The city of Mountainvale hired its first city manager four years ago. She favoured a “management by objectives” philosophy and accordingly set up many profit responsibility centres, including a sanitation department, a utility department, and a repair shop.
For many months, the sanitation manager had been complaining to the utility manager about overhead wires being too low at one point along a city road. There was barely clearance for large sanitation trucks. The sanitation manager asked the repair shop to make changes in the clearance. The repair shop manager asked, “Should I charge the sanitation or the utility department for the $2,400 cost of making the adjustment?” Both departments refused to accept the charge, so the repair department refused to do the work.
Late one day, the top of a sanitation truck caught the wires and ripped them down. The repair department made an emergency repair at a cost of $3,120. Moreover, the city lost $1,200 of utility revenue (net of variable costs) because of the disruption of service. Investigation disclosed that the sanitation truck had failed to clamp down its top properly. The extra two inches of height caused the wire to be caught. Both the sanitation manager and the utility manager argued strenuously about who should bear the $3,120 cost. Moreover, the utility manager demanded reimbursement from the sanitation department of the $1,200 of lost utility income.
REQUIRED
As the city controller in charge of the responsibility accounting system, how would you favour accounting for these costs? Specifically, what would you do next? What is the proper role of responsibility accounting in assigning cost in this situation?