Cost Accounting (14th Edition)

200 CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
to 15% of the monthly profits per customer. The costs for each customer included the
ordering and delivery costs. The effect of this change was immediate. The sales department
began charging customers for ordering and delivery, and salespeople at OPD
actively encouraged customers to consolidate their purchases into fewer orders. As a
result, each order began producing larger revenues. Customer profitability increased
because of a 40% reduction in ordering and delivery costs in one year.
Feedback
Budgets coupled with responsibility accounting provide feedback to top management
about the performance relative to the budget of different responsibility center managers.
Differences between actual results and budgeted amounts—called variances—if properly
used, can help managers implement and evaluate strategies in three ways:
1. Early warning. Variances alert managers early to events not easily or immediately evident.
Managers can then take corrective actions or exploit the available opportunities.
For example, after observing a small decline in sales this period, managers may want to
investigate if this is an indication of an even steeper decline to follow later in the year.
2. Performance evaluation. Variances prompt managers to probe how well the company
has performed in implementing its strategies. Were materials and labor used efficiently?
Was R&D spending increased as planned? Did product warranty costs
decrease as planned?
3. Evaluating strategy. Variances sometimes signal to managers that their strategies are
ineffective. For example, a company seeking to compete by reducing costs and
improving quality may find that it is achieving these goals but that it is having little
effect on sales and profits. Top management may then want to reevaluate the strategy.
Responsibility and Controllability
Controllability is the degree of influence that a specific manager has over costs, revenues,
or related items for which he or she is responsible. A controllable cost is any cost that is
primarily subject to the influence of a given responsibility center manager for a given
period. A responsibility accounting system could either exclude all uncontrollable costs
from a manager’s performance report or segregate such costs from the controllable costs.
For example, a machining supervisor’s performance report might be confined to direct
materials, direct manufacturing labor, power, and machine maintenance costs and might
exclude costs such as rent and taxes paid on the plant.
In practice, controllability is difficult to pinpoint for at least two reasons:
1. Few costs are clearly under the sole influence of one manager. For example, prices of
direct materials may be influenced by a purchasing manager, but these prices also
depend on market conditions beyond the manager’s control. Quantities used may be
influenced by a production manager, but quantities used also depend on the quality of
materials purchased. Moreover, managers often work in teams. Think about how difficult
it is to evaluate individual responsibility in a team situation.
2. With a long enough time span, all costs will come under somebody’s control. However,
most performance reports focus on periods of a year or less. A current manager may
benefit from a predecessor’s accomplishments or may inherit a predecessor’s problems
and inefficiencies. For example, present managers may have to work under undesirable
contracts with suppliers or labor unions that were negotiated by their predecessors.
How can we separate what the current manager actually controls from the results of
decisions made by others? Exactly what is the current manager accountable for?
Answers may not be clear-cut.
Executives differ in how they embrace the controllability notion when evaluating those
reporting to them. Some CEOs regard the budget as a firm commitment that subordinates
must meet. Failure to meet the budget is viewed unfavorably. Other CEOs believe a more
risk-sharing approach with managers is preferable, in which noncontrollable factors and
performance relative to competitors are taken into account when judging the performance
of managers who fail to meet their budgets.