Budgetary Control

One of management's functions is to control company operations. Control consists of the steps taken by management to see that planned objectives are met. We now ask: How do budgets contribute to control of operations?

The use of budgets in controlling operations is known as budgetary control. Such control takes place by means of budget reports that compare actual results with planned objectives. The use of budget reports is based on the belief that planned objectives lose much of their potential value without some monitoring of progress along the way. Just as your professors give midterm exams to evaluate your progress, top management requires periodic reports on the progress of department managers toward their planned objectives.

Budget reports provide management with feedback on operations. The feedback for a crucial objective, such as having enough cash on hand to pay bills, may be made daily. For other objectives, such as meeting budgeted annual sales and operating expenses, monthly budget reports may suffice. Budget reports are prepared as frequently as needed. From these reports, management analyzes any differences between actual and planned results and determines their causes. Management then takes corrective action, or it decides to modify future plans. Budgetary control involves the activities shown in Illustration 24-1.

Illustration 24-1 Budgetary control activities

Budgetary control works best when a company has a formalized reporting system. The system does the following:

1. Identifies the name of the budget report, such as the sales budget or the manufacturing overhead budget.

2. States the frequency of the report, such as weekly or monthly.

3. Specifies the purpose of the report.

4. Indicates the primary recipient(s) of the report.

Illustration 24-2 provides a partial budgetary control system for a manufacturing company. Note the frequency of the reports and their emphasis on control. For example, there is a daily report on scrap and a weekly report on labor.

Illustration 24-2 Budgetary control reporting system

Static Budget Reports

You learned in Chapter 23 that the master budget formalizes management's planned objectives for the coming year. When used in budgetary control, each budget included in the master budget is considered to be static. A static budget is a projection of budget data at one level of activity. These budgets do not consider data for different levels of activity. As a result, companies always compare actual results with budget data at the activity level that was used in developing the master budget.

Examples

To illustrate the role of a static budget in budgetary control, we will use selected data prepared for Hayes Company in Chapter 23. Budget and actual sales data for the Rightride product in the first and second quarters of 2014 are as follows.

Illustration 24-3 Budget and actual sales data

The sales budget report for Hayes Company's first quarter is shown below. The right-most column reports the difference between the budgeted and actual amounts.

Illustration 24-4 Sales budget report—first quarter

The report shows that sales are $1,000 under budget—an unfavorable result. This difference is less than 1% of budgeted sales ($1,000 ÷ $180,000 = .0056). Top management's reaction to unfavorable differences is often influenced by the materiality (significance) of the difference. Since the difference of $1,000 is immaterial in this case, we assume that Hayes Company management takes no specific corrective action.

Alternative Terminology The difference between budget and actual is sometimes called a budget variance.

Illustration 24-5 shows the budget report for the second quarter. It contains one new feature: cumulative year-to-date information. This report indicates that sales for the second quarter are $10,500 below budget. This is 5% of budgeted sales ($10,500 ÷ $210,000). Top management may now conclude that the difference between budgeted and actual sales requires investigation.

Illustration 24-5 Sales budget report—second quarter

Management's analysis should start by asking the sales manager the cause(s) of the shortfall. Managers should consider the need for corrective action. For example, management may decide to spur sales by offering sales incentives to customers or by increasing the advertising of Rightrides. Or, if management concludes that a downturn in the economy is responsible for the lower sales, it may modify planned sales and profit goals for the remainder of the year.

Uses and Limitations

From these examples, you can see that a master sales budget is useful in evaluating the performance of a sales manager. It is now necessary to ask: Is the master budget appropriate for evaluating a manager's performance in controlling costs? Recall that in a static budget, data are not modified or adjusted, regardless of changes in activity. It follows, then, that a static budget is appropriate in evaluating a manager's effectiveness in controlling costs when:

1. The actual level of activity closely approximates the master budget activity level, and/or

2. The behavior of the costs in response to changes in activity is fixed.

A static budget report is, therefore, appropriate for fixed manufacturing costs and for fixed selling and administrative expenses. But, as you will see shortly, static budget reports may not be a proper basis for evaluating a manager's performance in controlling variable costs.

Flexible Budgets

In contrast to a static budget, which is based on one level of activity, a flexible budget projects budget data for various levels of activity. In essence, the flexible budget is a series of static budgets at different levels of activity. The flexible budget recognizes that the budgetary process is more useful if it is adaptable to changed operating conditions.

Flexible budgets can be prepared for each of the types of budgets included in the master budget. For example, Marriott Hotels can budget revenue and net income on the basis of 60%, 80%, and 100% of room occupancy. Similarly, American Van Lines can budget its operating expenses on the basis of various levels of truck-miles driven. Duke Energy can budget revenue and net income on the basis of estimated billions of kwh (kilowatt hours) of residential, commercial, and industrial electricity generated. In the following pages, we will illustrate a flexible budget for manufacturing overhead.

Why Flexible Budgets?

Assume that you are the manager in charge of manufacturing overhead in the Assembly Department of Barton Robotics. In preparing the manufacturing overhead budget for 2014, you prepare the following static budget based on a production volume of 10,000 units of robotic controls.

Illustration 24-6 Static overhead budget

Helpful Hint The master budget described in Chapter 23 is based on a static budget.

Fortunately for the company, the demand for robotic controls has increased, and Barton produces and sells 12,000 units during the year, rather than 10,000. You are elated: Increased sales means increased profitability, which should mean a bonus or a raise for you and the employees in your department. Unfortunately, a comparison of Assembly Department actual and budgeted costs has put you on the spot. The budget report is shown below.

Illustration 24-7 Overhead static budget report

This comparison uses budget data based on the original activity level (10,000 robotic controls). It indicates that the Assembly Department is significantly over budget for three of the six overhead costs. There is a total unfavorable difference of $132,000, which is 12% over budget ($132,000 ÷ $1,100,000). Your supervisor is very unhappy! Instead of sharing in the company's success, you may find yourself looking for another job. What went wrong?

Helpful Hint A static budget is not useful for performance evaluation if a company has substantial variable costs.

When you calm down and carefully examine the manufacturing overhead budget, you identify the problem: The budget data are not relevant! At the time the budget was developed, the company anticipated that only 10,000 units would be produced, not 12,000. Comparing actual with budgeted variable costs is meaningless. As production increases, the budget allowances for variable costs should increase proportionately. The variable costs in this example are indirect materials, indirect labor, and utilities.

Analyzing the budget data for these costs at 10,000 units, you arrive at the following per unit results.

