Controllability Principle

Definition

The controllability principle states that managers should be held accountable only for the items that they can control or significantly influence. It is a fundamental concept in responsibility accounting that aligns performance evaluation and rewards with the actions and decisions that a manager can directly impact.

5 Must Know Facts For Your Next Test

1. The controllability principle ensures that managers are not held accountable for factors beyond their control, which can demotivate and discourage them.
2. It is closely tied to the concept of responsibility accounting, where costs, revenues, and profits are assigned to the manager responsible for them.
3. Responsibility centers, such as cost centers, profit centers, and investment centers, are the building blocks of responsibility accounting and the controllability principle.
4. Performance evaluation of managers should focus on the factors they can control, rather than external factors, to provide fair and meaningful assessments.
5. Applying the controllability principle helps align incentives and rewards with the actions and decisions that managers can directly influence.

Review Questions

• Explain how the controllability principle relates to the concept of responsibility accounting.
  • The controllability principle is a fundamental tenet of responsibility accounting. It states that managers should only be held accountable for the items they can control or significantly influence. This ensures that performance evaluation and rewards are aligned with the actions and decisions that a manager can directly impact, rather than external factors beyond their control. Responsibility accounting systems collect, summarize, and report information about the activities for which each level of management is responsible, enabling the application of the controllability principle.
• Describe the different types of responsibility centers and how the controllability principle applies to each.
  • Responsibility centers are the building blocks of responsibility accounting and the controllability principle. The main types of responsibility centers include cost centers, where managers are responsible for controlling costs; revenue centers, where managers are responsible for generating revenues; profit centers, where managers are responsible for both costs and revenues; and investment centers, where managers are responsible for the profitability and use of invested capital. The controllability principle dictates that the performance of managers in each of these responsibility centers should be evaluated based on the factors they can directly control or influence, rather than external factors beyond their control.
• Analyze how the application of the controllability principle can impact the design and implementation of a performance evaluation system.
  • The controllability principle has significant implications for the design and implementation of a performance evaluation system. By focusing the evaluation on the factors that managers can control or significantly influence, the system ensures that they are not held accountable for external factors beyond their control. This aligns incentives and rewards with the actions and decisions that managers can directly impact, which can enhance motivation, engagement, and accountability. Additionally, the controllability principle helps to provide fair and meaningful assessments, as managers are evaluated based on their own performance rather than factors outside of their influence. The effective application of the controllability principle in a performance evaluation system can therefore contribute to improved organizational performance and employee satisfaction.

Related terms

Responsibility Accounting: A system that collects, summarizes, and reports accounting information about the activities for which each level of management is responsible.

Responsibility Center: A segment of an organization headed by a manager who is responsible for its activities.

Performance Evaluation: The process of assessing an individual's or organization's achievement of predetermined goals and objectives.