Budgetary control 

the use of budgets in controlling operations – control takes place by budget reports – comparing actual results with planning objectives.

Static Budget

is a projection of budget data at one level of activity. 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.
So it is appropriate for fixed manu costs and selling and admin expenses, not variable costs.

Flexible budget

projects budget data for various levels of activity. Good for both Variable and Fixed Costs.

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. Investigate controllable and material items

Controllability of the item

no guidelines for noncontrollable items, more restrictive for controllable items.

Responsibility accounting

Can be used when: 1. Costs and revenues can be directly associated with the specific level of mgmt responsibility. 2. the costs and revenues can be controlled by EE’s at the level of responsibility with they are associated. 3. Budget data can be developed for evaluating the manager’s effectiveness in controlling the costs & revenue

Sales – Variable Cost =?

Contribution Margin – Controllable Fixed Costs =

Cost, Profit, and Investment centers

Return on Investment (ROI) =? 

ROI impacts - Improving ROI (how do you improve return on investment)

1) increase sales. 2) Decrease variable and fixed costs (controllable only) 3) Reduce average operating assets.

Both Budget and Standard cost use what kind of rate?

Standard costs 

predetermined unit costs, which companies use as a measure of performance – use unit amounts – concerned with cost components

Budgets

Actual Costs < Standard Costs = 

Favorable (and Vice Versa)

Total Direct Materials Variance=

(AA)-(SS)

[image]

DM Price Variable = 

AAASp

DM Quantity Variance = 

AqSSS  

Total Direct Labor Variance =

(AA)-(SS)

DL Price Variable =

AAASp

DL Quantity Variance = 

AqSSS

incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company's strategic goals.

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Present Value of Future Cash Flows
(discounted)
     - Initial Investment

= NPV

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Rule: accept the project when the NPV is positive or zero - means earning greater than or equal to the required rate of return (discounted rate)
Rule: rejuect the project when the NPV is negative - means earning less than the required rate of return (discounted rate)

1^st – Find Internal rate of return factor = Capital Investment / Annual Cash Flows 

2^nd – Find factor no TVM Tables – using PV of Annuity Tables

Rule: accept the project when the internal rate of return is equal to or greater than the required rate of return.

Reject project if internal rate of return is less than the required rate of return.