Explain the following concepts and describe their application in responsibility accounting:
i) The controllability principle (2.5 marks)
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This principle requires that managers of responsibility centres are evaluated based on only items (revenues and costs) that they have over. The principle is implemented by:
1. Eliminating uncontrollable items from the areas for which managers are held accountable
2. Calculating the effect of uncontrollable items so that the performance assessment reports distinguish between controllable and uncontrollable items.
ii) Budgetary slacks (2.5 marks)
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This is the process by which managers seek to obtain budget targets that can easily be achieved by understating revenues and/or overstating costs. Some of the ways in which budgetary slacks arise include the following:
1. Managers avoid risky but profitable projects.
2. Managers negotiate for lower targets
3. Managers dispute performance assessment results