Chapter 5 - Responsibility Centres

Question 1

Decentralisation

Answer 1

Objective:

• goal congruence
• increase motivation
• reduce head office bureaucracy
• provide better training for lower and middle mgmt

aka divisionalisation

avoid them acting in their own best interest by:

• promote goal congruence
• encourage initiative and motivation
• provide mgmt feedback
• promote long term view

=> introduce responsibility centres

Question 2

Profit and Cost centers and investment centre

Answer 2

cost centre: just costs
profit centre: costs and profits
Investment centre: cost, revenue, capital

Question 3

Responsibility and controllability of costs

Answer 3

Controllable: variable and directly attributable fixed costs

Committed fixed costs might be controllable in the long term, some committed fixed costs might be discretionary in nature (long term, but controllable)

uncontrollable for one manager might be controllable for another manager

Question 4

Participation in the budget process improves motivation:

Answer 4

IMPOSED (top down) with no input from the budget holder
fast
easy (manager does not need planning skills)
senior managers have a better overview
senior managers know the long term better
lower levels might build in slack
no office politics
provides external departmental opinion
avoids dissatisfaction of pseudo-participation

PARTICIPATIVE (bottom up)
better for morale
higher level of target acceptance
better detailed knowledge

Question 5

Behavioral aspects of budgetary control

Answer 5

motivation and co-operation
failure of goal congruence (sustainability)
pot of cash (spend the full budget)
budget negotiation (padding, negotiators, time)
influencing accounting policies
start up costs issue (costs impact short term budgets)
turns managers risk averse (to avoid budget impacts)

Question 6

Budget and motivation

Answer 6

loose budget: poor motivator
tight budget: good motivator
overly tight budgets: no motivation