There must be efficient systems and processes in place for an organisation to achieve its stated goals
To achieve this, organisations will need to:
- Monitor and report back to management
- Implement control procedures
- Make evaluations and take appropriate remedial action to rectify any identified deviations
Individual members from the different sections within an organisation are usually responsible for different tasks and functions.
Where individuals work together to achieve organisational goals, it is referred to as “goal congruence”. An accounting system that promotes goal congruence is called “responsibility accounting”.
Costs and revenue may be linked to an organisational chart that represents the responsibilities of the different sections or centres of the organisation, e.g. marketing, production, administration, quality management, sales, accounts, purchases, payroll, training and human resources.
In responsibility accounting, each division, branch or department is referred to as a “responsibility centre”. A responsibility centre is an organisational subunit, and the manager of each subunit is accountable for the activities and performance of that subunit.4
Enhance your understanding by watching the following 2:13-minute video.
The concept of responsibility accounting is that the person responsible controls the operations and spending of a particular section. They are also accountable to others in the organisation for the performance in that section or department.
The persons in charge of a department are held accountable for the revenue or costs that are under their control, such as:
- Production or administration centre: The manager is accountable for costs only.
- Marketing or sales centre: The manager is accountable for revenue earned.
- Head office or chief financial officer: The manager is accountable for profit, revenue and costs.
- Board of directors, chief executive officer: Held accountable for profit and capital investment. 2
Establishing control measures ensures that specified standards are set to measure current performance, making comparisons and then taking appropriate remedial action as required. For example, it is normal for an organisation to compare actual results with budgets by preparing performance reports. Reports need to be relevant, timely and set out in an appropriate format so that deviations can be readily identified.2
Once budgets are prepared, they need to be presented to relevant stakeholders. The development of performance reports which show the variance between actual results and budget expectations are often produced for this purpose.
The basic format used in the presentation of performance reports is to show the budgeted figures, the actual figures and the difference between the two. The monetary variance is referred to as a “variance”. Where the variance shows an increase in sales to that budgeted, it is described as “favourable”. Conversely, where the variance results in a decrease in profits, it is referred to as “unfavourable”. The variance may be disclosed in dollar amounts or as a percentage.
The following is an example of an income performance report for a small retail store for the quarter ended 31 March.
Example
| Budget $ | Actual $ | Variance $ | |
|---|---|---|---|
| Sales | 250,000 | 285,000 | 35,000 F |
| Less COGS | 125,000 | 147,000 | 22,000 U |
| Gross profit | 125,000 | 138,000 | 13,000 F |
| Less expenses | |||
| Wages | 51,000 | 54,000 | 3,000 U |
| Shop expenses | 13,460 | 12,000 | 1,460 F |
| Rent | 24,000 | 24,000 | |
| Other costs | 3,450 | 2,400 | 1,050 F |
| Advertising | 7,200 | 8,200 | 1,000 U |
| Total expenses | 25,890 | 37,400 | 11,510 F |
NB: “F” represents favourable; “U” represents unfavourable
The performance report identifies the items that need attention. The performance report format above is similar to that of a trader or service organisation. A performance report should be examined, and the results interpreted.
Example 20: Presentation of performance reports
Whilst financial reports produced from spreadsheets or accounting software are commonly used to present the data, there are occasions where this method may not be the most appropriate. The following resource outlines the various types of charts, graphs and diagrams which can also be used as effective presentation methods
Further Reading
Read the publication from the Corporate Finance Institute on using graphs and visuals to present financial information.
Distribute budget reports to required personnel
Each company has a different way of distributing budget reports, but the most common way is to email them directly to the required personnel. Alternatives may include making documents available via shared drives and presenting paper copies for distribution at meetings. By sending out regular budget updates, companies can keep everyone up-to-date on their financial status and ensure everyone is working towards the same goal.
It's important to confirm the details of all stakeholders, directors, clients etc., who need to see the report to ensure everyone is on the same page and knows what's going on with the company's money. Additionally, it allows for transparency and accountability throughout the organization. Staff can also be included in budget reports, depending on their level of clearance and need to know.
Ensure you double-check the distribution arrangements for the report as it will contain sensitive financial information.
The principle of management by exception is often used to enable management to concentrate on problem situations or other matters that require attention. It is implemented to notify the appropriate person when there is a significant deviation from a plan.
Performance reports can highlight the areas needing attention by expressing the variance as a percentage of the budget. Only those items that exceed an acceptable limit, e.g. plus or minus 5%, will be investigated.
The formula for calculating the variance is: variance / budgeted x 100
Example
| Budget $ | Actual $ | Variance $ | Variance % | |
|---|---|---|---|---|
| Sales | 250,000 | 285,000 | 35,000 F | 14%F |
| Less COGS | 125,000 | 147,000 | 22,000 U | 17.6% U |
| Gross profit | 125,000 | 138,000 | 13,000 F | 10.4% F |
| Less expenses | ||||
| Wages | 51,000 | 54,000 | 3,000 U | 5.88% U |
| Shop expenses | 13,460 | 12,000 | 1,460 F | 10.85% F |
| Rent | 24,000 | 24,000 | ||
| Other costs | 3,450 | 2,400 | 1,050 F | 30.43% F |
| Advertising | 7,200 | 8,200 | 1,000 U | 13.88% U |
| Total expenses | 99,110 | 100,600 | 1490 U | 44.46% F |
| Net profit | 25,890 | 37,400 | 11,510 F | 44% F |
If the policy were to investigate all variances that deviate from the budget by plus or minus 5%, all the variances listed above would need to be investigated. Even though the variances for sales, shop expenses and other costs are favourable, they should still be investigated as the budget may need to be adjusted accordingly. (Banks & Giliberti, 2010, pp. 203-204) 2
Performance reports can also be prepared for cash and balance sheet budgets. Responsibility accounting aims not to allocate blame as this may lead to defensive behaviour. The primary objective is to ensure the organisation achieves its set targets and budgets.
Enhance your understanding by watching the following 3-minute video.
