1. a. What is budgetary control?

The use of budgets in controlling operations is known as budgetary control . Such control
takes place using 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 monitoring progress along the way .

1. b. Kabir Lal is describing budgetary control. What steps should be included in Kabir's
description?
Fred should include the Budgetary control activities to develop a budget , analyze
differences between actual and budget , modify future plans , and take corrective action .

The following purposes are part of a budgetary reporting system:

(a) Determine efficient use of materials.
(b) Control overhead costs.
(c) Determine whether income objectives are being met. For each purpose, indicate the
name of the report, the frequency of the report, and the primary recipients) of the report.

3. How may a budget report for the second quarter differ from a budget report for the first
quarter?
Budget report of second quarter and first quarter are different due to : a) Errors by the
makers of budget . Error maybe because of faulty mathematical calculations , using wrong
assumptions while preparing budgets , or using wrong data on which data is based upon
example Sales data . b) Changing business conditions Changes in conditions due to
changes in overall economy , introduction of new competitors in the market , change in the
prices of raw materials , political and regulatory changes . c) Unmet expectations Since ,
there can be instances when management increases or decreases the expectations of
production , sales etc . Therefore , it might also lead to difference in budget report.

4. Razia Azen questions the usefulness of a master sales budget in evaluating sales
performance. Is there justification for Razia's concern? Explain.
NO. The sales budget is gotten from the sales conjecture and it addresses the board's best
gauge of sales. Accordingly, it is a helpful reason for assessing deals execution.

5. Under what circumstances may a static budget be an appropriate basis for evaluating a
manager's effectiveness in controlling costs?
a) the manager has control over only fixed costs b) the actual activity is very close to the
budgeted activity.
6. "A flexible budget is really a series of static budgets." Is this true? Why?
Indeed, a flexible budget is really a series of static budgets . Whereas a static budget is
based on one level of activity, a flexible budget is prepared at different activity levels . The
flexible budget is more useful and adaptable to changed operating conditions and projection
of budget data at a single level of activity before the actual activity occurs. The flexible
budget recognizes that the budgetary process is more useful if it is adaptable to changed
operating conditions.

7. The static manufacturing overhead budget based on 40,000 direct labor hours shows
budgeted indirect labor costs of HK$54,000. During March, the department incurs
HK$64,000 of indirect labor while working 45,000 direct labor hours. Is this a favorable or
unfavorable performance? Why?
54,000/40,000+$1.35 per DLH @45,000 DLH = 45,000 x 1.35 = $60,750 Budget:60,750
Actual: 64,000 Diff: (3,250) U over budget

Another Answer:
65000- 65000-54000=11000 Unfavorable by 11,000$

8. A static overhead budget based on 40,000 direct labor hours shows Factory Insurance
£6,500 as a fixed cost. At the 50,000 direct labor hours worked in March, factory insurance
costs were £6,300. Is this a favorable or unfavorable performance? Why?
the performance is favorable : this is because factory insurance is a fixed cost and will not
change regardless of change in direct labor hours.so the factory insurance is $6500-$6300 =
$200 under budget.

9. Georgi Petrov is confused about how a flexible budget is prepared.

The following budget steps are:
● 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

10. Kimje Foods has prepared a graph of flexible budget data. At zero direct labor hours, the
total budgeted cost line intersects the vertical axis at €20,000. At 10,000 direct labor hours,
the line drawn from the total budgeted cost line intersects the vertical axis at €85,000. How
may the fixed and variable costs be expressed?

$60,000 fixed plus $6 per direct labor hour variable.

11. The flexible budget formula is fixed costs R$5O.000 plus variable costs of R$4 per direct
labor hour. What is the total budgeted cost at (a) 9,000 hours and (b) 12,345 hours?

(a)
Step 1: To calculate the total budgeted cost at 9,000 hours, we need to use the flexible
budget formula:
Total Budgeted Cost = Fixed Costs + (Variable Costs per Direct Labor Hour x Number of
Direct Labor Hours)

Step 2: Plugging in the given numbers, we get:

Total Budgeted Cost = $50,000 + ($4 x 9,000)
Total Budgeted Cost = $50,000 + $36,000
Total Budgeted Cost = $86,000

Therefore, the total budgeted cost at 9,000 hours is $86,000

(b)
Step 1: To calculate the total budgeted cost at 12,345 hours, we use the same formula:

Total Budgeted Cost = Fixed Costs + (Variable Costs per Direct Labor Hour x Number of
Direct Labor Hours)