Illustration 24-8 Variable costs per unit

Illustration 24-9 calculates the budgeted variable costs at 12,000 units.

Illustration 24-9 Budgeted variable costs, 12,000 units

Because fixed costs do not change in total as activity changes, the budgeted amounts for these costs remain the same. Illustration 24-10 shows the budget report based on the flexible budget for 12,000 units of production. (Compare this with Illustration 24-7.)

This report indicates that the Assembly Department's costs are under budget—a favorable difference. Instead of worrying about being fired, you may be in line for a bonus or a raise after all! As this analysis shows, the only appropriate comparison is between actual costs at 12,000 units of production and budgeted costs at 12,000 units. Flexible budget reports provide this comparison.

Developing the Flexible Budget

The flexible budget uses the master budget as its basis. To develop the flexible budget, management uses the following steps.

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.

Illustration 24-10 Overhead flexible budget report

The activity index chosen should significantly influence the costs being budgeted. For manufacturing overhead costs, for example, the activity index is usually the same as the index used in developing the predetermined overhead rate—that is, direct labor hours or machine hours. For selling and administrative expenses, the activity index usually is sales or net sales.

The choice of the increment of activity is largely a matter of judgment. For example, if the relevant range is 8,000 to 12,000 direct labor hours, increments of 1,000 hours may be selected. The flexible budget is then prepared for each increment within the relevant range.

Flexible Budget—A Case Study

To illustrate the flexible budget, we use Fox Company. Fox's management uses a flexible budget for monthly comparisons of actual and budgeted manufacturing overhead costs of the Finishing Department. The master budget for the year ending December 31, 2014, shows expected annual operating capacity of 120,000 direct labor hours and the following overhead costs.

Illustration 24-11 Master budget data

The four steps for developing the flexible budget are applied as follows.

STEP 1. Identify the activity index and the relevant range of activity. The activity index is direct labor hours. The relevant range is 8,000–12,000 direct labor hours per month.

STEP 2. Identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost. There are three variable costs. The variable cost per unit is found by dividing each total budgeted cost by the direct labor hours used in preparing the annual master budget (120,000 hours). For Fox Company, the computations are:

Illustration 24-12 Computation of variable cost per direct labor hour

STEP 3. Identify the fixed costs, and determine the budgeted amount for each cost. There are three fixed costs. Since Fox desires monthly budget data, it divides each annual budgeted cost by 12 to find the monthly amounts. For Fox Company, the monthly budgeted fixed costs are depreciation $15,000, supervision $10,000, and property taxes $5,000.

STEP 4. Prepare the budget for selected increments of activity within the relevant range. Management prepares the budget in increments of 1,000 direct labor hours.

Illustration 24-13 shows Fox's flexible budget.

Illustration 24-13 Monthly overhead flexible budget

Fox uses the formula below to determine total budgeted costs at any level of activity.

Illustration 24-14 Formula for total budgeted costs

Helpful Hint Using the data given for Fox, what amount of total costs would be budgeted for 10,600 direct labor hours? Answer: $30,000 fixed + $42,400 variable (i.e., 10,600 × $4) = $72,400 total.

For Fox, fixed costs are $30,000, and total variable cost per direct labor hour is $4 ($1.50 + $2.00 + $0.50). At 9,000 direct labor hours, total budgeted costs are $66,000 [$30,000 + ($4 × 9,000)]. At 8,622 direct labor hours, total budgeted costs are $64,488 [$30,000 + ($4 × 8,622)].

Total budgeted costs can also be shown graphically, as in Illustration 24-15 (page 1132). In the graph, the horizontal axis represents the activity index, and costs are indicated on the vertical axis. The graph highlights two activity levels (10,000 and 12,000). As shown, total budgeted costs at these activity levels are $70,000 [$30,000 + ($4 × 10,000)] and $78,000 [$30,000 + ($4 × 12,000)], respectively.

Illustration 24-15 Graphic flexible budget data highlighting 10,000 and 12,000 activity levels

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Flexible Budget Reports

Flexible budget reports are another type of internal report. The flexible budget report consists of two sections: (1) production data for a selected activity index, such as direct labor hours, and (2) cost data for variable and fixed costs. The report provides a basis for evaluating a manager's performance in two areas: production control and cost control. Flexible budget reports are widely used in production and service departments.

Illustration 24-16 shows a budget report for the Finishing Department of Fox Company for the month of January. In this month, 9,000 hours are worked. The budget data are therefore based on the flexible budget for 9,000 hours in Illustration 24-13 (page 1131). The actual cost data are assumed.

Illustration 24-16 Overhead flexible budget report

How appropriate is this report in evaluating the Finishing Department manager's performance in controlling overhead costs? The report clearly provides a reliable basis. Both actual and budget costs are based on the activity level worked during January. Since variable costs generally are incurred directly by the department, the difference between the budget allowance for those hours and the actual costs is the responsibility of the department manager.

In subsequent months, Fox Company will prepare other flexible budget reports. For each month, the budget data are based on the actual activity level attained. In February that level may be 11,000 direct labor hours, in July 10,000, and so on.

Note that this flexible budget is based on a single cost driver. A more accurate budget often can be developed using the activity-based costing concepts explained in Chapter 21.

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Responsibility Accounting

Like budgeting, responsibility accounting is an important part of management accounting. Responsibility accounting involves accumulating and reporting costs (and revenues, where relevant) on the basis of the manager who has the authority to make the day-to-day decisions about the items. Under responsibility accounting, a manager's performance is evaluated on matters directly under that manager's control. Responsibility accounting can be used at every level of management in which the following conditions exist.

1. Costs and revenues can be directly associated with the specific level of management responsibility.

2. The costs and revenues can be controlled by employees at the level of responsibility with which they are associated.

3. Budget data can be developed for evaluating the manager's effectiveness in controlling the costs and revenues.

Illustration 24-17 depicts levels of responsibility for controlling costs.

Illustration 24-17 Responsibility for controllable costs at varying levels of management

Helpful Hint All companies use responsibility accounting. Without some form of responsibility accounting, there would be chaos in discharging management's control function.

Under responsibility accounting, any individual who controls a specified set of activities can be a responsibility center. Thus, responsibility accounting may extend from the lowest level of control to the top strata of management. Once responsibility is established, the company first measures and reports the effectiveness of the individual's performance for the specified activity. It then reports that measure upward throughout the organization.

