{"id":291,"date":"2021-01-26T22:37:59","date_gmt":"2021-01-26T22:37:59","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=291"},"modified":"2021-08-15T19:01:49","modified_gmt":"2021-08-15T19:01:49","slug":"budget-variances","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/budget-variances\/","title":{"raw":"Budget Variances","rendered":"Budget Variances"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Interpret budget variances with regard to directing and controlling<\/li>\r\n<\/ul>\r\n<\/div>\r\nIn preparing responsibility accounting reports, companies use two basic methods to handle revenue or expense items. In the first approach, only those items over which a manager has direct control are included in the responsibility report for that management level. Any revenue and expense items that cannot be directly controlled are not included. The second approach is to include all revenue and expense items that can be traced directly or allocated indirectly to a particular manager, whether or not they are controllable. This second method represents a full-cost approach, which means all costs of a given area are disclosed in a single report. When this approach is used, care must be taken to separate controllable from noncontrollable items to differentiate those items for which a manager can and should be held responsible.\r\n\r\n<img class=\"size-medium wp-image-1768 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/17222905\/lance-asper-tx3YTxZn6RA-unsplash-300x169.jpg\" alt=\"Bridge over water\" width=\"300\" height=\"169\" \/>For accounting reports to be of maximum benefit, they must be timely. That is, accountants should prepare reports as soon as possible after the end of the performance-measurement period. Timely reporting allows prompt corrective action to be taken. When reports are delayed excessively, they lose their effectiveness as control devices. For example, a report on the previous month\u2019s operations that is not received until the end of the current month is virtually useless for analyzing poor performance areas and taking corrective action.\r\n\r\nCompanies also should issue reports regularly in order for managers to spot trends. Then, appropriate management action can be initiated before major problems occur. Regular reporting allows managers to rely on reports and become familiar with their contents.\r\n\r\nFirms should make the format of their responsibility reports relatively simple and easy to read. Confusing terminology should be avoided. Where appropriate, expressing results in physical units may be more familiar and understandable to some managers. To assist management in quickly spotting budget variances, companies can report both budgeted (expected) and actual amounts. A budget variance is the difference between the budgeted and actual amounts of an item. Because variances highlight problem areas (exceptions), they are helpful in applying the management-by-exception principle. To help management evaluate performance to date, responsibility reports often include both a current period and year-to-date analysis.\r\n<h2>Example<\/h2>\r\nAssume a large clothing store called Marcy\u2019s has four management levels\u2014the president, vice president of operations, store manager, and department manager. In this section, we show that a responsibility report would be prepared for each management level. We will begin with the lowest level, the men\u2019s clothing department manager, and work our way up to the president. We start at the lowest level because the totals from each level will be reported in the next highest level.\r\n\r\nOnly the individual manager\u2019s controllable expenses are contained in these reports. For example, the store manager\u2019s report includes only totals from the men\u2019s clothing department manager\u2019s report. In turn, the report to the vice president includes only totals from the store manager\u2019s report, and so on. Detailed data from the lower levels are summarized or condensed and reported at the next higher level.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Marcy's Corporation<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Manager, Men\u2019s Clothing Department<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Responsibility Report<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Actual Amount<\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Budget Amount<\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Over or (Under) Budget<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"font-weight: bold;\">Controllable Expenses<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Inventory losses<\/td>\r\n<td class=\"r\">$2,000<\/td>\r\n<td class=\"r\">$10,000<\/td>\r\n<td class=\"r\">$1,900<\/td>\r\n<td class=\"r\">$9,600<\/td>\r\n<td class=\"r\">$100<\/td>\r\n<td class=\"r\">$400<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supplies<\/td>\r\n<td class=\"r\">1,800<\/td>\r\n<td class=\"r\">8,500<\/td>\r\n<td class=\"r\">$1,000<\/td>\r\n<td class=\"r\">$7,550<\/td>\r\n<td class=\"r\">800<\/td>\r\n<td class=\"r\">950<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Salaries<\/td>\r\n<td