Responsibility Budgeting &
Accounting

– detailed centralized materials requirements and logistical planning (input budgets),
– control by rules, standard operating procedures, and the merit principle,
– functional administrative design, distinction between staff and line
– decomposition of tasks to their simplest components,
– Sequential processing.

• made large, complex organizations possible; also made them inevitable
• POSDCORB functions were all treated as separate concerns, performed by staff specialists and coordinated by top mgmt.
• substantial staff resources needed to gather and process data for top mgmt. to coordinate activities and allocate resources

Marketing managers
Analysis
Planning
Implementation
Control
Marketing Information System
Developing information
Assessing information needs
Internal records
Marketing intelligence
Distributing information
Marketing decision support analysis
Marketing research
Marketing decisions and communication
Marketing environment
Test markets
Marketing channels
Competitors
Publics
Macroenvironment forces

• Multi-product, or M-form, organizational structure
– each major operating division serves a distinct product market
• Decentralized control
– by the numbers, using the DuPont system of financial controls, return-on-assets target
• Coordination
– short run via transfer prices
– Long run via modern capital budgeting system

The most common decentralized control system used by large-scale organizations
(a) units and managers are evaluated relative to the targets they accept,
(b) only financial measures are used to measure and reward accomplishment or punish failure, and
(c) financial success or failure is attributed entirely to managerial decisions and/or employee performance.

Discretionary & Engineered expense centers
Revenue centers
Cost centers
Standard cost centers
Quasi-profit centers
Profit centers
Investment Centers

Managers are responsible for executing the budget
(Spending as planned)
Little discretion to acquire assets; no discretion to exceed authorized spending levels
OE & Program Budgets are Discretionary
Expense Budgets
(given recipe]
Performance Budgets are Engineered
Expense Budgets
[recipe varies with volume]

• In some cases, expense center managers are evaluated in terms of the number and type of activities performed by their center.
• Revenue centers are expense centers that earn revenue or are assigned notational revenue
(transfer price) by the organization's controller as a direct result of the activities they perform.

• Cost center managers are responsible for producing a stated quantity and/or quality of output at the lowest feasible cost. Someone else within the organization usually determines the output of a cost center.
• Cost center managers are usually free to acquire short-term assets (those that are wholly consumed within a performance measurement cycle), to hire temporary or contract personnel, and to manage inventories.

• In a standard cost center, output levels are determined by requests from other responsibility centers
• The manager's budget for each performance measurement cycle is determined by multiplying actual output by standard cost per unit.
• Performance is measured against this figure -- the difference between actual costs and standard costs.

• In a quasi-profit center, performance is measured by the difference between the notational revenue earned and costs
• For example,
– a VA hospital radiology department performs
500 chest X-rays and 200 skull X-rays.
– The notational revenue earned is $25 per chest
X-ray (500) = $12,500 and $50 per skull X-ray
(200) = $10,000, or $22,500 total.
– If the department’s costs are $18,000, it earns a quasi-profit of $4,500 ($22,500 - $18,000).

• In profit centers, managers are responsible for both revenues and costs. Profit is the difference between revenue and cost (or expense).
• In addition to the authority to acquire short-term assets, to hire temporary or contract personnel, and to manage inventories, profit center managers are usually given the authority to make long-term hires, set salary and promotion schedules (subject to organization wide standards), organize their units, and acquire longlived assets costing less than some specified amount.

• In investment centers, managers are responsible for both profit and the assets used in generating the profit.
• Investment center managers are typically evaluated in terms of return on assets (ROA) -the ratio of profit to assets employed.
• In recent years many have turned to economic value added (EVA), net operating "profit" less an appropriate capital charge.