Responsibility accounting is especially valuable in a decentralized company. Decentralization means that the control of operations is delegated to many managers throughout the organization. The term segment is sometimes used to identify an area of responsibility in decentralized operations. Under responsibility accounting, companies prepare segment reports periodically, such as monthly, quarterly, and annually, to evaluate managers’ performance.

Responsibility accounting is an essential part of any effective system of budgetary control. The reporting of costs and revenues under responsibility accounting differs from budgeting in two respects:

1. A distinction is made between controllable and noncontrollable items.

2. Performance reports either emphasize or include only items controllable by the individual manager.

Responsibility accounting applies to both profit and not-for-profit entities. For-profit entities seek to maximize net income. Not-for-profit entities wish to perform services as efficiently as possible.

Controllable versus Noncontrollable Revenues and Costs

All costs and revenues are controllable at some level of responsibility within a company. This truth underscores the adage by the CEO of any organization that “the buck stops here.” Under responsibility accounting, the critical issue is whether the cost or revenue is controllable at the level of responsibility with which it is associated. A cost over which a manager has control is called a controllable cost. From this definition, it follows that:

Helpful Hint Are there more or fewer controllable costs as you move to higher levels of management? Answer: More.

1. All costs are controllable by top management because of the broad range of its authority.

2. Fewer costs are controllable as one moves down to each lower level of managerial responsibility because of the manager's decreasing authority.

In general, costs incurred directly by a level of responsibility are controllable at that level. In contrast, costs incurred indirectly and allocated to a responsibility level are noncontrollable costs at that level.

Helpful Hint The longer the time span, the more likely that the cost becomes controllable.

Principles of Performance Evaluation

Performance evaluation is at the center of responsibility accounting. It is a management function that compares actual results with budget goals. It involves both behavioral and reporting principles.

MANAGEMENT BY EXCEPTION

Management by exception means that top management's review of a budget report is focused either entirely or primarily on differences between actual results and planned objectives. This approach enables top management to focus on problem areas. For example, many companies now use online reporting systems for employees to file their travel and entertainment expense reports. In addition to cutting reporting time in half, the online system enables managers to quickly analyze variances from travel budgets. This cuts down on expense account “padding” such as spending too much on meals or falsifying documents for costs that were never actually incurred.

Management by exception does not mean that top management will investigate every difference. For this approach to be effective, there must be guidelines for identifying an exception. The usual criteria are materiality and controllability.

MATERIALITY Without quantitative guidelines, management would have to investigate every budget difference regardless of the amount. Materiality is usually expressed as a percentage difference from budget. For example, management may set the percentage difference at 5% for important items and 10% for other items. Managers will investigate all differences either over or under budget by the specified percentage. Costs over budget warrant investigation to determine why they were not controlled. Likewise, costs under budget merit investigation to determine whether costs critical to profitability are being curtailed. For example, if maintenance costs are budgeted at $80,000 but only $40,000 is spent, major unexpected breakdowns in productive facilities may occur in the future.

Alternatively, a company may specify a single percentage difference from budget for all items and supplement this guideline with a minimum dollar limit. For example, the exception criteria may be stated at 5% of budget or more than $10,000.

CONTROLLABILITY OF THE ITEM Exception guidelines are more restrictive for controllable items than for items the manager cannot control. In fact, there may be no guidelines for noncontrollable items. For example, a large unfavorable difference between actual and budgeted property tax expense may not be flagged for investigation because the only possible causes are an unexpected increase in the tax rate or in the assessed value of the property. An investigation into the difference would be useless: The manager cannot control either cause.

BEHAVIORAL PRINCIPLES

The human factor is critical in evaluating performance. Behavioral principles include the following.

1. Managers of responsibility centers should have direct input into the process of establishing budget goals of their area of responsibility. Without such input, managers may view the goals as unrealistic or arbitrarily set by top management. Such views adversely affect the managers’ motivation to meet the targeted objectives.

2. The evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated. Criticism of a manager on matters outside his or her control reduces the effectiveness of the evaluation process. It leads to negative reactions by a manager and to doubts about the fairness of the company's evaluation policies.

3. Top management should support the evaluation process. As explained earlier, the evaluation process begins at the lowest level of responsibility and extends upward to the highest level of management. Managers quickly lose faith in the process when top management ignores, overrules, or bypasses established procedures for evaluating a manager's performance.

4. The evaluation process must allow managers to respond to their evaluations. Evaluation is not a one-way street. Managers should have the opportunity to defend their performance. Evaluation without feedback is both impersonal and ineffective.

5. The evaluation should identify both good and poor performance. Praise for good performance is a powerful motivating factor for a manager. This is especially true when a manager's compensation includes rewards for meeting budget goals.

REPORTING PRINCIPLES

Performance evaluation under responsibility accounting should be based on certain reporting principles. These principles pertain primarily to the internal reports that provide the basis for evaluating performance. Performance reports should:

1. Contain only data that are controllable by the manager of the responsibility center.

2. Provide accurate and reliable budget data to measure performance.

3. Highlight significant differences between actual results and budget goals.

4. Be tailor-made for the intended evaluation.

5. Be prepared at reasonable time intervals.

In recent years, companies have come under increasing pressure from influential shareholder groups to do a better job of linking executive pay to corporate performance. For example, software maker Siebel Systems unveiled a new incentive plan after lengthy discussions with the California Public Employees’ Retirement System. One unique feature of the plan is that managers’ targets will be publicly disclosed at the beginning of each year for investors to evaluate.

Responsibility Reporting System

A responsibility reporting system involves the preparation of a report for each level of responsibility in the company's organization chart. To illustrate such a system, we use the partial organization chart and production departments of Francis Chair Company in Illustration 24-18 (page 1140).

Illustration 24-18 Partial organization chart

The responsibility reporting system begins with the lowest level of responsibility for controlling costs and moves upward to each higher level. Illustration 24-19 details the connections between levels.

A brief description of the four reports for Francis Chair Company is as follows.

1. Report D is typical of reports that go to department managers. Similar reports are prepared for the managers of the Fabricating, Assembly, and Enameling Departments.

2. Report C is an example of reports that are sent to plant managers. It shows the costs of the Chicago plant that are controllable at the second level of responsibility. In addition, Report C shows summary data for each department that is controlled by the plant manager. Similar reports are prepared for the Detroit and St. Louis plant managers.

3. Report B illustrates the reports at the third level of responsibility. It shows the controllable costs of the vice president of production and summary data on the three assembly plants for which this officer is responsible. Similar reports are prepared for the vice presidents of sales and finance.

