Cost Accounting (14th Edition)

BUDGETING AND RESPONSIBILITY ACCOUNTING 199
product development programs that it had included in its 2012 budget but that could be
deferred to a later year. More generally, when the success or viability of a venture is highly
dependent on attaining one or more targets, managers should frequently update their
budgets as uncertainty is resolved. These updated budgets can help managers to adjust
expenditure levels as circumstances change.
Instructors and students who, at this point, want to explore the cash budget and the
budgeted balance sheet for the Stylistic Furniture example can skip ahead to the appendix
on page 206.
Decision
Point
How can managers
plan for changes in
the assumptions
underlying the
budget?
Budgeting and Responsibility Accounting
To attain the goals described in the master budget, a company must coordinate the
efforts of all its employees—from the top executive through all levels of management to
every supervised worker. Coordinating the company’s efforts means assigning responsibility
to managers who are accountable for their actions in planning and controlling
human and other resources. How each company structures its own organization significantly
shapes how the company’s efforts will be coordinated.
Organization Structure and Responsibility
Organization structure is an arrangement of lines of responsibility within the organization.
A company such as ExxonMobil is organized by business function—exploration,
refining, marketing, and so on—with the president of each business-line company having
decision-making authority over his or her function. Another company, such as Procter &
Gamble, the household-products giant, is organized primarily by product line or brand.
The managers of the individual divisions (toothpaste, soap, and so on) would each have
decision-making authority concerning all the business functions (manufacturing, marketing,
and so on) within that division.
Each manager, regardless of level, is in charge of a responsibility center. A
responsibility center is a part, segment, or subunit of an organization whose manager is
accountable for a specified set of activities. The higher the manager’s level, the broader the
responsibility center and the larger the number of his or her subordinates. Responsibility
accounting is a system that measures the plans, budgets, actions, and actual results of
each responsibility center. Four types of responsibility centers are as follows:
Learning
Objective 5
Describe responsibility
centers
. . . a part of an
organization that a
manager is
accountable for
and responsibility
accounting
. . . measurement of
plans and actual results
that a manager is
accountable for
1. Cost center—the manager is accountable for costs only.
2. Revenue center—the manager is accountable for revenues only.
3. Profit center—the manager is accountable for revenues and costs.
4. Investment center—the manager is accountable for investments, revenues, and costs.
The maintenance department of a Marriott hotel is a cost center because the maintenance
manager is responsible only for costs, so this budget is based on costs. The sales
department is a revenue center because the sales manager is responsible primarily for revenues,
so this budget is based on revenues. The hotel manager is in charge of a profit center
because the manager is accountable for both revenues and costs, so this budget is
based on revenues and costs. The regional manager responsible for determining the
amount to be invested in new hotel projects and for revenues and costs generated from
these investments is in charge of an investment center, so this budget is based on revenues,
costs, and the investment base.
A responsibility center can be structured to promote better alignment of individual
and company goals. For example, until recently, OPD, an office products distributor,
operated its sales department as a revenue center. Each salesperson received a commission
of 3% of the revenues per order, regardless of its size, the cost of processing it, or the cost
of delivering the office products. An analysis of customer profitability at OPD found that
many customers were unprofitable. The main reason was the high ordering and delivery
costs of small orders. OPD’s managers decided to make the sales department a profit center,
accountable for revenues and costs, and to change the incentive system for salespeople