class=\"r\">11,000<\/td>\r\n<td class=\"r\">53,000<\/td>\r\n<td class=\"r\">$11,100<\/td>\r\n<td class=\"r\">$52,190<\/td>\r\n<td class=\"r\">(100)<\/td>\r\n<td class=\"r\">810<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Overtime<\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">2,000<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">14,500<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">$1,200<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">$14,360<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">800<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">140<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight-green\" style=\"font-weight: bold;\">Totals<\/td>\r\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$16,800<\/td>\r\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$86,000<\/td>\r\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$15,200<\/td>\r\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$83,700<\/td>\r\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$1,600<\/td>\r\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$2,300<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Marcy's Corporation<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Store Manager<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Responsibility Report<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Actual Amount<\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Budget Amount<\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Over or (Under) Budget<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"font-weight: bold;\">Controllable Expenses<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Children\u2019s Clothing Department<\/td>\r\n<td class=\"r\">$23,500<\/td>\r\n<td class=\"r\">$150,450<\/td>\r\n<td class=\"r\">$24,000<\/td>\r\n<td class=\"r\">$151,000<\/td>\r\n<td class=\"r\">($500)<\/td>\r\n<td class=\"r\">($550)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Women\u2019s Clothing Department<\/td>\r\n<td class=\"r\">$31,000<\/td>\r\n<td class=\"r\">$157,700<\/td>\r\n<td class=\"r\">$32,500<\/td>\r\n<td class=\"r\">$158,000<\/td>\r\n<td class=\"r\">($1,500)<\/td>\r\n<td class=\"r\">($300)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight-green\">Men\u2019s Clothing Department<\/td>\r\n<td class=\"r highlight-green\">$16,800<\/td>\r\n<td class=\"r highlight-green\">$86,000<\/td>\r\n<td class=\"r highlight-green\">$15,200<\/td>\r\n<td class=\"r highlight-green\">$83,700<\/td>\r\n<td class=\"r highlight-green\">$1,600<\/td>\r\n<td class=\"r highlight-green\">$2,300<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Shoe Department<\/td>\r\n<td class=\"r\">$11,750<\/td>\r\n<td class=\"r\">$64,350<\/td>\r\n<td class=\"r\">$9,600<\/td>\r\n<td class=\"r\">$62,000<\/td>\r\n<td class=\"r\">$2,150<\/td>\r\n<td class=\"r\">$2,350<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Accessories Department<\/td>\r\n<td class=\"r\">$5,750<\/td>\r\n<td class=\"r\">$31,500<\/td>\r\n<td class=\"r\">$5,000<\/td>\r\n<td class=\"r\">$30,300<\/td>\r\n<td class=\"r\">$750<\/td>\r\n<td class=\"r\">$1,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight\" style=\"font-weight: bold;\">Totals<\/td>\r\n<td class=\"r highlight\" style=\"font-weight: bold;\">88,800<\/td>\r\n<td class=\"r highlight\" style=\"font-weight: bold;\">490,000<\/td>\r\n<td class=\"r highlight\" style=\"font-weight: bold;\">$86,300<\/td>\r\n<td class=\"r highlight\" style=\"font-weight: bold;\">$485,000<\/td>\r\n<td class=\"r highlight\" style=\"font-weight: bold;\">2,500<\/td>\r\n<td class=\"r highlight\" style=\"font-weight: bold;\">5,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nYou can see that at each level, more and more costs become controllable. Also, the company introduces controllable costs not included on lower level reports into the reports for levels 3, 2, and 1. The only store cost not included at the store manager\u2019s level is the store manager\u2019s salary because it is noncontrollable by that store manager. It is, however, controllable by the store manager\u2019s supervisor, the vice president of operations.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Marcy's Corporation<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Vice President of Operations Responsibility Report<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Actual Amount<\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Budget Amount<\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Over or (Under) Budget<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"font-weight: bold;\">Controllable Expenses<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Vice president\u2019s office expense<\/td>\r\n<td class=\"r\">$2,840<\/td>\r\n<td class=\"r\">$9,500<\/td>\r\n<td class=\"r\">$3,340<\/td>\r\n<td class=\"r\">$17,500<\/td>\r\n<td class=\"r\">($500)<\/td>\r\n<td class=\"r\">($8,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight\">Store manager<\/td>\r\n<td class=\"r highlight\">88,800<\/td>\r\n<td class=\"r highlight\">490,000<\/td>\r\n<td class=\"r