Albrecht 19.pdf - Marriott School

76154_23_ch19_p942-1006.qxd 3/1/07 3:35 PM Page 947
Controlling Cost, Profit, and Investment Centers Chapter 19 947
goal congruence
The selection of goals for
responsibility centers that
are consistent, or congruent,
with those of the
company as a whole.
Decentralization has its drawbacks as well. Decisions made by managers of decentralized
units are sometimes not consistent with the overall objectives of the firm. For example,
Edison Automobile might find it less expensive to buy computer parts for its automobiles
from an outside source than from Acme Computer, or the Service division of Japan operations
may find it cheaper to buy repair parts from outsiders rather than from the Manufacturing
division. Such decisions would allow the buying divisions to report lower costs, but the decisions
might decrease the company’s overall profitability (depending on whether or not
costs in other division can actually be avoided when Edison Automobile decides to purchase
computer parts from an outside vendor).
There are two ways to prevent such problems. First, certain decisions should
be centralized. For example, all decisions related to insurance coverage, which
benefits the entire company, should probably be made at the corporate level.
Second, an effective system of responsibility accounting should be established so
that a manager’s decisions will benefit not only the segment but also the firm as
a whole. This goal congruence, whereby the goals of the company and all its
segments are in harmony, can be achieved only if the responsibility accounting
system is well designed.
responsibility
accounting
A system of evaluating performance;
managers are
held accountable for the
costs, revenues, assets, or
other elements over which
they have control.
exception reports
Reports that highlight variances
from, or exceptions
to, the budget.
Responsibility Accounting
Responsibility accounting is a system in which managers are assigned and held
accountable for certain costs, revenues, and/or assets. There are two important
behavioral considerations in assigning responsibilities to managers.
• First, the responsible manager should be involved in developing the plan
for the unit over which the manager has control. Current research indicates
that people are more motivated to achieve a goal if they participate in setting
it. Such participation assures that the goals will be reasonable and, perhaps
more importantly, that they will be perceived to be reasonable by the
managers.
• Second, a manager should be held accountable only for those costs,
revenues, or assets over which the manager has substantial control. Some
costs may be generated within a segment, but control over them lies outside
that unit. The manager of the Japan Manufacturing division, for example,
may be held responsible for labor costs, but employee wages may be determined
by a union scale controlled elsewhere. Admittedly, determining “substantial
control” requires a judgment based on the circumstances, but if all
relevant factors are considered, careful and fair judgments can be made.
Responsibility Accounting Reports Regardless of the degree of autonomy given to
managers at various operating levels, performance reports based on responsibility accounting
are needed at all levels of the organization. At the lowest levels, these reports tell managers
where corrective action must be taken to control their segments’ operations. At top
levels, these reports keep management informed of the activities of all segments. The reports
are then used to reward past performance and set incentives for future performance.
Exhibit 2 illustrates the kind of responsibility accounting reports a company might
use. Note that reporting begins at the bottom and “rolls” upward, with each manager receiving
information on the operations for which that manager is responsible, as well as
summary information on the performance of lower-level managers. Note also that
these reports are exception reports, meaning that variances from, or exceptions
to, the budget are highlighted. In the report, unfavorable variances are
labeled “U” while favorable variances are labeled “F.” Such reports direct management
immediately to the areas requiring their attention. Note that Exhibit 2
reports only on cost management. In this chapter, we’ll also discuss reporting
performance on revenue and asset management.