ACC513 Profit Planning, Budgeting and Performance Evaluation


This lesson shows how to develop profit plans. Budgets are a tool for planning, performance evaluation, and motivation. The idea of responsibility centers is explained. Steps to develop the master budget are identified along with ethical dilemmas in budgeting. The appendixes list components of a comprehensive master budget and describe an incentive model for accurate reporting. Finally, this lesson provides additional detail in comparing the profits achieved with those budgeted (profit variance analysis).

Lesson Learning Objectives

By the conclusion of this Lesson you should be able to:

  • Use a budget as a tool for planning and performance evaluation.
  • Explain how a budget can affect employee motivation.
  • Contrast the differences between a flexible budget and a master budget.
  • Describe ethical dilemmas in budgeting.
  • Evaluate the components of a comprehensive master budget.
  • Conduct variance analyses.
  • Use a budget for performance evaluation.
  • Explain different types of variances between actual results and the flexible budget.
  • Calculate mix variance.


Study Chapters 9 and 10 of the text.

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The following assignments should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Whenever possible, submit your responses to all assignment questions in one WORD document.

Short Answer Questions

  1. What is the difference between a cost center and a profit center?
  2. What is the difference between a profit center and an investment center?
  3. Why is it difficult to assess the effectiveness of discretionary cost centers?
  4. Why is the sales forecast so important in developing the master budget?
  5. Provide an example of how general economic trends would affect sales forecasting in the airline industry.
  6. How would management evaluate performance without a budget?
  7. What is the difference between a standard and a budget?
  8. Describe the basic decision that management must make when considering whether to investigate a variance.
  9. Why are the variances for fixed costs different from the variances for variable costs?
  10. For control purposes, why is an efficiency variance not calculated for fixed manufacturing overhead?

Professional Development Questions

  1. In chapter 9 of the text (page 330), answer the case study question #25. (Maxum Company; preparing flexible budgets.)
  2. In chapter 10 of the text (page 374), answer the case study question #31. (Crowe Sales; nonmanufacturing variances)

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