Budgeting and Responsibility Accounting

Most large organizations are divided into smaller divisions, each of which is then assigned separate and particular responsibilities. Even though these divisions are separated, managers of the organization need to insure each segment of the company is striving towards the same overall goals. As we all know in most businesses, personal goals and organization goals differ. Many times managers worry only about their division and not the company as a whole. Performance evaluations and incentive systems are designed to encourage managers to make their goals the same as the organizations goals. Managers then are encouraged to and can help the employees meet their goals.

Through responsibility accounting various concepts and tools are used to measure the performance of people and individual departments in order to foster these goals. This would mean that each manager and their employees are striving to meet the overall goal set by top management. Breaking the company up into different divisions allows each division to have a particular responsibility, which in the end will all lead to the same goal, either customer satisfaction or revenue.

Each responsibility center's performance is summarized periodically on a performance report. This shows the budgeted and actual amounts of key financial results. Each segment creates a flexible budget that provides a benchmark against which actual revenues, expenses, and profits are compared. The variance, which is the difference between the actual amounts reported and the budget, then is used to help management pinpoint where the problem is coming from. They can use this variance to then help make changes to the areas that are unsuccessful and leave the areas that are thriving alone.

River Beverages is a food and soft-drink company with worldwide operations. At River Beverages, the company is divided into five different regional divisions. The Vice President of each division, reports directly to the CEO, Cindy Wilkins. Each vice president has a Research and Development department, controller, and three divisions; carbonated drinks, juices and water, and food products. This structure seems to work very well for River Beverages because, each demographic has its own preferences and it's own likes and dislikes.

The beverage industry alone has done nothing but grown with population growth. U.S. consumers drink about 50 billion gallons of fluids each year. Most of this growth is due to nonalcoholic beverages, which is growing by 1.1 percent annually. Soft drinks are the largest segment, accounting for 53.4 percent of the beverages consumed, next in line is water (bottled and tap) representing about 23.7 percent of the industry. Juices represent only about 12 percent of the beverage industry. Last, the smallest but fastest-growing segment is ready-to-drink teas, which is growing by more then 91 percent in volume but still accounts for less than 1 percent of the beverages consumed.

At River Beverages, Susan Johnson, the plant manager, recently completed the annual budgeting process. Division managers have decision-making authority in their unit except for capital financing activities. In December, division managers submit a report to the vice president for the region summarizing key financial numbers (capital, sales, and income) for the upcoming year, which starts July 1. This report is used for strategic planning. This budget is passed onto the strategic research team that integrates each division's goals and more accurately forecasts their demand considering economic and current market conditions for each region. The strategic research team can more accurately integrate division products and assess demand for complementary products than the individual division managers. Once the corporate forecast is completed, the district sales manager estimates sales for the upcoming budgeted year. The district sales manager reports to the division sales manager of each division. The strategic research team and division controller review the forecasts prior to sending the forecasts on to top management.

Once top management approves the sales budget, it is separated into a sales budget for each plant. These plants are then designated as profit centers. The plant then should break the budget down into various plant departments. Each department within the plant is required to develop cost standards and cost reduction targets. The employees within each department likely know more about the costs they incur then top management. The final budgets are submitted and consolidated by April 1. The vice president makes any necessary changes to make sure they are in line with corporate objectives. The board finally votes on the final budget in June.

Each one of these budgeting steps is necessary because through the process everyone throughout the company becomes involved in creating the budget. The budget gets looked over by different levels of personnel and this allows the budget to be as accurate as possible. Having everyone involved also makes sure the budget is not inaccurately made, where it may just benefit one division or one person.

When evaluating River Beverages responsibility accounting system it is important to take a close look at their critical success