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ACCA Applied Knowledge · Management Accounting · Behavioural aspects of budgeting

Department X has a budget for controllable costs of $200,000. Actual controllable costs were $212,000, and the department was also charged $30,000 of head office apportioned costs that it cannot influence. Senior management reports an adverse variance of $42,000 to the manager as evidence of poor cost control. Which statement is correct?

The report should show only the $12,000 adverse variance on controllable costs. The $30,000 head office charge is outside the manager's influence, so including it breaches the controllability principle and would unfairly blame and demotivate the manager.

  1. AThe report is appropriate because all costs charged to a department should be included in its variance
  2. BThe report should show only the $12,000 adverse controllable variance, because the $30,000 is not controllable by the managerCorrect
  3. CThe report should show a $12,000 favourable variance after setting off the head office costs
  4. DThe report should show $18,000 adverse, being $30,000 less $12,000

Explanation

Managers should be held accountable only for costs they can control (controllability principle). The controllable variance is $212,000 - $200,000 = $12,000 adverse. Including the $30,000 apportioned cost, which is outside the manager's control, wrongly inflates the variance and is likely to demotivate.

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