Lecture 5- Standard costing & variance analysis (2)

Controllability principle- Principle that it's appropriate to [blank_start]charge[blank_end] to an area of [blank_start]responsibility[blank_end] only those [blank_start]costs[blank_end] that are significantly [blank_start]influenced[blank_end] by manager of that responsibility centre

Responsibility accounting- Creation of [blank_start]responsibility[blank_end] centres & [blank_start]accumulation[blank_end] of costs & revenues so that [blank_start]deviations[blank_end] from budget can be attributed to [blank_start]individual[blank_end] who is accountable for responsibility centre

Responsibility centre- [blank_start]Unit[blank_end] of firm where an [blank_start]individual[blank_end] manager is held [blank_start]responsible[blank_end] for unit's [blank_start]performance[blank_end]

Cost centre- [blank_start]Responsibility[blank_end] centres whose [blank_start]managers[blank_end] are normally accountable for only those [blank_start]costs[blank_end] that are under their [blank_start]control[blank_end], also known as [blank_start]expense[blank_end] centres

Revenue centre- [blank_start]Responsibility[blank_end] centres where [blank_start]managers[blank_end] are mainly accountable for [blank_start]financial[blank_end] outputs in form of generating [blank_start]sales revenues[blank_end]

Profit centre- [blank_start]Responsibility[blank_end] centres where [blank_start]managers[blank_end] are accountable for both [blank_start]revenues[blank_end] & [blank_start]costs[blank_end]

Investment centre- [blank_start]Responsibility[blank_end] centres whose [blank_start]managers[blank_end] are responsible for both [blank_start]sales revenues[blank_end] & [blank_start]costs[blank_end] & also have responsibility & authority to make [blank_start]capital investment[blank_end] decisions

One element of management accounting control systems is [blank_start]formal planning[blank_end] processes such as [blank_start]budgeting[blank_end] & [blank_start]long-term planning[blank_end]. These processes are used for establishing performance [blank_start]expectations[blank_end] for [blank_start]evaluating[blank_end] performance

Another element of management accounting control systems is [blank_start]responsibility accounting[blank_end] which involves creation of [blank_start]responsibility centres[blank_end]

Engineered targets- Used when there are clearly [blank_start]defined[blank_end] & stable [blank_start]input-output[blank_end] relationships such that [blank_start]inputs[blank_end] required can be estimated [blank_start]directly[blank_end] from [blank_start]product specifications[blank_end]

Targets derived from historical data- [blank_start]Previous[blank_end] results & an increase for expected [blank_start]price changes[blank_end] may form basis for setting [blank_start]targets[blank_end] or an [blank_start]improvement[blank_end] factor may be incorporated into [blank_start]estimate[blank_end]

Negotiated targets- Set based on [blank_start]negotiations[blank_end] between [blank_start]superiors[blank_end] & [blank_start]subordinates[blank_end]

With budget-constrained style, [blank_start]budget[blank_end] data are used in [blank_start]rigid[blank_end] manner in [blank_start]performance evaluation[blank_end]

Profit-conscious style uses [blank_start]accounting[blank_end] data in more [blank_start]flexible[blank_end] manner, with emphasis for [blank_start]performance evaluation[blank_end] on unit's contribution to [blank_start]long-term profitability[blank_end]

With non-accounting style, [blank_start]accounting[blank_end] data plays relatively [blank_start]unimportant[blank_end] part in [blank_start]performance evaluation[blank_end]

Responsibility accounting involves: distinguishing between items managers [blank_start]can control[blank_end] & those items they [blank_start]cannot control[blank_end], holding managers [blank_start]accountable[blank_end] only for those items they can [blank_start]control[blank_end], setting [blank_start]financial[blank_end] performance targets & determining how [blank_start]challenging[blank_end] those targets should be & determining how much [blank_start]influence[blank_end] managers should have in setting of [blank_start]targets[blank_end]

Budget-constrained style has adverse [blank_start]behavioural[blank_end] & [blank_start]emotional[blank_end] effects on [blank_start]managers[blank_end], especially where there are high levels of [blank_start]interdependency[blank_end] or [blank_start]task uncertainty[blank_end]

Managers pay attention to costs with [blank_start]budget-constrained[blank_end] & [blank_start]profit-conscious[blank_end] style

Difficulty with controllability principle is that [blank_start]many areas[blank_end] do not fit neatly into either [blank_start]controllable[blank_end] & [blank_start]uncontrollable[blank_end] categories. They are partially [blank_start]controllable[blank_end]. When outcomes are affected by occurrences outside manager's control, competent [blank_start]manager[blank_end] can take [blank_start]action[blank_end] to reduce their [blank_start]adverse[blank_end] effects

Responsibility accounting can lead to [blank_start]dysfunctional[blank_end] behaviour in situations of high [blank_start]managerial interdependency[blank_end] & high [blank_start]task uncertainty[blank_end]

To deal with uncontrollable factors before measurement period has started [blank_start]exclude[blank_end] effect from [blank_start]performance[blank_end] report & [blank_start]show[blank_end] effect in [blank_start]separate[blank_end] report

To deal with uncontrollable factors after measurement period has ended do [blank_start]variance analysis[blank_end], [blank_start]flexible performance[blank_end] standards, [blank_start]relative performance[blank_end] evaluations & [blank_start]subjective performance[blank_end] evaluations