5 Flashcards
What is decentralisation
Organisation is divided into responsibility centres
What is a responsibility centre
Unit of a business where an individual manager is held responsible for units performance
Links are made between responsibility, accountability and incentives
In cost or expense centres, what are managers normally accountable for
Costs under their control
In revenue centres, what are managers normally accountable for
Revenues that they generate
In profit centres, what are managers normally responsible for
Profits rather than specific costs or revenues
What are investment centre managers normally responsible for
Determining level of investments (Capital expenditure decisions) that will result in best profits and return on that investment
What should responsibility accounting involve
Distinguishing between items managers can control and those items they cannot control
Holding managers accountable only for those items that they can control
Setting financial performance targets and determining how challenging those targets should be
Determining how much influence managers should have in setting targets 
What is the controllability principle
We should use performance measures including costs and revenues for which manager has significant influence
What difficulties does the controllability principal create
Many overlaps and grey areas
Some effects are only partially controllable
It can be sensible to have managers responsible for responding to events that lay outside their control
Responsibility accounting can lead to dysfunctional behaviour in situations of high managerial interdependency and high task uncertainty
More on the controllability principle
If a manager can control quantity and price, then they are held accountable for whole cost or revenue
If a manager can control price but not quantity or quantity but not price, a more detailed breakdown of variances is required
If a manager cannot control either quantity or price, then cost is uncontrollable and manager shouldn’t be held accountable for differences to budget
What is a benchmark
Point of reference from which comparisons may be made
What is benchmarking
Continuous process of measuring activities against best levels of performance
How are standards and target set
Engineered targets – clear and stable input output relationships, strong estimation of inputs required
Historical targets – previous results plus incremental changes
Negotiated targets – information asymmetry, contracts and participation and motivation
How ambitious should targets be
A budget that is good for planning (expectations budget) may not be motivational
A budget that is good for motivation (optimal performance budget) may not be good for control
How should we use accounting information in performance evaluation
Budget constrained style
Profit conscious style
Non accounting style
