11.4: Describe the Effects of Various Decisions on Performance Evaluation of Responsibility Centers

Organizations incur various types of costs using decentralization and responsibility accounting, and they need to determine how the costs relate to particular segments of the organization within the responsibility accounting framework. One way to categorize costs is based on the level of autonomy the organization (or responsibility center manager) has over the costs. Controllable costs are costs that a company or manager can influence. Examples of controllable costs include the wages paid to employees of the company, the cost of training provided to employees, and the cost of maintaining buildings and equipment. As it relates to controllable costs, managers have a fair amount of discretion. While managers may choose to reduce controllable costs like the examples listed, the long-term implications of reducing certain controllable costs must be considered. For example, suppose a manager chooses to reduce the costs of maintaining buildings and equipment. While the manager would achieve the short-term goal of reducing expenses, it is important to also consider the long-term implications of those decisions. Often, deferring routine maintenance costs leads to a greater expense in the long-term because once the building or equipment ultimately needs repairs, the repairs will likely be more extensive, expensive, and time-consuming compared to investments in routine maintenance.

THINK IT THROUGH

The Frequency of Maintenance

If you own your own vehicle, you may have been advised (maybe all too often) to have your vehicle maintained through routine oil changes, inspections, and other safety-related checks. With advancements in technology in both car manufacturing and motor oil technology, the recommended mileage intervals between oil changes has increased significantly. If you ask some of your family members how often to change the oil in your vehicle, you might get a wide range of answers—including both time-based and mileage-based recommendations. It is not uncommon to hear that oil should be changed every three months or 3,000 miles. An article from the Edmunds.com website devoted to automobiles suggests automobile manufacturers are extending the recommended intervals between oil changes to up to 15,000 miles.

Do you know what the recommendation is for changing the oil in the vehicle you drive? Why do you think the recommendations have increased from the traditional 3,000 miles to longer intervals? How might a business apply these concepts to the concept of maintaining and upgrading equipment? If you were the accountant for a business, what factors would you recommend management consider when making the decisions on how frequently to maintain equipment and how big of a priority should equipment maintenance be?

The goal of responsibility center accounting is to evaluate managers only on the decisions over which they have control. While many of the costs that managers will encounter are controllable, other costs are uncontrollable and originate from within the organization. Uncontrollable costs are those costs that the organization or manager has little or no ability to influence (in the short-term, at least) and therefore should not be incorporated into the analysis of either the manager or the segment’s performance. Examples of uncontrollable costs include the cost of electricity the company uses, the cost per gallon of fuel for a company’s delivery trucks, and the amount of real estate taxes charged by the municipalities in which the company operates. While there are some long-term ways that companies can influence these costs, the examples listed are generally considered uncontrollable.

One category of uncontrollable costs is allocated costs. These are costs that are often allocated (or charged) to the segments within the organization based on some allocation formula or process, such as the costs of receiving support from corporate headquarters. These costs cannot be controlled by the responsibility center manager and thus should not be considered when that manager is being evaluated.