Budgeting Basics and Beyond

5.7. Responsibility

Profit planning requires that managers be held accountable for their results if they have authority over the items in question. Responsibility without authority causes the profit planning system to fail and results in manager frustration.

Planning should avoid conflicts that have a net negative profit impact on the business. An example is a sales manager who accepts short-term, low-volume sales orders even though they result in unusually high manufacturing costs for the production manager.

A solution is to make nonfinancial managers jointly responsible for an objective that affects both. Interrelated departments must work as a group to maximize company profit by considering the net advantage or disadvantage to the business. The managers should share credit or blame for these interrelated performances. In this way, managers will work toward meeting overall company objectives.

Each manager must determine whether responsibility unit managers are contributing to the profit plan in the expected proportion.