• Subject Name : Accounting and Finance

Responsibility Centres in Strategic Controlling

Introduction to Responsibility Accounting Case Study

Responsibility accounting is defined as a control system in which different responsibilities are being assigned to control and monitor costs. The particular person is held responsible to monitor and control particular class of costs. The person is assigned with adequate authority and power in order to maintain and improve the performance. After evaluation of performance, if the performance is not as per the predetermined standards then the person who is assigned will be held personally responsible for that performance (Lennon, 2019). In this type of accounting, various responsibility centres are recognised throughout the business organization. This reflects actions and plans of every responsibility centre by allocating specific costs and revenues to the one that have the appropriate responsibility. This also known as activity or profitability accounting. The complete organization is divided into several responsibility centres and every centre is held responsible for the expenditure incurred. the performance evaluation is being held of every responsibility centre.

MBA degree program for the Hidden Gem University is a type of profit centre. Profit centre is defined as a responsibility centre that consist of both revenue and expenses. The students who are enrolled provide revenue in the form of fees for the program and incur overhead cost for running the program. This is considered as an organizational segment where a person or manager of this program is primarily held responsible for both costs and revenues (Zimnicki, 2016). The structure of profit centre is somewhat complex as the manager is required to be well-efficient in applying various measures to raise revenues, decrease expenditure and thus, raise the profitability along with meeting the objectives of the overall organization. The other type of responsibility centres include cost centre, discretionary cost centre and revenue centre. A cost centre is defined as an organizational segment where a person is held responsible only for the expenses or costs. In this, a direct link is being formed among the occurrence of cost and the production of goods and services. This particular link must be effectively structure by the manager within the framework of responsibility accounting. For example, in college, there may a cost centre of canteen, etc. the other type of responsibility centre is discretionary cost centre. This is very much similar to cost centre but it has one different factor. In this, the manager is basically responsible for controllable costs in case when there is absence of effective relationship among the cost of centre and services and products produced by it. For example, human resource department of university as providing training to the staff members for self defence is good for the whole university but for the manager, it becomes difficult to estimate the performance of this centre in comparison to its influence on services provided by the university. In revenue centre, a manger is responsible just for the revenues. His/her objective is to raise revenue for the overall business (Beinkowska et al., 2016). An example of profit centre may include accounting department that measures both revenue and expenses incurred by the organization in a specific period.

There is a favourable variance in budgeted and actual revenue received by the university due to which the Dean is claiming that MBA program enrolled is up by 20%. The budgeted tuition and fees were projected as $3118345 but in actual, $3745982 has been received and thereby leading to $627637 as favourable variance. Net revenue has shown a favourable variance of $12151.

Management by exception is considered as a managerial approach where the management is required to pay attention to the matters that deviate significantly from the set standards or budgeted figures (Lowe, 2019). For instance, when a particular department incurred high level of costs as compared to the budgeted cost amounts, the management is required to laid emphasis on determining the major causes behind that and undertake effective measures to fix the issue by reducing the inadequate expenses, formulating different standards or budget, etc. The management of the university is required to focus on both direct and indirect expenses. The budget set for adjunct was $17407 but in actual, the expenses incurred on adjunct is $72587 that is leading to the unfavourable variance of $55180 which is a high amount. On admin wages and employee benefits also, there is unfavourable variance which shows high actual expenses than budgeted expenses. Overall, there is need to control the direct expenses as the budgeted direct expenses were $817017 and in actual, $916338 direct expenses have been incurred. This is leading to the unfavourable variance of $100000 approximately. Under the head of indirect expenses, personnel cost, cleaning and maintenance cost and facilities expenditure has shown unfavourable variance of $27391, $7682 and $7540 respectively. Proper and effective measures are required to reduce such expenses to improve profitability and sustainability of the university.

