Budgets and the Exotic Newcastle Disease

Exotic Newcastle Disease, one of the most infectious bird diseases in the world, kills so swiftly that many victims die before any symptoms appear. When it broke out in Southern California, it could have spelled disaster for the San Diego Zoo. “We have one of the most valuable collections of birds in the world, if not the most valuable,” says Paula Brock, CFO of the Zoological Society of San Diego, which operates the zoo.

Bird exhibits were closed to the public for several months (the disease, which is harmless to humans, can be carried on clothes and shoes). The tires of arriving delivery trucks were sanitized, as were the shoes of anyone visiting the zoo’s nonpublic areas. Zookeeper uniforms had to be changed and cleaned daily. And ultimately, the zoo, with $150 million in revenues, spent almost half a million dollars on quarantine measures.

It worked: No birds got sick. Better yet, the damage to the rest of the zoo’s budget was minimized by another protective measure: the monthly budget reforecast. “When we get a hit like this, we still have to find a way to make our bottom line,” says Brock. Thanks to a new planning process Brock had introduced a year earlier, the zoo’s scientists were able to raise the financial alarm as they redirected resources to ward off the disease. “Because we had timely awareness,” she says, “we were able to make adjustments to weather the storm.”

Source: Tim Reason, “Budgeting in the Real World,” CFO Magazine (July 12, 2005), www.cfodirect.com/cfopublic.nsf/vContentPrint/649A82C8FF8AB06B85257037004 (accessed July 2005).

What is the major benefit of tying a budget to the overall goals of the company? (Go to WileyPLUS for this answer and additional questions.)

DO IT! 2

Flexible Budgets

In Strassel Company’s flexible budget graph, the fixed cost line and the total budgeted cost line intersect the vertical axis at $36,000. The total budgeted cost line is $186,000 at an activity level of 50,000 direct labor hours. Compute total budgeted costs at 30,000 direct labor hours.

Action Plan

✓ Apply the formula: Fixed costs+Variable costs (Total variable cost per unit×Activity level)=Total budgeted costsFixed costs+Variable costs (Total variable cost per unit×Activity level)=Total budgeted costs.

SOLUTION

Using the graph, fixed costs are $36,000, and variable costs are $3 per direct labor hour [($186,000−$36,000)÷50,000][($186,000−$36,000)÷50,000]. Thus, at 30,000 direct labor hours, total budgeted costs are $126,000 [$36,000+($3×30,000)]$126,000 [$36,000+($3×30,000)].

Related exercise material: BE22-4, E22-3, E22-5, and DO IT! 22-2.

LEARNING OBJECTIVE 3

Apply responsibility accounting to cost and profit centers.

Like budgeting, responsibility accounting is an important part of management accounting.  Responsibility accounting  involves accumulating and reporting costs (and revenues, where relevant) on the basis of the manager who has the authority to make the day‐to‐day decisions about the items. Under responsibility accounting, a manager’s performance is evaluated on matters directly under that manager’s control. Responsibility accounting can be used at every level of management in which the following conditions exist.

1. Costs and revenues can be directly associated with the specific level of management responsibility.

2. The costs and revenues can be controlled by employees at the level of responsibility with which they are associated.

3. Budget data can be developed for evaluating the manager’s effectiveness in controlling the costs and revenues.

Illustration 22-17  depicts levels of responsibility for controlling costs.

ILLUSTRATION 22-17 Responsibility for controllable costs at varying levels of management

Under responsibility accounting, any individual who controls a specified set of activities can be a responsibility center. Thus, responsibility accounting may extend from the lowest level of control to the top strata of management. Once responsibility is established, the company first measures and reports the effectiveness of the individual’s performance for the specified activity. It then reports that measure upward throughout the organization.

Responsibility accounting is especially valuable in a decentralized company.  Decentralization  means that the control of operations is delegated to many managers throughout the organization. The term  segment  is sometimes used to identify an area of responsibility in decentralized operations. Under responsibility accounting, companies prepare segment reports periodically, such as monthly, quarterly, and annually, to evaluate managers’ performance.

Responsibility accounting is an essential part of any effective system of budgetary control. The reporting of costs and revenues under responsibility accounting differs from budgeting in two respects:

1. A distinction is made between controllable and noncontrollable items.

2. Performance reports either emphasize or include only items controllable by the individual manager.

Responsibility accounting applies to both profit and not‐for‐profit entities. For‐profit entities seek to maximize net income. Not‐for‐profit entities wish to provide services as efficiently as possible.