Responsibility, performance, and behaviour

Learning goals

• Distinguish cost, revenue, profit, and investment centres.
• Apply controllability while preserving accountability for shared outcomes.
• Compute ROI and residual income and explain conflicting incentives.
• Design a balanced performance dashboard with financial and non-financial measures.
• Anticipate gaming, short-termism, and ethical consequences of measurement.

Prerequisite check

1. Why does an unfavourable variance not prove the measured manager performed poorly?
2. Give one benefit the company may value even if it lowers a division's current ROI.

Vocabulary

• Responsibility centre: organizational unit whose manager is accountable for specified activities.
• Cost centre: manager focuses primarily on cost/service delivery.
• Revenue centre: manager focuses primarily on revenue.
• Profit centre: manager is accountable for revenue and costs.
• Investment centre: manager is accountable for profit and invested assets.
• Controllability principle: evaluate managers primarily on items they can significantly influence in the relevant horizon.
• Return on investment (ROI): operating income ÷ average operating assets, under a stated definition.
• Residual income (RI): operating income − required return × average operating assets.
• Balanced dashboard: linked financial, customer, process, people/learning, risk, and sustainability measures.

Core idea

What gets measured changes behaviour. A useful system aligns authority, responsibility, information, time horizon, and organizational purpose. Financial outcomes are lagging measures; quality, safety, customer retention, cycle time, staff capability, and control failures can be leading measures.

Managerial accounting is not governed by IFRS/ASPE in the same way as external reporting, but it must still be accurate, consistent, secure, explainable, and ethical. A dashboard should enable action, not merely rank people.

Why this treatment makes sense

Holding a branch manager responsible for centrally negotiated rent is unfair if used as a personal-performance claim, but excluding rent from all business decisions hides economics. Use layered reports: controllable contribution for manager evaluation and full costs for organizational sustainability. Multiple measures reduce tunnel vision but too many create noise.

A repeatable method

Use PURPOSE–AUTHORITY–MEASURES–BEHAVIOUR–REVIEW:

1. Define the decision and organizational objective.
2. Match each centre's authority to what it can influence and over what horizon.
3. Select a small cause-and-effect set of measures with definitions, owners, baselines, and safeguards.
4. Predict gaming, trade-offs, equity, safety, privacy, and long-term effects.
5. Review actual outcomes, learn, correct data, and update targets transparently.

Worked example

West Division earns $240,000 on average operating assets of $1,200,000.

• Current ROI = $240,000/$1,200,000 = 20%.
• With a 12% required return, current RI = $240,000 − 12%($1,200,000) = $96,000.

A project needs $300,000 assets and earns $45,000 annually:

• Project ROI = 15%, above the company's 12% required return.
• Project RI = $45,000 − $36,000 = $9,000 positive.
• Combined ROI = $285,000/$1,500,000 = 19%.
• Combined RI = $105,000.

An ROI-only manager may reject the value-creating project because divisional ROI falls from 20% to 19%. RI better aligns this decision with the 12% threshold, though neither measure captures risk, cash timing, useful-life assumptions, customer value, or environmental/people effects.

A balanced project dashboard might include:

Journal, ledger, and statement connection

ROI/RI and dashboards are management reports, not journal entries. Their inputs must reconcile to ledgers, asset registers, budgets, and operational systems. Definitions matter: gross or net assets, beginning or average assets, controllable or full income can change the metric. State the definition before comparing centres.

Common mistakes

• Calling a person accountable without giving authority, data, time, or resources.
• Comparing centres with different mandates and asset ages using one raw ROI.
• Encouraging managers to delay maintenance/training to raise short-term profit.
• Setting a speed target without quality or safety safeguards.
• Treating customer satisfaction as objective when response bias/sample size is unknown.
• Changing measure definitions after results are known.
• Using a dashboard as surveillance without privacy, access, retention, and appeal controls.
• Rewarding “zero incidents,” which can discourage honest reporting.

Guided practice

East Division earns $180,000 on average assets $900,000. A project needs $200,000 and earns $32,000. Required return is 10%. Calculate current, project, and combined ROI and RI. Predict the decision under a maximize-current-ROI incentive.

Independent practice

A service centre delivered 8,000 appointments. Flexible expectations are $75 revenue and $32 variable cost per appointment plus $210,000 fixed cost. Actual revenue is $592,000, variable cost $264,000, and fixed cost $205,000.

1. Prepare the flexible-versus-actual performance report and reconcile profit variance.
2. The centre manager controls scheduling and local supplies but not centrally set prices or building rent. Separate investigation from personal evaluation.
3. Design six balanced measures across financial, client, process, people/safety, and access/equity perspectives, each with one anti-gaming safeguard.
4. Write a five-sentence recommendation to the director.

Self-check and solutions

Guided: Current ROI 20%; project ROI 16%; combined ROI $212,000/$1,100,000 = 19.27%. Current RI = $180,000 − $90,000 = $90,000. Project RI = $32,000 − $20,000 = $12,000; combined RI $102,000. An ROI-maximizing manager may reject because 16% lowers the current 20%, despite positive RI.

Independent: Flexible revenue $600,000; variable cost $256,000; fixed cost $210,000; profit $134,000. Actual profit = $592,000 − $264,000 − $205,000 = $123,000, so $11,000 U: revenue $8,000 U, variable cost $8,000 U, fixed cost $5,000 F.

Investigate price/mix and rent centrally without blaming the local manager; ask the manager to explain scheduling-driven overtime, supply use, throughput, and quality within their influence. Measures might include contribution per staffed hour, client wait time paired with rebooking/complaints, first-time completion, staff overtime paired with safety/turnover, near-miss reporting with protection, and access by need/community paired with data-privacy and denominator checks.

A strong recommendation acknowledges $123,000 positive profit and fixed-cost savings, investigates the $16,000 combined revenue/variable shortfall, assigns questions by authority, protects service quality/access, and sets a 30-day review with reconciled data rather than an automatic punitive target.

Retrieval practice

1. Distinguish four responsibility-centre types.
2. Write ROI and RI formulas.
3. Why might ROI and RI motivate different project choices?
4. Give three measure-and-safeguard pairs.

Exam-style application

A manager rejects a project earning 14% because the division currently earns 18%; the company's required return is 11%. Project assets are $500,000. Calculate project income and RI, then explain the conflict.

Target: Project income = 14%($500,000) = $70,000. Required return is $55,000, so RI = +$15,000. The project lowers the division's average ROI but earns above the company's hurdle; an ROI-only incentive can create goal incongruence.

Lesson summary

Performance systems are behavioural systems. Match measures to authority and purpose, reconcile data, pair financial results with leading safeguards, and reward learning and long-term value rather than metric gaming.