Differences In Budgeting Perspective Of Engineered And Discretionary Expense Centre

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Differences in budgeting perspective of engineered and discretionary expense centre
Budget preparation
The decision that management make about a discretionary expense budget are different from the decisions that it makes about the budget for an engineered expense center. For the latter, management decides whether the proposed operating budget represent the cost of performing task efficiently for the coming period. Management is not so much concerned with the magnitude of the task because this is largely determined by the actions of other responsibility centers, such as the marketing departments’ability to generate sales. In formulating the budget for a discretionary expense center, however management principal task is to decide on the magnitude of the job that should be done.

Incremental budgeting
Here the current level expenses in a discretionary expense center is taken as a starting points this amount is adjusted for inflation for anticipated changes in the workload of continuing tasks for special tasks and if the data are readily available for the cost of comparable work in similar units.There are two drawbacks to incremental budgeting. First because managers of these centers typically want to provide more service they tend to request additional resources in the budgeting process and if they make a sufficiently strong case these request will be granted. This tendency is expressed in Parkinson’s second law: overhead costs tend to increase period. There is ample evidence that not all this upward creep in cost is necessary.This problem is especially compounded by the fact that the current level of expenditure in the discretionary expenses center is taken for granted and is not re-examined during the budget preparation process. Second when a company faces a crises or when a new management takes over overhead costs are sometimes drastically reduced without any adverse consequences.Despite this limitation most budgeting in discretionary expense centers is incremental. Time does not permit the more thorough analysis described in the next section.

Zero based review
An alternative approach is to make a thorough analysis of each discretionary expense center on a schedule that will cover all of them over a period of five year or so. That analysis provides a new base.There is a likelihood that expenses will creep up gradually over the next five years and this is tolerated at the end of five years, another new base is established. Such an analysis is often called a zero base review.

In contrast with incremental budgeting which takes the current level of spending as the starting point this more intensive review attempts to build up de now the resources that actually are needed by the activity. Basic question are raised;(1) should use customer?(2) what should the quality level be ?are we doing too much(3)should the function be performed in this way (4) how much should it cost?

Cost variability
In discretionary expense center costs tend to vary with volume from one year to the next but they tendnot to vary with short run fluctuation in volume within a given year. By contrast costs in engineeringexpense center are expected to vary with short run changes in volume. In part this reflect the fact thatvolume changes do have an impact throughout the company even though their actual impact cannot bemeasures the ; in part this reflect the fact that volume changes do have an impact throughout thecompany even though their actual impact cannot be measured in part this result from a management personnel and personnel related costs are by far the largest expense item in most discretionary expensecenter the annual budget for these center tend to be a constant percentage of budgeted sales volume
 
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