4. Report A is typical of reports that go to the top level of responsibility—the president. It shows the controllable costs and expenses of this office and summary data on the vice presidents that are accountable to the president.

Illustration 24-19 Responsibility reporting system

A responsibility reporting system permits management by exception at each level of responsibility. And, each higher level of responsibility can obtain the detailed report for each lower level of responsibility. For example, the vice president of production in the Francis Chair Company may request the Chicago plant manager's report because this plant is $5,300 over budget.

This type of reporting system also permits comparative evaluations. In Illustration 24-19, the Chicago plant manager can easily rank the department managers’ effectiveness in controlling manufacturing costs. Comparative rankings provide further incentive for a manager to control costs.

Types of Responsibility Centers

There are three basic types of responsibility centers: cost centers, profit centers, and investment centers. These classifications indicate the degree of responsibility the manager has for the performance of the center.

Helpful Hint (1) Is the jewelry department of Macy's department store a profit center or a cost center? (2) Is the props department of a movie studio a profit center or a cost center? Answers: (1) Profit center. (2) Cost center.

A cost center incurs costs (and expenses) but does not directly generate revenues. Managers of cost centers have the authority to incur costs. They are evaluated on their ability to control costs. Cost centers are usually either production departments or service departments. Production departments participate directly in making the product. Service departments perform only support services. In a Ford Motor Company automobile plant, the welding, painting, and assembling departments are production departments. Ford's maintenance, cafeteria, and human resources departments are service departments. All of them are cost centers.

A profit center incurs costs (and expenses) and also generates revenues. Managers of profit centers are judged on the profitability of their centers. Examples of profit centers include the individual departments of a retail store, such as clothing, furniture, and automotive products, and branch offices of banks.

Like a profit center, an investment center incurs costs (and expenses) and generates revenues. In addition, an investment center has control over decisions regarding the assets available for use. Investment center managers are evaluated on both the profitability of the center and the rate of return earned on the funds invested. Investment centers are often associated with subsidiary companies. Utility Duke Energy has operating divisions such as electric utility, energy trading, and natural gas. Investment center managers control or significantly influence investment decisions related to such matters as plant expansion and entry into new market areas. Illustration 24-20 depicts the three types of responsibility centers.

Illustration 24-20 Types of responsibility centers

Responsibility Accounting for Cost Centers

The evaluation of a manager's performance for cost centers is based on his or her ability to meet budgeted goals for controllable costs. Responsibility reports for cost centers compare actual controllable costs with flexible budget data.

Illustration 24-21 shows a responsibility report. The report is adapted from the flexible budget report for Fox Company in Illustration 24-16 (page 1133). It assumes that the Finishing Department manager is able to control all manufacturing overhead costs except depreciation, property taxes, and his own monthly salary of $6,000. The remaining $4,000 ($10,000 − $6,000) of supervision costs are assumed to apply to other supervisory personnel within the Finishing Department, whose salaries are controllable by the manager.

Illustration 24-21 Responsibility report for a cost center

The report in Illustration 24-21 includes only controllable costs, and no distinction is made between variable and fixed costs. The responsibility report continues the concept of management by exception. In this case, top management may request an explanation of the $1,000 favorable difference in indirect labor and/or the $500 unfavorable difference in indirect materials.

Responsibility Accounting for Profit Centers

To evaluate the performance of a profit center manager, upper management needs detailed information about both controllable revenues and controllable costs. The operating revenues earned by a profit center, such as sales, are controllable by the manager. All variable costs (and expenses) incurred by the center are also controllable by the manager because they vary with sales. However, to determine the controllability of fixed costs, it is necessary to distinguish between direct and indirect fixed costs.

DIRECT AND INDIRECT FIXED COSTS

A profit center may have both direct and indirect fixed costs. Direct fixed costs relate specifically to one center and are incurred for the sole benefit of that center. Examples of such costs include the salaries established by the profit center manager for supervisory personnel and the cost of a timekeeping department for the center's employees. Since these fixed costs can be traced directly to a center, they are also called traceable costs. Most direct fixed costs are controllable by the profit center manager.

In contrast, indirect fixed costs pertain to a company's overall operating activities and are incurred for the benefit of more than one profit center. Management allocates indirect fixed costs to profit centers on some type of equitable basis. For example, property taxes on a building occupied by more than one center may be allocated on the basis of square feet of floor space used by each center. Or, the costs of a company's human resources department may be allocated to profit centers on the basis of the number of employees in each center. Because these fixed costs apply to more than one center, they are also called common costs. Most indirect fixed costs are not controllable by the profit center manager.

RESPONSIBILITY REPORT

The responsibility report for a profit center shows budgeted and actual controllable revenues and costs. The report is prepared using the cost-volume-profit income statement explained in Chapter 22. In the report:

1. Controllable fixed costs are deducted from contribution margin.

2. The excess of contribution margin over controllable fixed costs is identified as controllable margin.

3. Noncontrollable fixed costs are not reported.

Illustration 24-22 shows the responsibility report for the manager of the Marine Division, a profit center of Mantle Company. For the year, the Marine Division also had $60,000 of indirect fixed costs that were not controllable by the profit center manager.

Illustration 24-22 Responsibility report for profit center

Controllable margin is considered to be the best measure of the manager's performance in controlling revenues and costs. The report in Illustration 24-22 shows that the manager's performance was below budgeted expectations by 10% ($36,000 ÷ $360,000). Top management would likely investigate the causes of this unfavorable result. Note that the report does not show the Marine Division's noncontrollable fixed costs of $60,000. These costs would be included in a report on the profitability of the profit center.

Management also may choose to see monthly responsibility reports for profit centers. In addition, responsibility reports may include cumulative year-to-date results.

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Responsibility Accounting for Investment Centers

As explained earlier, an investment center manager can control or significantly influence the investment funds available for use. Thus, the primary basis for evaluating the performance of a manager of an investment center is return on investment (ROI). The return on investment is considered to be a useful performance measurement because it shows the effectiveness of the manager in utilizing the assets at his or her disposal.

RETURN ON INVESTMENT (ROI)

The formula for computing ROI for an investment center, together with assumed illustrative data, is shown in Illustration 24-23.

Illustration 24-23 ROI formula

Both factors in the formula are controllable by the investment center manager. Operating assets consist of current assets and plant assets used in operations by the center and controlled by the manager. Nonoperating assets such as idle plant assets and land held for future use are excluded. Average operating assets are usually based on the cost or book value of the assets at the beginning and end of the year.

