DEVELOPING
THE FLEXIBLE BUDGET
Steps
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
FLEXIBLE BUDGET – A CASE STUDY
Example – Fox Manufacturing Co.
Monthly comparisons of actual and budgeted
manufacturing overhead costs for Finishing
Department
2005 master budget
Expected operating capacity of 120,000 direct labor hours
Overhead costs:
FLEXIBLE BUDGET – A CASE STUDY
Example – Fox Manufacturing Co.
Identify the activity index and the relevant range
activity index: direct labor hours
relevant range: 8,000 – 12,000 direct labor hours per month
Identify the variable costs, and determine the budgeted
variable cost per unit of activity for each cost
FLEXIBLE BUDGET – A CASE STUDY
Example – Fox Manufacturing Co.
Identify the fixed costs and determine the
budgeted amount for each cost
Three fixed costs per month:
depreciation $15,000
property taxes $5,000
supervision $10,000
Prepare the budget for selected increments
of activity within the relevant range
Prepared in increments of 1,000 direct labor hours
FLEXIBLE BUDGET – A CASE STUDY
Example – Fox Manufacturing Co.
Formula to determine total budgeted costs from the budget
at any level of activity:
* Total variable cost per unit X activity level
Determine total budgeted costs for Fox Manufacturing
Company with fixed costs of $30,000 and total variable cost
$4 per unit
At 9,000 direct labor hours : $30,000 + ($4 X 9,000) = $66,000
At 8,622 direct labor hours: $30,000 + ($4 X 8,622) = $64,488
FLEXIBLE BUDGET – A CASE STUDY
Example – Fox Manufacturing Co.
Graphic flexible budget data highlighting 10,000 and 12,000 activity levels
FLEXIBLE BUDGET REPORTS
A type of internal report
Consists of two sections:
Production data for a selected activity index, such
as direct labor hours
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 Finishing Department for
the month of January follows
MANAGEMENT BY EXCEPTION
Focus of top management’s review of a budget report:
differences between actual and planned results
Able to focus on problem areas
Investigate only material and controllable exceptions
Express materiality as a
percentage difference from budget
Controllability relates to those items
controllable by the manager
Let’s Review
Budgetary control involves all but one of
the following:
a. Modifying future plans
b. Analyzing differences
c. Using static budgets
d. Determining differences between actual and
planned results
Let’s Review
Budgetary control involves all but one of
the following:
a. Modifying future plans
b. Analyzing differences
c. Using static budgets
d. Determining differences between actual and
planned results
THE CONCEPT OF
RESPONSIBILITY ACCOUNTING
Study Objective 4
Involves accumulating and
reporting costs on the basis of the
manager who has the authority
to make the day-to-day decisions
about the items
Means a manager's
performance is evaluated on the
matters directly under the
manager's control
THE CONCEPT OF
RESPONSIBILITY ACCOUNTING
Conditions for using responsibility accounting:
Costs and revenues can be directly associated
with the specific level of management
responsibility
The costs and revenues are controllable at
the level of responsibility with which they are
associated
Budget data can be developed for evaluating
the manager's effectiveness in controlling the
costs and revenues
THE CONCEPT OF
RESPONSIBILITY ACCOUNTING
Levels of responsibility for controlling costs
THE CONCEPT OF
RESPONSIBILITY ACCOUNTING
Responsibility center - any
individual who has control and is
accountable
May extend from the lowest
levels of management to the top
strata of management
Responsibility accounting is
especially valuable in a
decentralized company
control of operations delegated to
many managers throughout the
organization
THE CONCEPT OF
RESPONSIBILITY ACCOUNTING
Two differences from budgeting in reporting costs
and revenues:
Distinguishes between controllable and noncontrollable
costs
Emphasizes or includes only items controllable by the
individual manager in performance reports
Applies to both profit and not-for-profit entities
Profit entities: maximize net income
Not-for-profit: minimize cost of providing services