highlight\">$86,300<\/td>\r\n<td class=\"r highlight\">$485,000<\/td>\r\n<td class=\"r highlight\">2,500<\/td>\r\n<td class=\"r highlight\">5,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Purchasing<\/td>\r\n<td class=\"r\">5,300<\/td>\r\n<td class=\"r\">32,500<\/td>\r\n<td class=\"r\">$4,300<\/td>\r\n<td class=\"r\">$30,500<\/td>\r\n<td class=\"r\">1,000<\/td>\r\n<td class=\"r\">2,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Receiving<\/td>\r\n<td class=\"r\">4,700<\/td>\r\n<td class=\"r\">33,000<\/td>\r\n<td class=\"r\">$1,700<\/td>\r\n<td class=\"r\">$24,000<\/td>\r\n<td class=\"r\">3,000<\/td>\r\n<td class=\"r\">9,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Salaries of store managers and heads of purchasing and receiving<\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">27,000<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">135,000<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">$27,000<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">$135,000<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">-0-<\/span><\/td>\r\n<td class=\"r\"><span style=\"text-decoration: underline;\">-0-<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight-red\" style=\"font-weight: bold;\">Totals<\/td>\r\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$128,640<\/td>\r\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$700,000<\/td>\r\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$122,640<\/td>\r\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$692,000<\/td>\r\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$6,000<\/td>\r\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$8,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Marcy's Corporation<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">President's Responsibility Report<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Actual Amount<\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Budget Amount<\/td>\r\n<td><\/td>\r\n<td style=\"font-weight: bold;\">Over or (Under) Budget<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"font-weight: bold;\">Controllable Expenses<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>President\u2019s office expense<\/td>\r\n<td class=\"r\">$11,000<\/td>\r\n<td class=\"r\">$55,000<\/td>\r\n<td class=\"r\">$10,000<\/td>\r\n<td class=\"r\">$53,000<\/td>\r\n<td class=\"r\">$1,000<\/td>\r\n<td class=\"r\">$2,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Vice president of operations<\/td>\r\n<td class=\"r highlight-red\">128,640<\/td>\r\n<td class=\"r highlight-red\">700,000<\/td>\r\n<td class=\"r highlight-red\">122,640<\/td>\r\n<td class=\"r highlight-red\">692,000<\/td>\r\n<td class=\"r highlight-red\">6,000<\/td>\r\n<td class=\"r highlight-red\">8,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Vice president of marketing<\/td>\r\n<td class=\"r\">18,700<\/td>\r\n<td class=\"r\">119,000<\/td>\r\n<td class=\"r\">$14,700<\/td>\r\n<td class=\"r\">$111,000<\/td>\r\n<td class=\"r\">4,000<\/td>\r\n<td class=\"r\">8,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Vice president of finance<\/td>\r\n<td class=\"r\">14,000<\/td>\r\n<td class=\"r\">115,000<\/td>\r\n<td class=\"r\">$6,000<\/td>\r\n<td class=\"r\">$106,000<\/td>\r\n<td class=\"r\">8,000<\/td>\r\n<td class=\"r\">9,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Vice presidents\u2019 salaries<\/td>\r\n<td class=\"r\">29,000<\/td>\r\n<td class=\"r\">145,000<\/td>\r\n<td class=\"r\">$29,000<\/td>\r\n<td class=\"r\">$145,000<\/td>\r\n<td class=\"r\">-0-<\/td>\r\n<td class=\"r\">-0-<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"font-weight: bold;\">Totals<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">$201,340<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">$1,134,000<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">$182,340<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">$1,107,000<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">$19,000<\/td>\r\n<td class=\"r\" style=\"font-weight: bold;\">$27,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nBased on an analysis of these reports, the Men\u2019s Clothing Department manager probably would take immediate action to see why supplies and overtime were significantly over budget this month. The store manager may ask the department manager what the problems were and whether they are now under control. The vice president may ask the same question of the store manager. The president may ask each vice president why the budget was exceeded this month and what corrective action has been taken.\r\n\r\nNow, check your understanding of Interpreting budget variances with regard to directing and controlling.