Page 60 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 4: Responsibility Centers

Second, the difference between budgeted and actual expense is not a measure of efficiency. It is Notes
simply the difference between the budgeted input and the actual input.
Third, the financial control system measures neither the efficiency nor the effectiveness of these
responsibility centres. It is necessary, therefore, that non-financial measures and judgements be
employed in evaluating their performance.

Committed expenses: These are expenses that cannot be changed by the responsibility centre
manager during the budget year or expenses that can be changed only in extraordinary
circumstances. Depreciation is fixed by the amount of depreciable assets in place during the year
and can be changed only by the disposal or addition of assets. Other examples are long-term
leases, salaries of key personnel. These amounts are not useful for management control purposes;
they are included in the budget to show the overall profitability of business units and to indicate
to responsibility centre managers the size of the resources that they use. In judging actual
performance, the actual amount is set equal to the budgeted amount, so no variance develops.

Task Take an example of any public sector enterprise and write about responsibility
accounting and its responsibility centres.

Approaches to budgeting with reference to engineered / standard and discretionary costs: The
starting point in preparing the budget is the current level of spending. The budgetee adjusts
these amounts for anticipated inflation, cost implications of the changes in the job to be done
and in some cases for anticipated productivity improvements. In some companies, the preparation
of budget is preceded by a zero base review.
In the case of engineered expense centre/standard cost centre, management must decide whether
the proposed operating budget represents the cost of performing a task efficiently for the coming
period. Once that is decided, based on the actions of other responsibility centres such as: marketing
department’s ability to generate sales, magnitudes of the tasks is determined.
In the case of discretionary cost centre, while formulating the budget, managements’ principal
task is to decide on the magnitude of the job that should be done, because based on such job
expenses/resources are budgeted. The following questions are asked about a discretionary
expense budget proposal:
1. What are the precise decisions that management should make?

2. Does the proposal include all the available information pertinent to making these decisions?
3. Does the proposal include irrelevant information which, at best, will tend to observe the
real issues?

These tasks can be divided into two types: continuing and special. Continuing tasks are those
that continue from year to year, for example, financial statement preparation by the controller’s
office. Special tasks are one-time projects, for example, developing and installing a profit
budgeting system in a newly acquired division.

Other Characteristics with Reference to Engineered/Standard Costs and
Discretionary Costs

1. Cost variability: In discretionary expense centres, cost tends to vary with volumes from
one year to the next, but they tend not to vary with short-term fluctuations in volume
within a given year. Whereas, costs in engineered expense centres/standard centres are
expected to vary with short-run changes in volume. Hence, in preparing budgets for
discretionary expenses centres, managements tend to approve a change in their size that

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