For expense centers the budget is a spending plan
– For discretionary expense centers, fixed spending targets
– For engineered expense centers, flexible spending targets (i.e., the budget has two components, a discretionary component and a component that varies directly with volume)

For a cost or profit centers the budget is a performance target or goal
– For cost centers, the target is a unit-cost standard
– For quasi-profit centers, the target is a quasi-profit measure: (Standard Cost [units delivered] – Actual Unit Cost [units delivered]).

For profit centers, the budget is a profit target [revenue – cost of goods sold.]
The budget of an investment center is also a target or goal – usually return on assets [ROA or ROI] or residual income
[EVA or RI]
The main difference between investment centers and all other responsibility centers is that the former approve their own capital budgets

is concerned with changes that have multi-period consequences for the responsibility center in question e.g. investment in new plant or equipment, a new program, a major process enhancement, etc.
Where cost and profit centers are concerned, some higher authority must approve these kinds of projects. And, each time a project is approved, the targets for the current period should be adjusted accordingly, as should future year targets.

IN CONTRAST, investment center mangers make these kinds of decisions without the approval of a higher authority.
Their budgets are expressed in terms that reflect their skill in managing assets: ROA, EVA.

Formerly, individual production units were typically standard cost centers; staff units were typically discretionary expense centers. Mission centers were investment centers.
Mission centers in private sector organizations produce final products that are easily priced and that are expensed following generally accepted accounting practice.
In contrast, support centers produce intermediate products and these were, until recently, hard to cost, let alone price, with accuracy. Attempts to do so were often either excessively arbitrary or prohibitively costly.

New developments in management control technique
Recognized that firms in Japan and
Germany were producing higher quality goods and services at a lower cost:
JIT, Cycle-time analysis, Cost of Quality
Analysis, Balanced Scorecards, and the
Rules of BPR

• Narrow rather than comprehensive
• Uses wrong cost drivers
• Unwillingness to rely on statistical cost measures and estimates
• Poor averaging, especially temporal averaging
• Failure to distinguish between needs of financial reporting and management control

The charge for invested capital = [working capital + fixed capita] * discount rate
This approach contains three errors
[assumed to be self-correcting]
HC is used rather than replacement cost;
A nominal rather than a real rate is used (not adjusted for inflation), and
An average rate is used rather than a marginal rate.

The proper way to measure the use of invested capital would = the market rent that could be earned on each item
The rental rate per asset = interest foregone, plus depreciation, minus any price appreciation or decline
[Replacement Cost * (r+d-a)]

• Importance of inventories and overheads, insignificance of labor hours
• Quality
– Solution: manage process through product design and process value management so as to minimize the discrepancy between Process time and
Cycle time [inefficiency = 1 – (PT/CT)]

• Chart the flow of activities needed to design, create, and deliver a service
• For each activity and step within the activity determine its associated cost and its cause
• Determine how the step adds value or, if it is non-value adding, identify ways to eliminate it and its associated cost;
• Determine the cycle time of each activity and calculate its cycle efficiency (value-added time/total time); and
• Seek ways to improve cycle efficiency and reduce associated costs due to delays, excesses, and unevenness in activities.

Jobs should be designed around an objective or outcome instead of a single function;
Functional specialization and sequential execution are inherently inimical to expeditious processing;
Those who use the output of activity should perform the activity and the people who produce information should process it, since they have the greatest need for information and the greatest interest in its accuracy;
Information should be captured once and at the source;
Parallel activities should be coordinated during their performance, not after they are completed;
The people who do the work should be responsible for decision making and control built into job designs

• Nobody but the front-line worker adds value,
• Front-line workers can perform most functions better than specialists (lean manufacturing),
• Every step of the service delivery process should be done perfectly (TQM)
• This reduces the need for buffer stocks (JIT) and produces a higher quality end-product.

– Multidisciplinary teams, members work together from start of job to completion
– push exercise of judgment down to teams that do an organization's work
– more equal distribution of knowledge, authority, and responsibility
– average firm size falling for the last twenty years

• Financial
• Customer
• Internal Business Processes
• Learning and Growth Perspective