RESPONSIBILITY REPORT

The scope of the investment center manager's responsibility significantly affects the content of the performance report. Since an investment center is an independent entity for operating purposes, all fixed costs are controllable by its manager. For example, the manager is responsible for depreciation on investment center assets. Therefore, more fixed costs are identified as controllable in the performance report for an investment center manager than in a performance report for a profit center manager. The report also shows budgeted and actual ROI below controllable margin.

To illustrate this responsibility report, we will now assume that the Marine Division of Mantle Company is an investment center. It has budgeted and actual average operating assets of $2,000,000. The manager can control $60,000 of fixed costs that were not controllable when the division was a profit center. Illustration 24-24 shows the division's responsibility report.

Illustration 24-24 Responsibility report for investment center

The report shows that the manager's performance based on ROI was below budget expectations by 1.8% (15.0% versus 13.2%). Top management would likely want an explanation of the reasons for this unfavorable result.

JUDGMENTAL FACTORS IN ROI

The return on investment approach includes two judgmental factors:

1. Valuation of operating assets. Operating assets may be valued at acquisition cost, book value, appraised value, or fair value. The first two bases are readily available from the accounting records.

2. Margin (income) measure. This measure may be controllable margin, income from operations, or net income.

Each of the alternative values for operating assets can provide a reliable basis for evaluating a manager's performance as long as it is consistently applied between reporting periods. However, the use of income measures other than controllable margin will not result in a valid basis for evaluating the performance of an investment center manager.

IMPROVING ROI

The manager of an investment center can improve ROI by increasing controllable margin, and/or reducing average operating assets. To illustrate, we will use the following assumed data for the Laser Division of Berra Company.

Illustration 24-25 Assumed data for Laser Division

INCREASING CONTROLLABLE MARGIN Controllable margin can be increased by increasing sales or by reducing variable and controllable fixed costs as follows.

1. Increase sales 10%. Sales will increase $200,000 ($2,000,000 × .10). Assuming no change in the contribution margin percentage of 45%, contribution margin will increase $90,000 ($200,000 × .45). Controllable margin will increase by the same amount because controllable fixed costs will not change. Thus, controllable margin becomes $690,000 ($600,000 + $90,000). The new ROI is 13.8%, computed as follows.

Illustration 24-26 ROI computation—increase in sales

An increase in sales benefits both the investment center and the company if it results in new business. It would not benefit the company if the increase was achieved at the expense of other investment centers.

2. Decrease variable and fixed costs 10%. Total costs decrease $140,000 [($1,100,000 + $300,000) × .10]. This reduction results in a corresponding increase in controllable margin. Thus, controllable margin becomes $740,000 ($600,000 + $140,000). The new ROI is 14.8%, computed as follows.

Illustration 24-27 ROI computation—decrease in costs

This course of action is clearly beneficial when the reduction in costs is the result of eliminating waste and inefficiency. But, a reduction in costs that results from cutting expenditures on vital activities, such as required maintenance and inspections, is not likely to be acceptable to top management.

REDUCING AVERAGE OPERATING ASSETS Assume that average operating assets are reduced 10% or $500,000 ($5,000,000 × .10). Average operating assets become $4,500,000 ($5,000,000 − $500,000). Since controllable margin remains unchanged at $600,000, the new ROI is 13.3%, computed as follows.

Illustration 24-28 ROI computation—decrease in operating assets

Reductions in operating assets may or may not be prudent. It is beneficial to eliminate overinvestment in inventories and to dispose of excessive plant assets. However, it is unwise to reduce inventories below expected needs or to dispose of essential plant assets.

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Comprehensive DO IT! 1

Comprehensive DO IT! 2

SUMMARY OF LEARNING OBJECTIVES

EXERCISES

E24-1 Mike Trusler has prepared the following list of statements about budgetary control.

Understand the concept of budgetary control.
(LO 1, 2, 3)

1. Budget reports compare actual results with planned objectives.

2. All budget reports are prepared on a weekly basis.

3. Management uses budget reports to analyze differences between actual and planned results and determine their causes.

4. As a result of analyzing budget reports, management may either take corrective action or modify future plans.

5. Budgetary control works best when a company has an informal reporting system.

6. The primary recipients of the sales report are the sales manager and the vice president of production.

7. The primary recipient of the scrap report is the production manager.

8. A static budget is a projection of budget data at one level of activity.

9. Top management's reaction to unfavorable differences is not influenced by the materiality of the difference.

10. A static budget is not appropriate in evaluating a manager's effectiveness in controlling costs unless the actual activity level approximates the static budget activity level or the behavior of the costs is fixed.

Instructions

Identify each statement as true or false. If false, indicate how to correct the statement.

E24-2 Crede Company budgeted selling expenses of $30,000 in January, $35,000 in February, and $40,000 in March. Actual selling expenses were $31,200 in January, $34,525 in February, and $46,000 in March.

Prepare and evaluate static budget report.
(LO 2)

Instructions

(a) Prepare a selling expense report that compares budgeted and actual amounts by month and for the year to date.

(b) What is the purpose of the report prepared in (a), and who would be the primary recipient?

(c) What would be the likely result of management's analysis of the report?

E24-3 Thome Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows.

Prepare flexible manufacturing overhead budget.
(LO 3)

Indirect labor	$1.00
Indirect materials	0.60
Utilities	0.40

Fixed overhead costs per month are supervision $4,000, depreciation $1,200, and property taxes $800. The company believes it will normally operate in a range of 7,000–10,000 direct labor hours per month.

Instructions

Prepare a monthly manufacturing overhead flexible budget for 2014 for the expected range of activity, using increments of 1,000 direct labor hours.

E24-4 Using the information in E24-3, assume that in July 2014, Thome Company incurs the following manufacturing overhead costs.

Prepare flexible budget reports for manufacturing overhead costs, and comment on findings.
(LO 3)

Instructions

(a) Prepare a flexible budget performance report, assuming that the company worked 9,000 direct labor hours during the month.

(b) Prepare a flexible budget performance report, assuming that the company worked 8,500 direct labor hours during the month.

(c) Comment on your findings.

E24-5 DeWitt Company uses flexible budgets to control its selling expenses. Monthly sales are expected to range from $170,000 to $200,000. Variable costs and their percentage relationship to sales are sales commissions 6%, advertising 4%, traveling 3%, and delivery 2%. Fixed selling expenses will consist of sales salaries $35,000, depreciation on delivery equipment $7,000, and insurance on delivery equipment $1,000.