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]221662[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Interpret budget variances with regard to directing and controlling<\/li>\n<\/ul>\n<\/div>\n<p>In preparing responsibility accounting reports, companies use two basic methods to handle revenue or expense items. In the first approach, only those items over which a manager has direct control are included in the responsibility report for that management level. Any revenue and expense items that cannot be directly controlled are not included. The second approach is to include all revenue and expense items that can be traced directly or allocated indirectly to a particular manager, whether or not they are controllable. This second method represents a full-cost approach, which means all costs of a given area are disclosed in a single report. When this approach is used, care must be taken to separate controllable from noncontrollable items to differentiate those items for which a manager can and should be held responsible.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-1768 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/17222905\/lance-asper-tx3YTxZn6RA-unsplash-300x169.jpg\" alt=\"Bridge over water\" width=\"300\" height=\"169\" \/>For accounting reports to be of maximum benefit, they must be timely. That is, accountants should prepare reports as soon as possible after the end of the performance-measurement period. Timely reporting allows prompt corrective action to be taken. When reports are delayed excessively, they lose their effectiveness as control devices. For example, a report on the previous month\u2019s operations that is not received until the end of the current month is virtually useless for analyzing poor performance areas and taking corrective action.<\/p>\n<p>Companies also should issue reports regularly in order for managers to spot trends. Then, appropriate management action can be initiated before major problems occur. Regular reporting allows managers to rely on reports and become familiar with their contents.<\/p>\n<p>Firms should make the format of their responsibility reports relatively simple and easy to read. Confusing terminology should be avoided. Where appropriate, expressing results in physical units may be more familiar and understandable to some managers. To assist management in quickly spotting budget variances, companies can report both budgeted (expected) and actual amounts. A budget variance is the difference between the budgeted and actual amounts of an item. Because variances highlight problem areas (exceptions), they are helpful in applying the management-by-exception principle. To help management evaluate performance to date, responsibility reports often include both a current period and year-to-date analysis.<\/p>\n<h2>Example<\/h2>\n<p>Assume a large clothing store called Marcy\u2019s has four management levels\u2014the president, vice president of operations, store manager, and department manager. In this section, we show that a responsibility report would be prepared for each management level. We will begin with the lowest level, the men\u2019s clothing department manager, and work our way up to the president. We start at the lowest level because the totals from each level will be reported in the next highest level.<\/p>\n<p>Only the individual manager\u2019s controllable expenses are contained in these reports. For example, the store manager\u2019s report includes only totals from the men\u2019s clothing department manager\u2019s report. In turn, the report to the vice president includes only totals from the store manager\u2019s report, and so on. Detailed data from the lower levels are summarized or condensed and reported at the next higher level.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Marcy&#8217;s Corporation<\/td>\n<\/tr>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Manager, Men\u2019s Clothing Department<\/td>\n<\/tr>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Responsibility Report<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Actual Amount<\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Budget Amount<\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Over or (Under) Budget<\/td>\n<\/tr>\n<tr>\n<td style=\"font-weight: bold;\">Controllable Expenses<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<\/tr>\n<tr>\n<td>Inventory losses<\/td>\n<td class=\"r\">$2,000<\/td>\n<td class=\"r\">$10,000<\/td>\n<td class=\"r\">$1,900<\/td>\n<td class=\"r\">$9,600<\/td>\n<td class=\"r\">$100<\/td>\n<td class=\"r\">$400<\/td>\n<\/tr>\n<tr>\n<td>Supplies<\/td>\n<td class=\"r\">1,800<\/td>\n<td class=\"r\">8,500<\/td>\n<td class=\"r\">$1,000<\/td>\n<td class=\"r\">$7,550<\/td>\n<td class=\"r\">800<\/td>\n<td class=\"r\">950<\/td>\n<\/tr>\n<tr>\n<td>Salaries<\/td>\n<td class=\"r\">11,000<\/td>\n<td class=\"r\">53,000<\/td>\n<td class=\"r\">$11,100<\/td>\n<td class=\"r\">$52,190<\/td>\n<td class=\"r\">(100)<\/td>\n<td class=\"r\">810<\/td>\n<\/tr>\n<tr>\n<td>Overtime<\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">2,000<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">14,500<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">$1,200<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">$14,360<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">800<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">140<\/span><\/td>\n<\/tr>\n<tr>\n<td class=\"highlight-green\" style=\"font-weight: