Controllable Margin
• Sales-Variable Costs-Controllable Fixed Costs

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Responsibility Centers

• Cost center
• Responsibility center that only incurs costs.
• Does not generate revenue.
• Support departments, i.e. purchasing, credit,
  warehouse, etc.
• Profit center
• Responsibility center that incurs both revenues
  and costs.
• Sales departments, i.e. product, parts, or
  service departments
• Investment center
• Responsibility center that incurs both revenues
  and costs, while also controlling the funds that
  are available for use.
• Subsidiaries, product lines

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Jacobs Corporation Example

• Jacobs Corporation has gathered the following
  information for this years budget. Overhead is
  prorated based on direct labor hours. For the
  year, Jacobs has estimated total direct labor
  hours to be 100,000 hours.

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Expected Annual Costs

• Variable Overhead
• Indirect Labor 63,000
• Indirect Material 45,000
• Utilities 18,000
• Other 7,000
• Remembervariable costs are constant per unit.

• Fixed Overhead
• Depreciation 24,000
• Rent 15,000
• Factory Salaries 84,000
• Rememberfixed costs are constant per period.

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Jacobs CorporationManufacturing Overhead Budget
(Static)For the Year Ended December 31, 2003
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Jacobs CorporationFlexible Monthly Overhead
BudgetFor the Year 2003
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Jacobs CorporationFlexible Manufacturing
Overhead Budget ReportFor the Year Ended
December 31, 2003
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Have a great day!