Question Tag: Budgetary Slack

i) The Controllability Principle:

The controllability principle requires that managers of responsibility centers are evaluated based on only those items (revenues and costs) that they have control over. This principle is essential to ensure fair and accurate performance assessment.

Application in Responsibility Accounting:

1. Elimination of Uncontrollable Items: Uncontrollable items should be excluded from the performance evaluation of managers to ensure they are not held accountable for factors beyond their control.
2. Distinction in Reports: Performance reports should clearly distinguish between controllable and uncontrollable items, allowing for a fair evaluation of managerial performance.

(Total: 2.5 marks)

ii) Budgetary Slack:

Budgetary slack refers to the process by which managers seek to obtain budget targets that can easily be achieved by understating revenues and/or overstating costs. This can lead to inefficiencies and a lack of alignment with organizational goals.

Application in Responsibility Accounting:

1. Risk Avoidance: Managers may avoid risky but potentially profitable projects to ensure they meet their easier budget targets.
2. Negotiation of Lower Targets: Managers might negotiate for lower budget targets, making it easier to achieve their goals but potentially harming the organization’s overall performance.
3. Disputed Performance Assessments: Budgetary slack can lead to disputes in performance assessments, as the targets set may not accurately reflect the organization’s potential.

(Total: 2.5 marks)