Chapter 9 Exhibits

Management Accounting:
Concepts, Techniques & Controversial Issues

James R. Martin

Some Exhibits From Chapter 9

Exhibit 9-1: Conceptual View of Financial Performance	Exhibit 9-2: Cost Defined in Terms of Cause and Effect	Exhibit 9-3: Budget Types and Characteristics	Supplementary Exhibit: Types of Appropriation Budgets
Exhibit 9-4: Diagram of a Master Budget	Supplementary Exhibit: Responsibility Accounting	Figure 9-1: Standard & Budgeted Fixed Overhead Compared	Figure 9-2: Standard and Budgeted Total Overhead Compared

Exhibit 9-1: Conceptual View of Financial Performance

Conceptual View of Financial Performance

Exhibit 9-2: Cost Defined in Terms of Cause and Effect

TYPE OF COST	CAUSE & EFFECT OR COST BENEFIT RELATIONSHIP	COST BEHAVIOR	EXAMPLES
DISCRETIONARY	Relationships are difficult or impossible to define.	Fixed, variable and mixed in the short run.	Cost of administrative and support services such as employee training, advertising, sales promotion, legal advice, preventive maintenance, and research and development.
ENGINEERED	Relationships are relatively easy to define.	Variable in the short run.	Direct resources used in production activities such as direct materials and direct labor and many indirect resources such as electric power.
COMMITTED	Relationships can be estimated, but not defined precisely.	Fixed in the short run.	Cost of establishing and maintaining the readiness to conduct business, such as the cost associated with plant and equipment.

Exhibit 9-3: Budget Types and Characteristics

TYPE OF BUDGET	CHARACTERISTICS OF THE TECHNIQUE	TYPE OF COST OR EXPENDITURE	EXAMPLES
APPROPRIATION BUDGET	A maximum amount is established for certain expenditures based on management judgement.	Discretionary costs.	Employee training, advertising, sales promotion and research and development.
FLEXIBLE BUDGET	A static amount (a) is established for fixed costs and a variable rate (b) is determined per activity measure for variable costs, i.e., Y = a + bX	The static amount (a) includes both discretionary and committed costs while the flexible part (b) includes engineered costs per X value.	The static part: salaries, depreciation, property taxes and planned maintenance. The flexible part: direct material, direct labor and variable overhead. Also, some costs related to sales reps such as sales commissions and travel.
CAPITAL BUDGET	Decisions concerning potential investments are made using discounted cash flow techniques.	Committed costs.	New plant and equipment.
MASTER BUDGET	A comprehensive plan is developed for all revenue and expenditures.	Discretionary, engineered and committed costs.	All revenue and expenditures for any company.

Supplementary Exhibit
Types of Appropriation Budgets

TYPE	BASIS OF BUDGET AMOUNT
INCREMENTAL	Last year’s budget plus an increment.
PRIORITY INCREMENTAL	Last year’s budget plus an increment, but includes the manager’s priority of increases and possible decreases by activity.
ZERO BASED	Manager must supply detailed justification for the entire budget each budget period. In practice few budgets were ever zero based. Eighty percent based is more common.

Exhibit 9-4: Diagram of a Master Budget

Supplementary Exhibit
Responsibility Accounting

Responsibility centers

Evaluation method

1) Revenue centers

2) Cost centers

3) Profit centers

4) Investment centers

Sales

Cost

Profitability measure

Return on investment*

*Typically ROI = Net income ÷ Total assets

Figure 9-1: Standard & Budgeted Fixed Overhead Compared

Standard and Budgeted Fixed Overhead Compared

Figure 9-2: Standard and Budgeted Total Overhead Compared

Standard and Budgeted Total Overhead Compared