Question

3. A common practice in the fast food industry is to evaluate a store manager on the basis of profits as well as other nonfinancial performance measures (i.e. cleanliness, quality, customer service...). How does this practice violate the controllability principle as used in responsibility accounting? Explain the use of these performance measures in terms of informativeness.

Answer 1

According to general principles, the performance of store manager depends on the number of units he sold as to financial measures and customer feedback can be evaluated as to non financial measures.

The fast food industry has a common practice of evaluation of store managers performance based in profits, profits may be higher or lower based on the purchases cost, maintenance costs and many other costs, so the benefit of profit (or loss) cannot be given to the store manager.

According to responsibility accounting, we should develop a proper responsibility centre based on which we should measure the performance and not based on profits.

This performance measures provide information related to how the personnel of the company are performing and whose performance is better and who are working hard, based on which incentives can be provided to employees to encourage them further.