Step 2: Plugging in the given numbers, we get:

Total Budgeted Cost = $50,000 + ($4 x 12,345)
Total Budgeted Cost = $50,000 + $49,380
Total Budgeted Cost = $99,380

Therefore, the total budgeted cost at 12,345 hours is $99,380

12. What is management by exception? What criteria may be used in identifying exceptions?
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 . For management by exception to be effective , there must be guidelines for
identifying an exception . The usual criteria are : a) Materiality—usually expressed as a
percentage difference from budget . b) Controllability of the item—exception guidelines are
more restrictive for controllable items than for items that are not controllable by the manager.

13. What is responsibility accounting? Explain the purpose of responsibility accounting.

Responsibility accounting refers to the various concepts and tools used by managerial
accountants to measure the performance of people and departments in order to ensure the
achievement of the goals set by the top management . Responsibility reports help each
successively higher level of management in evaluating the performances of subordinate
managers and their respective organization units . It also helps to improve their
performance.

14. Kalyani Rai is studying for an accounting examination. Describe for Kalyani what
conditions are necessary for responsibility accounting to be used effectively.
Responsibility accounting is a type of management accounting that holds a company's
management, budgeting, and internal accounting accountable. The fundamental goal of this
accounting is to assist all of a company's planning, costing, and responsibility centers.
Conditions that must be met in order for responsibility accounting to be useful. Both planned
and actual financial data are required for effective responsibility accounting. Not only does
the installation of a responsibility accounting system demand previous cost and revenue
data, but it also necessitates forecasted future data. 1. The first is to have a well-defined
organizational structure in which staff levels are clearly defined and authorization is
established quickly inside the company. 2. The metrics that will be used to examine and
evaluate performance must be clearly defined and conveyed to the entire team. In Order to
have an efficient responsibility accounting system the following steps are a must, Defining a
cost center or a duty. Keeping track of each responsibility center's actual performance. The
actual performance is compared with the desired outcome. Examining the discrepancy
between actual and desired performance.

15. Distinguish between controllable and non-controllable costs.

The key difference between controllable and uncontrollable cost is that controllable cost is
an expense that can be increased or decreased based on a particular business decision
whereas uncontrollable cost is a cost that can not be increased or decreased based on a
business decision.

16. How do responsibility reports differ from budget reports?

Responsibility reports are budget variance reports - they are " scaled down " to include only
the items controllable by the specific manager being evaluated . The budget variance report
is prepared for the business segment ; the responsibility report is prepared for the manager
of the segment .

*17. What is the relationship, if any, between a responsibility reporting system and a
company's organization chart?

18. Distinguish among the three types of responsibility centers.

Cost centers - a segment of the business in which the manager of the segment has control
over only cost items . Profit centers - a segment of the business in which the manager of the
segment has control over both revenue and cost items . Investment center - a segment of
the business in which the manager of the segment has control over revenue and cost items
and control over the operating assets used to generate the net income

19. (a) What costs are included in a performance report for a cost center? (b) In the report,
are variable and fixed costs identified?

20. How do direct fixed costs differ from indirect fixed costs? Are both types of fixed costs
controllable?
The direct fixed costs of the segment are specifically incurred by that segment ; if the
segment were to be eliminated , the direct fixed costs would also be eliminated . Direct fixed
costs are typically controllable but not always . The indirect fixed costs of the segment are
not specifically incurred by that segment - they are incurred somewhere else in the company
and are allocated out to the various segments ; if the segment were to be eliminated , the
indirect fixed costs would not be eliminated.

21. Ojas Namjoshi is confused about controllable margin reported in an income statement
for a profit center. How is this margin computed, and what is its primary purpose?
Controllable Margin is computed by taking the Contribution Margin ( Sales less Variable
Costs ) minus the controllable fixed costs . In responsibility accounting , it represents the
profit amount that the manager of a profit or investment center is responsible for.
22. What is the primary basis for evaluating the performance of the manager of an
investment center? Indicate the formula for this basis.
The primary basis for evaluating performance ininvestment centers is return on
investment(ROI).TheformulaforcomputingROIforinvestmentcentersis:Controllablemargin÷Av
erage operating assets.

23. Explain the ways that ROI can be improved.

Here are several ways to enhance ROI:

Cost Reduction: One way to improve ROI is by reducing costs associated with the
investment. This can be achieved through various strategies such as negotiating better deals
with suppliers, optimizing operational processes, and implementing cost-saving measures
like energy efficiency initiatives or automation.