bold;\">Totals<\/td>\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$16,800<\/td>\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$86,000<\/td>\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$15,200<\/td>\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$83,700<\/td>\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$1,600<\/td>\n<td class=\"r highlight-green\" style=\"font-weight: bold;\">$2,300<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Marcy&#8217;s Corporation<\/td>\n<\/tr>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Store Manager<\/td>\n<\/tr>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Responsibility Report<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Actual Amount<\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Budget Amount<\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Over or (Under) Budget<\/td>\n<\/tr>\n<tr>\n<td style=\"font-weight: bold;\">Controllable Expenses<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<\/tr>\n<tr>\n<td>Children\u2019s Clothing Department<\/td>\n<td class=\"r\">$23,500<\/td>\n<td class=\"r\">$150,450<\/td>\n<td class=\"r\">$24,000<\/td>\n<td class=\"r\">$151,000<\/td>\n<td class=\"r\">($500)<\/td>\n<td class=\"r\">($550)<\/td>\n<\/tr>\n<tr>\n<td>Women\u2019s Clothing Department<\/td>\n<td class=\"r\">$31,000<\/td>\n<td class=\"r\">$157,700<\/td>\n<td class=\"r\">$32,500<\/td>\n<td class=\"r\">$158,000<\/td>\n<td class=\"r\">($1,500)<\/td>\n<td class=\"r\">($300)<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight-green\">Men\u2019s Clothing Department<\/td>\n<td class=\"r highlight-green\">$16,800<\/td>\n<td class=\"r highlight-green\">$86,000<\/td>\n<td class=\"r highlight-green\">$15,200<\/td>\n<td class=\"r highlight-green\">$83,700<\/td>\n<td class=\"r highlight-green\">$1,600<\/td>\n<td class=\"r highlight-green\">$2,300<\/td>\n<\/tr>\n<tr>\n<td>Shoe Department<\/td>\n<td class=\"r\">$11,750<\/td>\n<td class=\"r\">$64,350<\/td>\n<td class=\"r\">$9,600<\/td>\n<td class=\"r\">$62,000<\/td>\n<td class=\"r\">$2,150<\/td>\n<td class=\"r\">$2,350<\/td>\n<\/tr>\n<tr>\n<td>Accessories Department<\/td>\n<td class=\"r\">$5,750<\/td>\n<td class=\"r\">$31,500<\/td>\n<td class=\"r\">$5,000<\/td>\n<td class=\"r\">$30,300<\/td>\n<td class=\"r\">$750<\/td>\n<td class=\"r\">$1,200<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight\" style=\"font-weight: bold;\">Totals<\/td>\n<td class=\"r highlight\" style=\"font-weight: bold;\">88,800<\/td>\n<td class=\"r highlight\" style=\"font-weight: bold;\">490,000<\/td>\n<td class=\"r highlight\" style=\"font-weight: bold;\">$86,300<\/td>\n<td class=\"r highlight\" style=\"font-weight: bold;\">$485,000<\/td>\n<td class=\"r highlight\" style=\"font-weight: bold;\">2,500<\/td>\n<td class=\"r highlight\" style=\"font-weight: bold;\">5,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>You can see that at each level, more and more costs become controllable. Also, the company introduces controllable costs not included on lower level reports into the reports for levels 3, 2, and 1. The only store cost not included at the store manager\u2019s level is the store manager\u2019s salary because it is noncontrollable by that store manager. It is, however, controllable by the store manager\u2019s supervisor, the vice president of operations.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Marcy&#8217;s Corporation<\/td>\n<\/tr>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Vice President of Operations Responsibility Report<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Actual Amount<\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Budget Amount<\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Over or (Under) Budget<\/td>\n<\/tr>\n<tr>\n<td style=\"font-weight: bold;\">Controllable Expenses<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<\/tr>\n<tr>\n<td>Vice president\u2019s office expense<\/td>\n<td class=\"r\">$2,840<\/td>\n<td class=\"r\">$9,500<\/td>\n<td class=\"r\">$3,340<\/td>\n<td class=\"r\">$17,500<\/td>\n<td class=\"r\">($500)<\/td>\n<td class=\"r\">($8,000)<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight\">Store manager<\/td>\n<td class=\"r highlight\">88,800<\/td>\n<td class=\"r highlight\">490,000<\/td>\n<td class=\"r highlight\">$86,300<\/td>\n<td class=\"r highlight\">$485,000<\/td>\n<td class=\"r highlight\">2,500<\/td>\n<td class=\"r highlight\">5,000<\/td>\n<\/tr>\n<tr>\n<td>Purchasing<\/td>\n<td class=\"r\">5,300<\/td>\n<td class=\"r\">32,500<\/td>\n<td class=\"r\">$4,300<\/td>\n<td class=\"r\">$30,500<\/td>\n<td class=\"r\">1,000<\/td>\n<td class=\"r\">2,000<\/td>\n<\/tr>\n<tr>\n<td>Receiving<\/td>\n<td class=\"r\">4,700<\/td>\n<td class=\"r\">33,000<\/td>\n<td class=\"r\">$1,700<\/td>\n<td class=\"r\">$24,000<\/td>\n<td class=\"r\">3,000<\/td>\n<td class=\"r\">9,000<\/td>\n<\/tr>\n<tr>\n<td>Salaries of store managers and heads of purchasing and receiving<\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">27,000<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">135,000<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">$27,000<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">$135,000<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">-0-<\/span><\/td>\n<td