Question

2) Budgetary control is the use of budgets in controlling operations. What are the steps in budgetary control?

3) What is a static budget? Whys is a static budget is an appropriate basis for evaluating a manager’s effectiveness in controlling costs?

4) List the steps in preparing a flexible budget?

5)Responsibility reports differ from budget reports in two respects? State and explain each one.

6) There are three types of responsibility centers. Please list and define what each center does?

7) What costs are included in a performance report for a cost center?

8) What is a Controllable margin? What is the purpose of controllable margin?

9) What is the primary basis for evaluating the performance of the manager of an investment center? How is it calculated?

Answer 1

2) Answer:

Steps of Budgetary Control:

The following steps are involved in a budgetary control system:

a. Establish a plan or target of performance, which coordinates all the activities of the business.

b. Record the actual performance.

c. Compare the actual performance with that planned.

d. Calculate the differences, or variances and the reasons for them.

e. Act immediately, if necessary, to remedy the situation.

3) Answer:

Static Budget - A static budget is a type of budget that incorporates anticipated values about inputs and outputs that are conceived before the period in question begins. When compared to the actual results that are received after the fact, the numbers fromstatic budgets are often quite different from the actual results.

The static budget is appropriate in evaluating a manager’s effectiveness incontrolling costs when:

a.The actual level of activity closely approximates the master budgetactivity level and/or

b.The behaviour of the costs in response to changes in activity is fixed.

A static budget report is appropriate for fixed manufacturing costs and fixedselling and administrative expenses.

4) Answer:

Steps involved in flexible budgeting:

The following steps or stages are involved in the preparation of flexible budget.

a. Decide a range of activity for which the budget is to be prepared.

b. Determine the cost behavior pattern (Fixed, Variable and Semi-variable) for each element of costs that are included in the flexible budget.

c. Prepare the budgets for each level of activity with corresponding costs.

5) Answer:

Responsibility reports differ from budget reports in two respects:

(a) a distinction is made between controllable and noncontrollable items and

(b) performance reports either emphasize, or only include, items controllable by the individual manager.

6) Answer:

There are three types of responsibility centers:

(a) A cost center incurs costs (and expenses) but does not generate revenues.

(b) A profit center incurs costs (and expenses) and also generates revenues.

(c) An investment center incurs costs (and expenses), generates revenues, and controls the investment funds available for use.

7) Answer:

Only controllable costs are included in a performance report for a cost center.