6.2 Financial Reporting - 1. Responsibility Reporting and Financial Forecasting - Design and Utilization - Introduction

Companies are constantly searching for more effective methods of controlling and reducing costs. In recent years increased emphasis has been placed on cost reporting to the middle manager and down to the first-line foreman because this is the place where the money is really spent. Traditionally, operations management has been relegated to using cost systems designed by financial management for the use of financial management. They reflect the machinery necessary to produce profit and loss statements, and so-called cost reports emanating from these systems frequently have a heavy orientation toward product costing rather than the cost that an individual manager or foreman actually controls. In addition to direct operating costs by function or product type, they often include overhead allocations from local operations as well as from the home office. This type of full-absorption costing has many worthwhile uses but is of little or no use to operations management for cost control purposes. It is particularly discouraging to many supervisors because it includes so many categories of cost over which they have little or no control. It is for this reason that modern, aggressively managed companies are increasingly moving in the direction of responsibility cost reporting. It is the objective of responsibility cost reporting to report only direct operating costs over which the individual manager or foreman has complete control, thus facilitating cost control by fixing responsibility for cost.