ACCA Applied Knowledge · Management Accounting · Behavioural aspects of budgeting
A production manager's budget includes a charge for head office central services of $80,000, allocated by head office. The manager has no influence over the amount. Which action is most consistent with good budgetary control practice?
The charge should be reported separately as non-controllable, or excluded from the manager's performance assessment. Managers should be held responsible only for items they can influence, otherwise appraisal is unfair and motivation suffers. The cost still stays in the overall company budget.
- AHold the manager accountable for any adverse variance on the charge
- BReport the charge separately as a non-controllable cost, or exclude it from the manager's performance assessmentCorrect
- CRemove the charge from the company budget entirely
- DDouble the manager's bonus to compensate for the charge
Explanation
Managers should be assessed on costs they can control. Non-controllable costs should be separated or excluded from performance evaluation to avoid demotivation and unfair judgement. Removing the charge from the company budget would misstate total costs.
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