15) Disk Company was very profitable for the first ten years of its existence, but the company has fallen on hard times with the growth of compact disks. In 2007 Jean Adams was appointed head of the Product Research Department. She began a number of product development projects. Although the department has developed several good ideas that led to the introduction of several promising products, Ms. Adams was criticized for poor cost control. The financial performance reports of the department under Ms. Adams leadership were consistently unfavourable. Management was quite concerned about cost control because profits for the company were low and the cash budget indicated that additional borrowing would be required during the next year.
Because of her inability to control costs, Ms. Adams was relieved of her responsibilities in 2008 and Fran Jones became head of the department. Ms. Jones promised to improve performance of Product Research and scaled back the developmental activities to obtain favourable financial performance. By the end of 2008 Ms. Jones was showing a favourable financial variance.
If the Product Research Department is classified as a responsibility centre, what unique problems are associated with evaluating its financial performance?
16) Rick Christensen is the new division manager of Fastfood Sales. His division is considered a responsibility centre, and he has control over all costs and revenue of the division. His predecessor had been dismissed from the company because he could not keep the revenues and costs with acceptable variances on a quarterly basis. However, the former manager had relatively good annual reports. Christensen is very concerned about the situation because Fastfood has a somewhat seasonal business and it is very difficult to keep sales up during the winter months. He is considering changing jobs after only a few months but wants some advice as to the likelihood that he will be able to keep revenue and costs under control throughout the year.
Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally control all revenue and costs? Why or why not?
17) Describe some of the drawbacks of using the operating budget as a control device.