class=\"r\"><span style=\"text-decoration: underline;\">-0-<\/span><\/td>\n<\/tr>\n<tr>\n<td class=\"highlight-red\" style=\"font-weight: bold;\">Totals<\/td>\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$128,640<\/td>\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$700,000<\/td>\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$122,640<\/td>\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$692,000<\/td>\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$6,000<\/td>\n<td class=\"r highlight-red\" style=\"font-weight: bold;\">$8,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">Marcy&#8217;s Corporation<\/td>\n<\/tr>\n<tr>\n<td class=\"c\" style=\"font-weight: bold;\" colspan=\"7\">President&#8217;s Responsibility Report<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Actual Amount<\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Budget Amount<\/td>\n<td><\/td>\n<td style=\"font-weight: bold;\">Over or (Under) Budget<\/td>\n<\/tr>\n<tr>\n<td style=\"font-weight: bold;\">Controllable Expenses<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">This Month<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">Year to Date<\/td>\n<\/tr>\n<tr>\n<td>President\u2019s office expense<\/td>\n<td class=\"r\">$11,000<\/td>\n<td class=\"r\">$55,000<\/td>\n<td class=\"r\">$10,000<\/td>\n<td class=\"r\">$53,000<\/td>\n<td class=\"r\">$1,000<\/td>\n<td class=\"r\">$2,000<\/td>\n<\/tr>\n<tr>\n<td>Vice president of operations<\/td>\n<td class=\"r highlight-red\">128,640<\/td>\n<td class=\"r highlight-red\">700,000<\/td>\n<td class=\"r highlight-red\">122,640<\/td>\n<td class=\"r highlight-red\">692,000<\/td>\n<td class=\"r highlight-red\">6,000<\/td>\n<td class=\"r highlight-red\">8,000<\/td>\n<\/tr>\n<tr>\n<td>Vice president of marketing<\/td>\n<td class=\"r\">18,700<\/td>\n<td class=\"r\">119,000<\/td>\n<td class=\"r\">$14,700<\/td>\n<td class=\"r\">$111,000<\/td>\n<td class=\"r\">4,000<\/td>\n<td class=\"r\">8,000<\/td>\n<\/tr>\n<tr>\n<td>Vice president of finance<\/td>\n<td class=\"r\">14,000<\/td>\n<td class=\"r\">115,000<\/td>\n<td class=\"r\">$6,000<\/td>\n<td class=\"r\">$106,000<\/td>\n<td class=\"r\">8,000<\/td>\n<td class=\"r\">9,000<\/td>\n<\/tr>\n<tr>\n<td>Vice presidents\u2019 salaries<\/td>\n<td class=\"r\">29,000<\/td>\n<td class=\"r\">145,000<\/td>\n<td class=\"r\">$29,000<\/td>\n<td class=\"r\">$145,000<\/td>\n<td class=\"r\">-0-<\/td>\n<td class=\"r\">-0-<\/td>\n<\/tr>\n<tr>\n<td style=\"font-weight: bold;\">Totals<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">$201,340<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">$1,134,000<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">$182,340<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">$1,107,000<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">$19,000<\/td>\n<td class=\"r\" style=\"font-weight: bold;\">$27,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>Based on an analysis of these reports, the Men\u2019s Clothing Department manager probably would take immediate action to see why supplies and overtime were significantly over budget this month. The store manager may ask the department manager what the problems were and whether they are now under control. The vice president may ask the same question of the store manager. The president may ask each vice president why the budget was exceeded this month and what corrective action has been taken.<\/p>\n<p>Now, check your understanding of Interpreting budget variances with regard to directing and controlling.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm221662\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=221662&theme=oea&iframe_resize_id=ohm221662\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-291\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Budget Variances. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Bridge. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/tx3YTxZn6RA\">https:\/\/unsplash.com\/photos\/tx3YTxZn6RA<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":12,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Budget Variances\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Bridge\",\"author\":\"\",\"organization\":\"Unsplash\",\"url\":\"https:\/\/unsplash.com\/photos\/tx3YTxZn6RA\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-291","chapter","type-chapter","status-publish","hentry"],"part":39,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/291","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":8,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/291\/revisions"}],"predecessor-version":[{"id":2620,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/291\/revisions\/2620"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/39"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/291\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/media?parent=291"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=291"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=291"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/license?post=291"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}