Overview

Learning objectives

After studying this chapter, you should have developed an appreciation of:

1. How organizations are subdivided into responsibility centres

2. The four main types of responsibility centre

3. How to compute residual income as an alternative to using ROI when measuring the performance of an investment centre

4. The importance of budgeting

5. The organizational roles that are served by budgeting

6. The behavioural implications of budgeting

7. How a purchases, production and labour budget schedule can be prepared.

Introduction

This chapter focuses on responsibility accounting and budgeting. The underlying theme of these two topics is organizational control. Responsibility accounting involves sub-dividing an organization into units of accountability. It is fundamental to control as it involves holding managers accountable for the performance of their respective units. Closely associated with responsibility accounting is budgeting. This is because budgeting involves allocating resources to an organization s sub-units. In addition, the budget highlights benchmarks that are used when appraising a unit manager s performance.

Budgeting is an exceedingly important yet challenging exercise as it requires managers representing the full range of an organization s activities to commit themselves to the same co-ordinated plan. Emmanuel et al. (1990) highlight the budget s importance in the following way:

Budgetary planning and control is the most visible use of accounting information in the management control process. By setting standards of performance and providing feedback by means of variance reports, the accountant supplies much of the fundamental information required for overall planning...