9.3 Responsibility Reports

Responsibility reports

Responsibility accounting provides reports to different levels of management. The amount of detail varies depending on the manager’s level in the organization. A performance report to a department manager of a retail store would include actual and budgeted dollar amounts of all revenue and expense items under that supervisor’s control. The report issued to the store manager would show only totals from all the department supervisors’ performance reports and any additional items under the store manager’s control, such as the store’s administrative expenses. The report to the company’s president includes summary totals of all the stores’ performance levels plus any additional items under the president’s control. In effect, the president’s report should include all revenue and expense items in summary form because the president is responsible for controlling the profitability of the entire company.

Management by exception is the principle that upper level management does not need to examine operating details at lower levels unless there appears to be a problem. As businesses become increasingly complex, accountants have found it necessary to filter and condense accounting data so that these data may be analyzed quickly. Most executives do not have time to study detailed accounting reports and search for problem areas. Reporting only summary totals highlights any areas needing attention and makes the most efficient use of the executive’s time.

The condensation of data in successive levels of management reports is justified on the basis that the appropriate manager will take the necessary corrective action. Thus, specific performance details need not be reported to superiors.

For example, if sales personnel costs have been excessively high in a particular department, that departmental manager should find and correct the cause of the problem. When the store manager questions the unfavorable budget variance of the department, the departmental supervisor can inform the store manager that corrective action was taken. Hence, it is not necessary to report to any higher authority that a particular department within one of the stores is not operating satisfactorily because the matter has already been resolved. Alternatively, if a manager’s entire store has been performing poorly, summary totals reported to the vice president of operations discloses this situation, and an investigation of the store manager’s problems may be indicated.


In preparing responsibility accounting reports, companies use two basic methods to handle revenue or expense items. In the first approach, only those items over which a manager has direct control are included in the responsibility report for that management level. Any revenue and expense items that cannot be directly controlled are not included. The second approach is to include all revenue and expense items that can be traced directly or allocated indirectly to a particular manager, whether or not they are controllable. This second method represents a full-cost approach, which means all costs of a given area are disclosed in a single report. When this approach is used, care must be taken to separate controllable from noncontrollable items to differentiate those items for which a manager can and should be held responsible.

For accounting reports to be of maximum benefit, they must be timely. That is, accountants should prepare reports as soon as possible after the end of the performance measurement period. Timely reporting allows prompt corrective action to be taken. When reports are delayed excessively, they lose their effectiveness as control devices. For example, a report on the previous month’s operations that is not received until the end of the current month is virtually useless for analyzing poor performance areas and taking corrective action.

Companies also should issue reports regularly so that managers can spot trends. Then, appropriate management action can be initiated before major problems occur. Regular reporting allows managers to rely on reports and become familiar with their contents.

Firms should make the format of their responsibility reports relatively simple and easy to read. Confusing terminology should be avoided. Where appropriate, expressing results in physical units may be more familiar and understandable to some managers. To assist management in quickly spotting budget variances, companies can report both budgeted (expected) and actual amounts. A budget variance is the difference between the budgeted and actual amounts of an item. Because variances highlight problem areas (exceptions), they are helpful in applying the management-by-exception principle. To help management evaluate performance to date, responsibility reports often include both a current period and year-to-date analysis.

Responsibility reports—An illustration

Assume Macy’s has four management levels—the president, vice president of operations, store manager, and department manager. In this section, we show that a responsibility report would be prepared for each management level.  We will begin with the lowest level, the Men's department manager and work our way up to the president.  We start at the lowest level because the totals from each level will be reported in the next highest level.

Only the individual manager’s controllable expenses are contained in these reports. For example, the store manager’s report includes only totals from the Men’s Clothing Department manager’s report. In turn, the report to the vice president includes only totals from the store manager’s report, and so on. Detailed data from the lower levels are summarized or condensed and reported at the next higher level.

Macy's Corporation
Manger, Men's Clothing Department
Responsibility Report
Actual Amount Budget Amount  Over or (Under) Budget
Controllable Expenses          This Month Year to Date This Month Year to Date This Month Year to Date
Inventory losses $2,000 $10,000 $1,900 $9,600 $100 $400
Supplies 1,800 8,500 $1,000 $7,550 800 950
Salaries 11,000 53,000 $11,100 $52,190 (100) 810
Overtime 2,000 14,500 $1,200 $14,360 800 140
Totals $16,800 $86,000 $15,200 $83,700 $1,600 $2,300
Macy's Corporation
Store Manager
Responsibility Report
Actual Amount Budget Amount  Over or (Under) Budget
Controllable Expenses This Month Year to Date This Month Year to Date This Month Year to Date
Children's Clothing Department $23,500 $150,450 $24,000 $151,000 ($500) ($550)
Women's Clothing Department $31,000 $157,700 $32,500 $158,000 ($1,500) ($300)
Men's Clothing Department $16,800 $86,000 $15,200 $83,700 $1,600 $2,300
Shoe Department $11,750 $64,350 $9,600 $62,000 $2,150 $2,350
Accessories Department $5,750 $31,500 $5,000 $30,300 $750 $1,200
Totals 88,800 490,000 $86,300 $485,000 2,500 5,000

You can see that at each level, more and more costs become controllable. Also, the company introduces controllable costs not included on lower level reports into the reports for levels 3, 2, and 1. The only store cost not included at the store manager’s level is the store manager’s salary because it is noncontrollable by that store manager. It is, however, controllable by the store manager’s supervisor, the vice president of operations.

Macy's Corporation
Vice President of Operations Responsibility Report
Actual Amount Budget Amount  Over or (Under) Budget
Controllable Expenses            This Month Year to Date This Month Year to Date This Month Year to Date
Vice president's office expense $2,840 $9,500 $3,340 $17,500 ($500) ($8,000)
Store manager 88,800 490,000 $86,300 $485,000 2,500 5,000
Purchasing 5,300 32,500 $4,300 $30,500 1,000 2,000
Receiving 4,700 33,000 $1,700 $24,000 3,000 9,000
Salaries of store managers and heads of purchasing and receiving 27,000 135,000 $27,000 $135,000 -0- -0-
Totals $128,640 $700,000 $122,640 $692,000 $6,000 $8,000
Macy's Corporation
President's Responsibility Report
Actual Amount Budget Amount  Over or (Under) Budget
Controllable Expenses       This Month Year to Date This Month Year to Date This Month Year to Date
President's office expense $11,000 $55,000 $10,000 $53,000 $1,000 $2,000
Vice president of operations 128,640 700,000 122,640 692,000 6,000 8,000
Vice president of marketing 18,700 119,000 $14,700 $111,000 4,000 8,000
Vice president of finance 14,000 115,000 $6,000 $106,000 8,000 9,000
Vice presidents' salaries 29,000 145,000 $29,000 $145,000 -0- -0-
Totals $201,340 $1,134,000 $182,340 $1,107,000 $19,000 $27,000

Based on an analysis of these reports, the Men’s Clothing Department manager probably would take immediate action to see why supplies and overtime were significantly over budget this month. The store manager may ask the department manager what the problems were and whether they are now under control. The vice president may ask the same question of the store manager. The president may ask each vice president why the budget was exceeded this month and what corrective action has been taken.

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