Variance Analysis for Responsibility Accounting. Today with the emphasis on responsible control of financial results via the Return On Capital Employed [ROCE] concept, assets, liabilities, net worth, revenue, and costs form a vast area in which the entire management spectrum from the top executive to the lowest foreman holds some share of responsibility. Like blocks in a pyramid, the responsibility travels from the lowest to the highest level of supervision. Each supervisory level is responsible for costs incurred by its supervisor and his subordinates.
To be able to exercise this control, the cost and /or budget department must issue monthly reports that compare the actual results with predetermined amounts or budget allowances in a view to Variance Analysis for Responsibility Accounting . An analysis prepared at the end of the annual fiscal period, is not very helpful for immediate control actions.
Reports on a monthly or more frequent basis are advisable to allow short-range comparisons of those costs for which operating management is being held responsible.
Many of the variable expenses are controllable at the departmental level while fixed expenses are not. These assumptions apply to almost all costs in most situations.
In some circumstances certain variable expenses may be controlled at a higher level in the organization; e.g., employee fringe benefits may be determined by negotiations between executive management and the labor union or by government regulations. Such costs should be analyzed and separately identified to relieve a department manager of this responsibility.
Conversely, a department manager may have some control over certain fixed costs — those that involve a long-term commitment (sometimes called “committed fixed expenses”) such as equipment depreciation or lease expense and those that can be readily changed in the short run (sometimes called “programmed fixed expenses”). Such as the number of foremen in the department.
These costs should be individually identified as controllable by the manager of the department. Analyze whether fixed or variable, some costs may be joint with respect to two or more departments. Thus, they require arbitrary allocation. Accordingly, their controllability by a single department manager is restricted.