Prepare flexible selling expense budget.
(LO 3)

Instructions

Prepare a monthly flexible budget for each $10,000 increment of sales within the relevant range for the year ending December 31, 2014.

E24-6 The actual selling expenses incurred in March 2014 by DeWitt Company are as follows.

Prepare flexible budget reports for selling expenses.
(LO 3)

Instructions

(a) Prepare a flexible budget performance report for March using the budget data in E24-5, assuming that March sales were $170,000.

(b) Prepare a flexible budget performance report, assuming that March sales were $180,000.

(c) Comment on the importance of using flexible budgets in evaluating the performance of the sales manager.

E24-7 Lowell Company's manufacturing overhead budget for the first quarter of 2014 contained the following data.

Prepare flexible budget and responsibility report for manufacturing overhead.
(LO 3, 5)

Actual variable costs were indirect materials $13,900, indirect labor $9,500, utilities $8,700, and maintenance $5,000. Actual fixed costs equaled budgeted costs except for property taxes and insurance, which were $8,400. The actual activity level equaled the budgeted level.

All costs are considered controllable by the production department manager except for depreciation, and property taxes and insurance.

Instructions

(a) Prepare a manufacturing overhead flexible budget report for the first quarter.

(b) Prepare a responsibility report for the first quarter.

E24-8 As sales manager, Joe Batista was given the following static budget report for selling expenses in the Clothing Department of Soria Company for the month of October.

Prepare flexible budget report, and answer question.
(LO 2, 3)

As a result of this budget report, Joe was called into the president's office and congratulated on his fine sales performance. He was reprimanded, however, for allowing his costs to get out of control. Joe knew something was wrong with the performance report that he had been given. However, he was not sure what to do, and comes to you for advice.

Instructions

(a) Prepare a budget report based on flexible budget data to help Joe.

(b) Should Joe have been reprimanded? Explain.

E24-9 Kirkland Plumbing Company is a newly formed company specializing in plumbing services for home and business. The owner, Lenny Kirkland, had divided the company into two segments: Home Plumbing Services and Business Plumbing Services. Each segment is run by its own supervisor, while basic selling and administrative services are shared by both segments.

Prepare and discuss a responsibility report.
(LO 3, 5)

Lenny has asked you to help him create a performance reporting system that will allow him to measure each segment's performance in terms of its profitability. To that end, the following information has been collected on the Home Plumbing Services segment for the first quarter of 2014.

Instructions

(a) Prepare a responsibility report for the first quarter of 2014 for the Home Plumbing Services segment.

(b) Write a memo to Lenny Kirkland discussing the principles that should be used when preparing performance reports.

E24-10 Venetian Company has two production departments, Fabricating and Assembling. At a department managers’ meeting, the controller uses flexible budget graphs to explain total budgeted costs. Separate graphs based on direct labor hours are used for each department. The graphs show the following.

State total budgeted cost formulas, and prepare flexible budget graph.
(LO 3)

1. At zero direct labor hours, the total budgeted cost line and the fixed cost line intersect the vertical axis at $50,000 in the Fabricating Department and $40,000 in the Assembling Department.

2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $150,000 in the Fabricating Department, and $120,000 in the Assembling Department.

Instructions

(a) State the total budgeted cost formula for each department.

(b) Compute the total budgeted cost for each department, assuming actual direct labor hours worked were 53,000 and 47,000, in the Fabricating and Assembling Departments, respectively.

(c) Prepare the flexible budget graph for the Fabricating Department, assuming the maximum direct labor hours in the relevant range is 100,000. Use increments of 10,000 direct labor hours on the horizontal axis and increments of $50,000 on the vertical axis.

E24-11 Fultz Company's organization chart includes the president; the vice president of production; three assembly plants—Dallas, Atlanta, and Tucson; and two departments within each plant—Machining and Finishing. Budget and actual manufacturing cost data for July 2014 are as follows.

Prepare reports in a responsibility reporting system.
(LO 4, 5)

The Dallas plant manager's office costs were $95,000 actual and $92,000 budget. The vice president of production's office costs were $132,000 actual and $130,000 budget. Office costs are not allocated to departments and plants.

Instructions

Using the format on page 1141, prepare the reports in a responsibility system for:

(a) The Finishing Department—Dallas.

(b) The plant manager—Dallas.

(c) The vice president of production.

E24-12 The Mixing Department manager of Malone Company is able to control all overhead costs except rent, property taxes, and salaries. Budgeted monthly overhead costs for the Mixing Department, in alphabetical order, are:

Prepare a responsibility report for a cost center.
(LO 5)

Actual costs incurred for January 2014 are indirect labor $12,250; indirect materials $10,200; lubricants $1,650; maintenance $3,500; property taxes $1,100; rent $1,800; salaries $10,000; and utilities $6,400.

Instructions

(a) Prepare a responsibility report for January 2014.

(b) What would be the likely result of management's analysis of the report?

E24-13 Deitz Inc. has three divisions which are operated as profit centers. Actual operating data for the divisions listed alphabetically are as follows.

Compute missing amounts in responsibility reports for three profit centers, and prepare a report.
(LO 6)

Instructions

(a) Compute the missing amounts. Show computations.

(b) Prepare a responsibility report for the Women's Shoes Division assuming (1) the data are for the month ended June 30, 2014, and (2) all data equal budget except variable costs which are $10,000 over budget.

E24-14 The Sports Equipment Division of Harrington Company is operated as a profit center. Sales for the division were budgeted for 2014 at $900,000. The only variable costs budgeted for the division were cost of goods sold ($440,000) and selling and administrative ($60,000). Fixed costs were budgeted at $100,000 for cost of goods sold, $90,000 for selling and administrative, and $70,000 for noncontrollable fixed costs. Actual results for these items were:

Prepare a responsibility report for a profit center, and compute ROI.
(LO 6, 7)

Sales revenue	$880,000
Cost of goods sold
Variable	408,000
Fixed	105,000
Selling and administrative
Variable	61,000
Fixed	66,000
Noncontrollable fixed	90,000

Instructions

(a) Prepare a responsibility report for the Sports Equipment Division for 2014.

(b) Assume the division is an investment center, and average operating assets were $1,000,000. The noncontrollable fixed costs are controllable at the investment center level. Compute ROI.

E24-15 The West Division of Nieto Company reported the following data for the current year.

Compute ROI for current year and for possible future changes.
(LO 7)

Sales revenue	$3,000,000
Variable costs	1,980,000
Controllable fixed costs	600,000
Average operating assets	5,000,000

Top management is unhappy with the investment center's return on investment (ROI). It asks the manager of the West Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action.

