One of the most effective ways of allowing managers to achieve predetermined targets is through giving them greater responsibility of their department.
In divisionalised businesses, each centres’ main targets and goals are going to be based, understandably, upon their purpose, whether it’s a cost centre, profit centre, or investment centre. Divisionalisation allows for more-informed decisions to be made in a quicker fashion.
An example of a profit centre is a hotel in a chain of hotels. Its managers’ performances should rightly be based upon the profit generated from the revenue generated and associated costs.
Profit = Revenue – Costs
Proft Calculation
However, not all costs are controllable in the short-term. Assessing a manager’s performance based upon factors outside of their control will not only be demoralising, but also prove ineffective when trying to give an accurate record of their performance.
Essentially, managers should only be accountable for what they can control.
What counts as controllable?
Distinguishing whether a cost is controllable or not can be pretty difficult. Hotel rent for example. It’s uncontrollable, right? What if rent was negotiable with the landlord? Then it would be controllable to some extent.
| Expenses | Controllable/Uncontrollable |
| Goods from Head Office | Both |
| Rent | Controllable |
| Wages | Controllable |
| Expenses | Controllable |
| Manager’s Salary | Uncontrollable |
| Overhead allocation from Head Office | Uncontrollable |
A simple way of assessing whether something is controllable or not is by using the below table:
| Quantity Controllable | Quantity Uncontrollable | |
| Price Controllable | Responsible for total Expenditure | Responsible for Unit Price |
| Price Uncontrollable | Responsible for Quantity | Not Responsible |
Improving responsibility accounting
Whilst events may occur that are outside of the control of a manager, for example a competitor opening a new hotel nearby or an economic recession, the manager’s subsequent reactive actions to mitigate for these events are controllable.
As such, by implementing the following, you can gain a better insight into how the actions of your managers not only improve performance, but also improve their morale which will hopefully improve the customers’ satisfaction:
- Using flexible budgets to account for unforeseen events. A large decrease in sales, for example, would be reflected in the new ‘flexed’ budget
- Variance Analysis to explain for any changes in what was planned and what actually happened
- Benchmarking – comparing what’s happening to other similar businesses
- Qualitative information – such as customer surveys
What this means for Marketing?
Marketing plays a key role in the planning and implementation of strategies. Whilst it comes at a (controllable) cost, it has the ability to increase revenues (controllable) and to be able to forecast other key bits of information such as consumer demands.
When reviewing the success of a marketing campaign, it is important to only review areas it was able to have control over.
By considering areas that are uncontrollable in a marketing campaign (for example the cost of goods sold when using profit as a measure), you run the risk of taking into account irrelevant factors when making further strategic decisions.
Glimpse Media are an expert multidisciplinary team in all areas of Marketing, Accounting, and Business Management. This joint way of working ensures a more holistic and informed approach for our projects.
Dan Chesney, Director