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ACCA Strategic Professional · Advanced Performance Management · Performance hierarchy

Cobalt Pharma's divisional managers are rewarded on budget-versus-actual operating profit. A new ERP system now gives real-time data. The CFO wants to preserve the benefit of controllability in the variance reports. Which design is most appropriate?

Variances should be split into controllable and uncontrollable items and reported to the manager able to influence them. This is the principle of responsibility accounting and keeps assessment fair and motivating. Aggregated reports, hiding adverse variances, or charging allocated head-office costs all weaken accountability.

  1. AReport all variances in total, since the ERP records everything in one ledger
  2. BReport only favourable variances to protect morale
  3. CHold managers accountable for all costs including allocated head-office costs, to encourage cost awareness
  4. DSeparate controllable from uncontrollable items and report variances to the manager who can influence themCorrect

Explanation

Responsibility accounting requires that managers be assessed on items they can influence. Splitting controllable and uncontrollable items gives fair and motivating reports. Total variances blur accountability, hiding unfavourable variances defeats control, and charging allocated head-office costs holds managers responsible for items they cannot influence.

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