Increase Revenue: Increasing revenue is another effective method to boost ROI. This can
be accomplished through different means such as expanding the customer base, introducing
new products or services, raising prices (if feasible), improving marketing and sales
strategies, or entering new markets.

Efficiency and Productivity Enhancements: Improving operational efficiency and productivity

can lead to higher returns. This can involve streamlining workflows, eliminating bottlenecks,
enhancing employee training, implementing technology solutions to automate tasks, or
adopting lean management principles to eliminate waste and improve processes.

Investment Diversification: Diversifying investments can mitigate risks and improve overall
ROI. By spreading investments across different assets or markets, potential losses from one
investment can be offset by gains from others. This helps to minimize the impact of
individual underperforming investments on the overall portfolio.

Performance Tracking and Analysis: Regularly monitoring and analyzing the performance of
investments is crucial for improving ROI. By tracking key performance indicators (KPIs) and
conducting thorough analysis, areas of improvement or underperformance can be identified.
This enables informed decision-making and allows for adjustments to be made to optimize
ROI.

Risk Management: Managing and mitigating risks associated with investments can positively
impact ROI. Implementing risk management strategies such as insurance coverage,
contingency plans, or diversifying investments across different sectors or asset classes can
help protect against potential losses and improve overall ROI.

Long-Term Perspective: Taking a long-term perspective when evaluating investments can

lead to improved ROI. Some investments may have a longer gestation period before
generating significant returns. By focusing on the long-term potential and avoiding short-term
fluctuations, investors can maximize ROI over time.

Customer Satisfaction and Retention: For businesses, enhancing customer satisfaction and
retention can drive repeat business and increase ROI. By providing exceptional customer
service, personalized experiences, and continuously improving the quality of products or
services, companies can foster customer loyalty, which leads to higher sales and improved
ROI.

It's important to note that the specific strategies to improve ROI may vary depending on the
nature of the investment, industry, and individual circumstances. It's advisable to conduct
thorough research, seek expert advice when necessary, and tailor the approach to the
specific investment and organizational goals.

24. Indicate two behavioral principles that pertain to (a) the manager being evaluated and (b)
top management.

(a) Behavioral Principles Pertaining to the Manager Being Evaluated:

Goal Setting Theory: This principle emphasizes the importance of setting clear and specific
goals to enhance performance. Managers being evaluated should establish challenging yet
achievable goals that are aligned with organizational objectives. Well-defined goals provide
direction, motivate managers, and facilitate performance evaluation based on the extent to
which goals are accomplished.

Reinforcement Theory: This principle focuses on the use of positive reinforcement to

reinforce desired behaviors and improve performance. When evaluating managers, it is
essential to provide feedback and recognition for their achievements and successes.
Recognizing and rewarding managers for their efforts and results can increase their
motivation and engagement, leading to improved performance.

(b) Behavioral Principles Pertaining to Top Management:

Transformational Leadership: This principle emphasizes the role of top management in

inspiring and motivating employees to achieve exceptional performance. Transformational
leaders exhibit charismatic and visionary qualities, promote a sense of purpose and mission,
encourage innovation, and build strong relationships with employees. By exhibiting
transformational leadership, top management can inspire employees to go above and
beyond, resulting in improved organizational performance.

Ethical Leadership: This principle highlights the significance of top management

demonstrating ethical behavior and fostering an ethical culture within the organization.
Ethical leaders set a positive example by adhering to high moral standards, promoting
transparency, and making ethical decisions. When top management upholds ethical
principles, it enhances employee trust, engagement, and commitment, leading to improved
performance and long-term success.

These behavioral principles provide a framework for evaluating managers and guiding the
behavior of top management, ultimately contributing to the effectiveness and success of the
organization.
*25. What is a major disadvantage of using ROI to evaluate investment and company
performance?
The manager can try to manipulate the numerator or denominator of the computation ; the
manager may reflect any project which has an ROI acceptable to the company as a whole .

*26. What is residual income, and what is one of its major weaknesses?
Residual income computes a base controllable margin by taking a minimum required ROI
percentage times the profit center 's average operating assets . The excess of the profit
center 's actual controllable margin over the base controllable margin is considered residual
income . The primary weakness of residual income is that each dollar of residual income is
considered equivalent - the amount of assets used to generate the dollar of residual income
is ignored.