Responsibility system of accounting helps in providing information to assess the performance of each manager on expense and revenue items over which the managers exercises authority and has control (Zhang & Xia, 2017). In the university, the have applied responsibility accounting system to prepare a performance report but the finance committee has prepared the performance report for various programs in the university by evaluating each line item and by utilizing activity-based costing method to assign or allocate overhead and common costs to adequate degreed programs. This actually led to the difference for an overall organization report compared to a performance report. In activity-based costing method, costs are allocated to departments on the basis of major activities but in responsibility accounting, only those items are mentioned in the report that are under the control of responsible manager (Hofamnn & Bosshard, 2017). In case, both uncontrollable and controllable costs are included in the performance report, the accountants are required to separate out the categories. The determination of controllable items is considered as the fundamental task in case of responsibility accounting and reporting.

To ensure the effective implementation of responsibility accounting, the organizational structure must be well-defined. Responsibility and authority must be efficiently formulated and clearly understood by the different departments working in the university (Jabbar & Hussein, 2017). The standards and measures for evaluating performance of different departments or centres must be effectively established and communicated. The particular items for which the manager of the responsibility centre is held responsible form the part of performance evaluation report. He/she cannot be held responsible for the items ion which they do not have any influence. Since the MBA program at Hidden Gem University was considered as the profit centre with respect to responsibility accounting, so both revenue and cost items must be included in the performance report. To handle the employee tuition waivers, the employee must be held responsible to inform human resource department if they or their family members adds or withdraws from the classes in the MBA program on an instant basis (Nizhum, 2018). They must be held responsible for the taxable income for the dropped classes after the official date of drop and for not informing the human resource department on time. This will help in reducing the unfavourable variance with regard to Employee tuition waivers.

Yes, there is an ethical dilemma faced by the university in offering a program that is popular with its own employees that it is becoming unprofitable to provide continuous support to the program. The structure to prepare performance report used by the management and finance committee differs and so their decisions with respect to efficient utilisation of different resources.

Recommendations on Responsibility Accounting Case Study

Hidden Gem University must link financing and implement effective fixed cost reduction strategies and measures to enhance its profitability for the MBA program. The management must carefully review the expenses that are being incurred in relation to the program and undertake suitable measures to cut those expenditure and raise revenue (Akeem, 2017). It must promote its program using different marketing techniques like offering of competitive program pricing, scholarships on merit basis, etc. Implement MBA Program as a cost saving program. Increase efficiency and reduce cost wherever possible. University must re-evaluate the offerings made by it in curriculum to ensure that the programs are well aligned with the job market to enhance the outcomes for post-graduation students. All these recommendations will help the university in continuing the MBA program.

References for Responsibility Accounting Case Study

Akeem, L. B. (2017). Effect of cost control and cost reduction techniques in organizational performance. International business and management14(3), 19-26.

Bieńkowska, A., Kral, Z., & Zabłocka-Kluczka, A. (2016). Responsibility Centres in Strategic Controlling. Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu, (441 Global Challenges of Management Control and Reporting), 21-33.

Hofmann, E., & Bosshard, J. (2017). Supply chain management and activity-based costing. International Journal of Physical Distribution & Logistics Management.

Jabbar, A. A., & Hussein, A. M. (2017). The role of leadership in strategic management. International Journal of Research-Granthaalayah5(5), 99-106.

Lennon, N. J. (2019). Responsibility accounting, managerial action and ‘a counter-ability’: Relating the physical and virtual spaces of decision-making. Scandinavian Journal of Management35(3), 101062.

Lowe, E. A. (2019). On the idea of a management control system: integrating accounting and management control. Management Control Theory, 63.

Nizhum, N. T. (2018). An Evaluation of Human Resource Management Practices of Opal Grammar School (OGS).

Zhang, Y., & Xia, Y. (2017, June). The Preliminary Study Of The New Responsibility Accounting. In 2017 2nd International Conference on Education, Sports, Arts and Management Engineering (ICESAME 2017). Atlantis Press.

Zimnicki, T. (2016). Responsibility accounting inspiration for segment reporting. Copernican Journal of Finance & Accounting5(2), 219-232.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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