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ACCA Applied Knowledge · Management Accounting · Budgetary control and reporting

Hartley Co has a Production division with a manager who has no authority over insurance policies. Head office charges the division $18,000 for group insurance, which is the same each period. Production's budgeted controllable costs are $240,000 and actual controllable costs were $252,000. In a report assessing the Production manager's performance, which treatment is most appropriate?

The report should show an adverse variance of $12,000 on controllable costs ($252,000 actual against $240,000 budget), with the $18,000 head office insurance charge shown separately as uncontrollable. The manager has no authority over insurance, so including it would unfairly distort performance assessment.

  1. AReport an adverse variance of $30,000 including the insurance charge
  2. BReport an adverse variance of $12,000 on controllable costs and show the insurance charge separately as uncontrollableCorrect
  3. CReport a favourable variance of $6,000 by offsetting the insurance charge
  4. DReport an adverse variance of $18,000 relating to the insurance charge only

Explanation

The manager can only be held accountable for controllable costs: $252,000 - $240,000 = $12,000 adverse. The $18,000 insurance charge is outside the manager's authority and should be shown separately or excluded. Adding it ($30,000) would wrongly penalise the manager.

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