Responsibility And Controllability Considerations 832879

Responsibility And Controllability Consider Each Of The Followin

Consider each of the following independent situations for Prestige Fountains. Prestige manufactures and sells decorative fountains for commercial properties. The company also contracts to service both its own and other brands of fountains. Prestige has a manufacturing plant, a supply warehouse that supplies both the manufacturing plant and the service technicians, and 12 service vans. The service technicians drive to customer sites to service the fountains. Prestige owns the vans, pays for the gas, and supplies fountain parts, but the technicians own their own tools.

1. In the manufacturing plant, the production manager is not happy with the motors that the purchasing manager has been purchasing. In May, the production manager stops requesting motors from the supply warehouse and starts purchasing them directly from a different motor manufacturer. Actual materials costs in May are higher than budgeted.

2. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigation reveals a utility rate hike in effect that was not included in the budget.

3. Gasoline costs for each van are budgeted based on the service area of the van and expected driving. The driver of van 3 routinely exceeds the gasoline budget. Investigation finds the driver has been driving for personal use.

4. Regency Mall, a customer, calls Prestige for emergencies only, not routine maintenance. As a result, materials and labor costs for these emergency service calls exceed the monthly budget for a contract customer.

5. Prestige’s service technicians are paid a uniform hourly wage of $22, regardless of experience or tenure. An analysis shows first-year technicians work 20% more slowly than experienced technicians. Billing is per service call, not per hour.

6. The health insurance cost for technicians has increased by 40%, significantly exceeding the budgeted costs.

For each situation, determine (a) where responsibility lies and (b) where controllability lies. Suggest ways to resolve or improve each situation.

Paper For Above instruction

Effective management of responsibility and controllability is essential for optimizing operations, controlling costs, and enhancing organizational performance. The concept of responsibility accounting emphasizes that managers should be held accountable only for those areas where they have control over costs and outcomes. By analyzing the situations at Prestige Fountains, we can better understand how responsibility and controllability are distributed and identify strategies for improvement.

Situation 1: Procurement of Motors

The production manager's decision to purchase motors directly from a different supplier without involving the purchasing department shifts responsibility away from the purchasing manager. Responsibility primarily lies with the production manager because their decision bypassed established procedures. Controllability also resides with the production manager, as they have control over procurement decisions within their department. The higher-than-budgeted materials costs reflect their unilateral action.

To address this, Prestige should reinforce procurement policies that designate purchasing decisions to the procurement or supply chain department. Implementing internal controls, such as requiring managerial approval for direct purchases beyond a certain amount, can prevent unauthorized procurement. Training managers on cost control and accountability can also help ensure adherence to established procedures.

Situation 2: Increased Overhead Costs Due to Utility Rate Hike

The utility rate hike is outside the control of plant managers since it results from external market conditions. Responsibility for this overspending does not rest with internal managers but with the external utility provider. As such, responsibility for the higher costs lies outside the organization.

However, controllability may exist in seeking alternative energy sources or implementing energy conservation measures. To mitigate such situations, management can negotiate fixed-rate utility contracts or invest in energy-efficient technologies, thereby gaining some control over future utility costs.

Situation 3: Personal Use of Van 3

The service manager bears responsibility for supervising drivers and enforcing company policies on vehicle use. The driver of Van 3 controls the extent of personal use, but the manager can establish policies and monitor adherence. Controllability resides chiefly with management, as they can implement control systems such as GPS tracking or use of logbooks to prevent excessive personal use.

An effective solution includes instituting a clear policy on vehicle use, periodic monitoring, and potentially implementing disciplinary measures for violations. These steps help enhance control over van costs.

Situation 4: Emergency Calls at Regency Mall

Responsibility for the nature of calls—emergency versus routine—lies with the customer, but the service team’s scheduling and response protocols influence costs. Responsibility can also be shared with the service managers for planning and prioritization of calls.

To manage costs, Prestige could negotiate service agreements that specify routine maintenance calls, or implement scheduling practices to minimize emergency visits. Clear communication with clients about service boundaries can also help control costs.

Situation 5: Technician Productivity and Billing

The hourly wage of $22 is fixed and does not vary with technician speed or experience. Responsibility lies with HR and operations management, responsible for setting compensation policies. Controllability involves training and process improvements to enhance technician efficiency.

Strategies include conducting training programs tailored to skill levels, implementing performance incentives, and developing performance benchmarks. Since billing is per call, improving technician productivity directly impacts service capacity and profitability.

Situation 6: Increase in Health Insurance Costs

The 40% rise in health insurance costs is largely outside the direct control of managers but is related to external insurance market trends. Responsibility is shared with the HR department, which manages benefits. Controllability focuses on exploring alternative insurance providers or strategies like health savings accounts to reduce future costs.

Negotiating group rates or self-insurance options can also help control costs. Communicating these changes and strategies to employees is crucial for managing expectations and maintaining morale.

Conclusion

Proper allocation of responsibility and controllability promotes accountability and efficient cost management in organizations like Prestige Fountains. Managers should be empowered to control those elements within their scope and held accountable for areas where they have influence. Implementing policies, controls, and strategic initiatives tailored to each situation ensures better cost control and operational efficiency.

References

• Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.
• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Horngren, C. T., Sundem, G. L., Stratton, W. O., & Burgstahler, D. (2013). Introduction to Management Accounting. Pearson.
• Merchant, K. A., & Van der Stede, W. A. (2017). Management Control Systems: Performance Measurement, Evaluation, and Incentives. Pearson.
• Simons, R. (1995). Levers of control: How managers use innovative control systems to drive strategic renewal. Harvard Business School Press.
• Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press.
• Blocher, E., Stout, D. E., Juras, P. E., & Cokins, G. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.
• Anthony, R. N. (1988). The responsibility accounting model: Focus on strategic behavior. Journal of Accounting.
• Langfield-Smith, K. (1997). Management control and new managerial work. Accounting, Organizations and Society.
• Anthony, R. N., & Govindarajan, V. (2007). Management Control Systems. McGraw-Hill Irwin.