Describe Differences In Budgeting Perspective Of Engineered And Discretionary Expense Centre

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Describe differences in budgeting perspective of engineered and discretionary expense centre

Expense centers:

Expenses center are responsibility centers for which input or expenses are measured in monetary terms, but for which outputs are not measured in monetary terms. There are two general types: engineered expense center and discretionary expense center. They correspond to two types of costs: Engineered costs are elements of cost for which the right or proper amount of costs that should be incurred can be estimated with a reasonable degree of reliability. Costs incurred in factory for direct labour direct material component supplies and utilities are examples.

Engineered expense centers:
Engineered expense center have the following characteristics:1.Their inputs can be measured in monetary terms.2.Their output can be measured in physical terms.3.The optimal dollar amount of input required to produce one unit of output can be established Engineered expense center usually are found in manufacturing operations. Warehousing, distribution,trucking and similar units in the marketing organization also may be engineered expense center and so many certain responsibility center within administrative and support department. Examples are accounts receivable account payable and payroll section in the controller department personnel record and cafeteria in the human resource department shareholder record in the corporate secretary department and the company motor pool. Such units perform repetitive task for which standard cost can be developed. In an engineered expense center the output multiplied by the standard cost or each unit produced represents what the finished product should have cost. When this cost is compared to actual costs, the difference between the two represents the efficiency of the organization unit being measured.We emphasize that engineered expense centers have other important tasks not measured by cast alone.The effectiveness of these aspects of performance should be controlled. For example expenses center supervisor are responsible for the quality of good and for the volume of production in addition to their responsibility for cost efficiency.

Therefore the type and amount of production is prescribed and specific quality standards are set so that manufacturing costs are not minimized at the expense of quality. Moreover manager of engineered expense center may be responsible for activities such at raining that are not related to current production judgment about their performance should include an appraisal of how well they carry out these responsibilities.There are few if any responsibility center in which all cost items are engineered. Even in highly automated production department the amount of indirect labour and of various services used can vary with management discretion.Thus, the term engineered costs center refers to responsibility center in which engineered cost predominate but it does not imply that valid engineering estimates can be made for each and every cost item.

Discretionary expense center:
The output of discretionary expenses center cannot be measured in monetary terms. They include administration and support units research and development organization and most marketing activities.The term discretionary does not mean that management judgments are capricious or haphazard.Management has decided on certain policies that should govern the operation of the company. One company may have a small headquarter staff another company of similar size and in the same industry may have a staff that is 10 time as large the management of both companies may be concerned that they made the correct decision on staff size but there is no objective way judging which decision was actually better manager are hired and paid to make such decision after such a drastic change the level of discretionary expenses generally has a similar pattern from one year to the next.The difference between budgeted and actual expense is not a measure of efficiency in a discretionary expense centre it is simply the difference between the budgeted input and the actual input. It in no way measures the value of the output, if actual expense do not exceed the budget amount, the manager has‘lived within the budget ‘ however ,because by definition the budget does not purport to measure the optimum amount of spending we cannot say that living within the budget is efficient performance
 
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