1. Increase sales by $320,000 with no change in the contribution margin percentage.

2. Reduce variable costs by $150,000.

3. Reduce average operating assets by 4%.

Instructions

(a) Compute the return on investment (ROI) for the current year.

(b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round to one decimal.)

E24-16 The Dinkle and Frizell Dental Clinic performs both preventive and orthodontic dental services. The two owners, Reese Dinkle and Anita Frizell, operate the clinic as two separate investment centers: Preventive Services and Orthodontic Services. Each of them is in charge of one of the centers: Reese for Preventive Services and Anita for Orthodontic Services. Each month, they prepare an income statement for the two centers to evaluate performance and make decisions about how to improve the operational efficiency and profitability of the clinic.

Prepare a responsibility report for an investment center.
(LO 7)

Recently, they have been concerned about the profitability of the Preventive Services operations. For several months, it has been reporting a loss. The responsibility report for the month of May 2014 is shown on page 1162.

In addition, the owners know that the investment in operating assets at the beginning of the month was $82,400, and it was $77,600 at the end of the month. They have asked for your assistance in evaluating their current performance reporting system.

Instructions

(a) Prepare a responsibility report for an investment center as illustrated in the chapter.

(b) Write a memo to the owners discussing the deficiencies of their current reporting system.

E24-17 The Pletcher Transportation Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports.

Prepare missing amounts in responsibility reports for three investment centers.
(LO 7)

Recently, the company was the victim of a computer virus that deleted portions of the company's accounting records. This was discovered when the current period's responsibility reports were being prepared. The printout of the actual operating results appeared as follows.

Instructions

Determine the missing pieces of information above.

EXERCISES: SET B ANDCHALLENGE EXERCISES

Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.

PROBLEMS: SET A

P24-1A Cook Company estimates that 300,000 direct labor hours will be worked during the coming year, 2014, in the Packaging Department. On this basis, the budgeted manufacturing overhead cost data, shown below, are computed for the year.

Prepare flexible budget and budget report for manufacturing overhead.
(LO 3)

It is estimated that direct labor hours worked each month will range from 27,000 to 36,000 hours.

During October, 27,000 direct labor hours were worked and the following overhead costs were incurred.

Instructions

(a) Prepare a monthly manufacturing overhead flexible budget for each increment of 3,000 direct labor hours over the relevant range for the year ending December 31, 2014.

(b) Prepare a flexible budget report for October.

(c) Comment on management's efficiency in controlling manufacturing overhead costs in October.

P24-2A Zelmer Company manufactures tablecloths. Sales have grown rapidly over the past 2 years. As a result, the president has installed a budgetary control system for 2014. The following data were used in developing the master manufacturing overhead budget for the Ironing Department, which is based on an activity index of direct labor hours.

Prepare flexible budget, budget report, and graph for manufacturing overhead.
(LO 3)

The master overhead budget was prepared on the expectation that 480,000 direct labor hours will be worked during the year. In June, 41,000 direct labor hours were worked. At that level of activity, actual costs were as shown below.

Instructions

(a) Prepare a monthly manufacturing overhead flexible budget for the year ending December 31, 2014, assuming production levels range from 35,000 to 50,000 direct labor hours. Use increments of 5,000 direct labor hours.

(b) Prepare a budget report for June comparing actual results with budget data based on the flexible budget.

(c) Were costs effectively controlled? Explain.

(d) State the formula for computing the total budgeted costs for the Ironing Department.

(e) Prepare the flexible budget graph, showing total budgeted costs at 35,000 and 45,000 direct labor hours. Use increments of 5,000 direct labor hours on the horizontal axis and increments of $10,000 on the vertical axis.

P24-3A Hill Company uses budgets in controlling costs. The August 2014 budget report for the company's Assembling Department is as follows.

State total budgeted cost formula, and prepare flexible budget reports for 2 time periods.
(LO 2, 3)

The monthly budget amounts in the report were based on an expected production of 60,000 units per month or 720,000 units per year. The Assembling Department manager is pleased with the report and expects a raise, or at least praise for a job well done. The company president, however, is unhappy with the results for August because only 58,000 units were produced.

Instructions

(a) State the total monthly budgeted cost formula.

(b) Prepare a budget report for August using flexible budget data. Why does this report provide a better basis for evaluating performance than the report based on static budget data?

(c) In September, 64,000 units were produced. Prepare the budget report using flexible budget data, assuming (1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in September as in August.

P24-4A Clarke Inc. operates the Patio Furniture Division as a profit center. Operating data for this division for the year ended December 31, 2014, are as shown below.

Prepare responsibility report for a profit center.
(LO 6)

In addition, Clarke incurs $180,000 of indirect fixed costs that were budgeted at $175,000. Twenty percent (20%) of these costs are allocated to the Patio Furniture Division.

Instructions

(a) Prepare a responsibility report for the Patio Furniture Division for the year.

(b) Comment on the manager's performance in controlling revenues and costs.

(c) Identify any costs excluded from the responsibility report and explain why they were excluded.

P24-5A Suppan Company manufactures a variety of tools and industrial equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Home Division for the year ended December 31, 2014, and relevant budget data are as follows.

Prepare responsibility report for an investment center, and compute ROI.
(LO 7)

Average operating assets for the year for the Home Division were $2,000,000 which was also the budgeted amount.

Instructions

(a) Prepare a responsibility report (in thousands of dollars) for the Home Division.

(b) Evaluate the manager's performance. Which items will likely be investigated by top management?

(c) Compute the expected ROI in 2014 for the Home Division, assuming the following independent changes to actual data.

(1) Variable cost of goods sold is decreased by 5%.

(2) Average operating assets are decreased by 10%.

(3) Sales are increased by $200,000, and this increase is expected to increase contribution margin by $85,000.

P24-6A Durham Company uses a responsibility reporting system. It has divisions in Denver, Seattle, and San Diego. Each division has three production departments: Cutting, Shaping, and Finishing. The responsibility for each department rests with a manager who reports to the division production manager. Each division manager reports to the vice president of production. There are also vice presidents for marketing and finance. All vice presidents report to the president.

Prepare reports for cost centers under responsibility accounting, and comment on performance of managers.
(LO 4)

In January 2014, controllable actual and budget manufacturing overhead cost data for the departments and divisions were as shown below.

