BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING
In order to effectively control and coordinate business efforts, management will usually design a budget for a forthcoming period to use as a standard with which to compare actual results as the period unfolds. The budget process usually begins with an estimate of sales (or other output) activity, because all other activities will be geared to the sales level. The most useful type of budget allows for estimates of costs at various levels of sales (within an appropriate range, of course). The individual cost figures that are computed for such a flexible budget depend on the cost behavior of the relevant cost elements. Budgets are discussed in this chapter. The second main concept discussed in this chapter is that of responsibility accounting. This concept is based on the idea that a manager's or segment's performance should be evaluated only on the basis of controllable items.
SUMMARY OF STUDY OBJECTIVES
- Describe the concept of budgetary control. Budgetary control consists of (a) preparing periodic budget reports that compare actual results with planned objectives, (b) analyzing the differences to determine their causes, (c) taking appropriate corrective action, and (d) modifying future plans, if necessary.
- Evaluate the usefulness of static budget reports. Static budget reports are useful in evaluating the progress toward planned sales and profit goals. They are also appropriate in assessing a manager's effectiveness ...