Cost Accounting (14th Edition)

HUMAN ASPECTS OF BUDGETING 201
Managers should avoid overemphasizing controllability. Responsibility accounting is
more far-reaching. It focuses on gaining information and knowledge, not only on control.
Responsibility accounting helps managers to first focus on whom they should ask to
obtain information and not on whom they should blame. For example, if actual revenues
at a Marriott hotel are less than budgeted revenues, the managers of the hotel may be
tempted to blame the sales manager for the poor performance. The fundamental purpose
of responsibility accounting, however, is not to fix blame but to gather information to
enable future improvement.
Managers want to know who can tell them the most about the specific item in question,
regardless of that person’s ability to exert personal control over that item. For
instance, purchasing managers may be held accountable for total purchase costs, not
because of their ability to control market prices, but because of their ability to predict
uncontrollable prices and to explain uncontrollable price changes. Similarly, managers at
a Pizza Hut unit may be held responsible for operating income of their units, even though
they (a) do not fully control selling prices or the costs of many food items and (b) have
minimal flexibility about what items to sell or the ingredients in the items they sell. They
are, however, in the best position to explain differences between their actual operating
incomes and their budgeted operating incomes.
Performance reports for responsibility centers are sometimes designed to change managers’
behavior in the direction top management desires. A cost-center manager may
emphasize efficiency and deemphasize the pleas of sales personnel for faster service and
rush orders. When evaluated as a profit center, the manager will more likely consider
ways to influence activities that affect sales and weigh the impact of decisions on costs
and revenues rather than on costs alone. To induce that change, some companies have
changed the accountability of a cost center to a profit center. Call centers are an interesting
example of this trend. As firms continue to differentiate on customer service while
attempting to control operating expenses, driving efficiency wherever possible in the call
centers has become a critical issue—as has driving revenue through this unique channel.
There is increasing pressure for customer service representatives to promote new offers
through upsell and cross-sell tactics. Microsoft, Oracle, and others offer software platforms
that seek to evolve the call center from cost center to profit center. The new adage
is, “Every service call is a sales call.”
Decision
Point
How do companies
use responsibility
centers? Should
performance reports
of responsibility
center managers
include only costs
the manager
can control?
Human Aspects of Budgeting
Why did we discuss the two major topics, the master budget and responsibility
accounting, in the same chapter? Primarily to emphasize that human factors are crucial
in budgeting. Too often, budgeting is thought of as a mechanical tool as the budgeting
techniques themselves are free of emotion. However, the administration of budgeting
requires education, persuasion, and intelligent interpretation.
Budgetary Slack
As we discussed earlier in this chapter, budgeting is most effective when lower-level managers
actively participate and meaningfully engage in the budgeting process.
Participation adds credibility to the budgeting process and creates greater commitment
and accountability toward the budget. But participation requires “honest” communication
about the business from subordinates and lower-level managers to their bosses.
At times, subordinates may try to “play games” and build in budgetary slack.
Budgetary slack describes the practice of underestimating budgeted revenues, or overestimating
budgeted costs, to make budgeted targets more easily achievable. It frequently
occurs when budget variances (the differences between actual results and
budgeted amounts) are used to evaluate performance. Line managers are also unlikely
to be fully honest in their budget communications if top management mechanically
institutes across-the-board cost reductions (say, a 10% reduction in all areas) in the
face of projected revenue reductions.
Budgetary slack provides managers with a hedge against unexpected adverse circumstances.
But budgetary slack also misleads top management about the true profit potential
Learning
Objective 6
Recognize the human
aspects of budgeting
. . . to engage
subordinate
managers in the
budgeting process