Additional overhead costs were incurred as follows: Seattle division production manager—actual costs $52,500, budget $51,000; vice president of production—actual costs $65,000, budget $64,000; president—actual costs $76,400, budget $74,200. These expenses are not allocated.

The vice presidents who report to the president, other than the vice president of production, had the following expenses.

Instructions

(a) Using the format on page 1141, prepare the following responsibility reports.

(1) Manufacturing overhead—Cutting Department manager—Seattle division.

(2) Manufacturing overhead—Seattle division manager.

(3) Manufacturing overhead—vice president of production.

(4) Manufacturing overhead and expenses—president.

(b) Comment on the comparative performances of:

(1) Department managers in the Seattle division.

(2) Division managers.

(3) Vice presidents.

PROBLEMS: SET B

Prepare flexible budget and budget report for manufacturing overhead.
(LO 3)

P24-1B Speier Company estimates that 240,000 direct labor hours will be worked during 2014 in the Assembly Department. On this basis, the following budgeted manufacturing overhead data are computed.

It is estimated that direct labor hours worked each month will range from 18,000 to 24,000 hours.

During January, 20,000 direct labor hours were worked and the following overhead costs were incurred.

Instructions

(a) Prepare a monthly flexible manufacturing overhead budget for each increment of 2,000 direct labor hours over the relevant range for the year ending December 31, 2014.

(b) Prepare a manufacturing overhead budget report for January.

(c) Comment on management's efficiency in controlling manufacturing overhead costs in January.

P24-2B Gonzalez Company produces one product, Olpe. Because of wide fluctuations in demand for Olpe, the Assembly Department experiences significant variations in monthly production levels.

Prepare flexible budget, budget report, and graph for manufacturing overhead.
(LO 3)

The annual master manufacturing overhead budget is based on 300,000 direct labor hours. In July, 27,500 labor hours were worked. The master manufacturing overhead budget for the year and the actual overhead costs incurred in July are as follows.

Instructions

(a) Prepare a monthly flexible overhead budget for the year ending December 31, 2014, assuming monthly production levels range from 22,500 to 30,000 direct labor hours. Use increments of 2,500 direct labor hours.

(b) Prepare a budget report for the month of July 2014, comparing actual results with budget data based on the flexible budget.

(c) Were costs effectively controlled? Explain.

(d) State the formula for computing the total monthly budgeted costs in the Gonzalez Company.

(e) Prepare the flexible budget graph showing total budgeted costs at 25,000 and 27,500 direct labor hours. Use increments of 5,000 on the horizontal axis and increments of $10,000 on the vertical axis.

P24-3B Hardesty Company uses budgets in controlling costs. The May 2014 budget report for the company's Packaging Department is as follows.

State total budgeted cost formula, and prepare flexible budget reports for 2 time periods.
(LO 2, 3)

The monthly budget amounts in the report were based on an expected production of 50,000 units per month or 600,000 units per year.

The company president was displeased with the department manager's performance. The department manager, who thought he had done a good job, could not understand the unfavorable results. In May, 55,000 units were produced.

Instructions

(a) State the total budgeted cost formula.

(b) Prepare a budget report for May using flexible budget data. Why does this report provide a better basis for evaluating performance than the report based on static budget data?

(c) In June, 40,000 units were produced. Prepare the budget report using flexible budget data, assuming (1) each variable cost was 20% less in June than its actual cost in May, and (2) fixed costs were the same in the month of June as in May.

P24-4B Guzman Inc. operates the Home Appliance Division as a profit center. Operating data for this division for the year ended December 31, 2014, are shown below.

Prepare responsibility report for a profit center.
(LO 6)

In addition, Guzman incurs $150,000 of indirect fixed costs that were budgeted at $155,000. Twenty percent (20%) of these costs are allocated to the Home Appliance Division. None of these costs are controllable by the division manager.

Instructions

(a) Prepare a responsibility report for the Home Appliance Division (a profit center) for the year.

(b) Comment on the manager's performance in controlling revenues and costs.

(c) Identify any costs excluded from the responsibility report and explain why they were excluded.

P24-5B Strauss Company manufactures a variety of garden and lawn equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Lawnmower Division for the year ended December 31, 2014, and relevant budget data are as follows.

Prepare responsibility report for an investment center, and compute ROI.
(LO 7)

Average operating assets for the year for the Lawnmower Division were $5,000,000, which was also the budgeted amount.

Instructions

(a) Prepare a responsibility report (in thousands of dollars) for the Lawnmower Division.

(b) Evaluate the manager's performance. Which items will likely be investigated by top management?

(c) Compute the expected ROI in 2014 for the Lawnmower Division, assuming the following independent changes to actual data.

(1) Variable cost of goods sold is decreased by 20%.

(2) Average operating assets are decreased by 24%.

(3) Sales are increased by $700,000, and this increase is expected to increase contribution margin by $260,000.

P24-6B Gore Company uses a responsibility reporting system. It has divisions in San Francisco, Phoenix, and Tulsa. Each division has three production departments: Cutting, Shaping, and Finishing. The responsibility for each department rests with a manager who reports to the division production manager. Each division manager reports to the vice president of production. There are also vice presidents for marketing and finance. All vice presidents report to the president.

Prepare reports for cost centers under responsibility accounting, and comment on performance of managers.
(LO 4)

In January 2014, controllable actual and budget manufacturing overhead cost data for the departments and divisions were as shown below.

Additional overhead costs were incurred as follows: Phoenix division production manager— actual costs $73,100, budget $70,000; vice president of production—actual costs $72,000, budget $70,000; president—actual costs $94,200, budget $91,300. These expenses are not allocated.

The vice presidents, who report to the president (other than the vice president of production), had the following expenses.

Instructions

(a) Using the format on page 1141, prepare the following responsibility reports.

(1) Manufacturing overhead—Cutting Department manager—Phoenix division.

(2) Manufacturing overhead—Phoenix division manager.

(3) Manufacturing overhead—vice president of production.

(4) Manufacturing overhead and expenses—president.

(b) Comment on the comparative performances of:

(1) Department managers in the Phoenix division.

(2) Division managers.

(3) Vice presidents.

PROBLEMS: SET C

Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.

WATERWAYS CONTINUING PROBLEM

(Note: This is a continuation of the Waterways Problem from Chapters 19 through 23.)

WCP24 Waterways Corporation is continuing its budget preparations. This problem gives you static budget information as well as actual overhead costs, and asks you to calculate amounts related to budgetary control and responsibility accounting.

Go to the book's companion website, at www.wiley.com/college/weygandt, to find the completion of this problem.

__________