Additional Factors to Consider in Responsibility Accounting

Flexing the budget in line with the uncontrollable fall in sales due to the decline in advertising immediately portrays a different image on the performance of Harry Hammerhead. Indeed a positive variance on net income took place of $70,800 rather than the previous $70,000 adverse variance. Further more, in such flexible budget no account has been taken for the uncontrollable variances that will be listed and explained below: • There was a general increase in food prices of 10%, which is uncontrollable to the organization.

Therefore $7,000 ($70,000 x 10%) of the adverse variance on food expenditure is uncontrollable and Harry cannot be held accountable for. • The consumption of utility rates remained at the same rate as budgeted. The increase was due to a general rise in prices by the Public Utility Commission. Therefore the $7,000 adverse variance portrayed in the flexible budget statement report is all uncontrollable. • Another uncontrollable variance was noted for the taxation expenditure, which also experienced a local increase, which is outside the control of the firm.

The insurance costs were on budget and therefore the $2,000 negative variance shown in the flexible budget statement is all uncontrollable. • The adverse variance of $10,000 arising from rent shown in the income statement is an element that is controllable to the organization but uncontrollable to Harry. This is due to the fact that it stems from new computer equipment installed by the corporate headquarters. Thus the controllable variance portrayed in the flexible budget statement pertinent to rent is $20,000 and not $30,000 In view of the above comments one can classify the adverse variance on total expenditure as follows:

Uncontrollable Expenditure Variances $26,000 Controllable Expenditure Variances $163,200 Total Expenditure Variances $189,200 Recommendations to Gregory Gourmet Gregory should pay particular attention to the evaluation of management upon fixed budgets, because it may demotive employees especially if they are held accountable for uncontrollable factors. Therefore it is important that an accounting system, which provides a flexible budget as the one computed above, is implemented. Evaluation of employees should not rest solely upon financial figures, because they may still be misleading.

It is also important that qualitative factors are taken into consideration. For instance, in the section above, consideration of qualitative elements pinpoint a number of factors, which further portray uncontrollable items in the department Harry is in charge of. Gregory should also consider the intention behind certain actions, together with their long-term effect. For example, the increase in the wage rates of hourly employees acted as a motivational effect for the staff to work harder. This in turn may enhance the efficiency and effectiveness of the company.