Electric and then AT&T Network Systems, became an independent company on October 1, 1996 when AT&T separated into three companies. The other two are the new AT&T and NCR.) Backed by Bell Laboratories, Lucent designs, develops, manufactures and markets communications systems and technologies ranging from microchips to entire networks. A change in the number of suppliers is not the same as a change in the quantity supplied. The News Note on page 667 illustrates the costs of regulation in the case of pharmaceutical companies.
The news release on page 669 discusses benchmarks for the financial services function - the area where Lucent Technologies strives to reduce costs and improve quality. Such analysis can provide insightful information about cost drivers so that the activities that cause costs can be better controlled in the future. In the event of a lack of cash flow or expected operating losses, discretionary fixed costs can be reduced more easily than committed fixed costs.
Budgeting Discretionary Costs
Because the benefits of discretionary cost activities cannot be definitively assessed, these activities are often among the first to be cut when profits lag. The output quality of discretionary cost activities can also vary depending on the tasks and skill level of the individuals performing the activities. Because of varying service levels and quality, discretionary costs are generally not amenable to the precise planning and control measurements available for variable production costs or to the cost-benefit evaluation techniques available for fixed fixed costs.
While the benefits of committed fixed costs can be measured on a before-and-after basis (through capital budgeting and post-investment review processes), the benefits of discretionary fixed costs are often not clearly measurable in terms of money.
Measuring Benefits from Discretionary Costs
Part of the difference in management's attitude between authorized and discretionary costs has to do with the ability to measure the benefits that these costs provide. Exhibit 15–7 presents some useful proxy measures for determining the effectiveness of different types of discretionary spending. Increase in unit sales in the two weeks following the advertising effort compared to sales two weeks prior to the effort.
The number of students from the area visited who requested that ACT/SAT scores be sent to the university. The degree to which a satisfactory ratio is reached in comparing outputs with inputs reflects the efficiency of the activity. The higher the number of miles per gallon, the higher the fuel efficiency of the car.
The comparison of actual production results with desired results indicates the effectiveness of an activity or how well the objectives of the activity have been achieved. But management can only subjectively attribute some or all of the cost effectiveness of performing the results. Although management was 80 percent effective in achieving its goal of reducing defects, this result was not necessarily related to the cost of quality control training.
The relationship between discretionary costs and desired outcomes is inconclusive at best, and the effectiveness of such costs can only be inferred from it. Because many discretionary costs result in benefits that must be measured on a nondeterministic, nonmonetary basis, exercising control over these costs during activities or after they have begun is difficult.
Control Using Engineered Costs
The price difference shows that Ace Engineered Products paid an average of $0.20 more per hour for inspectors in April than planned. A favorable efficiency variance is the result of using fewer hours than standard; but keep in mind that the standard calls for only 15 scans per hour, even though the average scan is supposed to take “a little less” than four minutes. Ace Engineered Products has set a "generous" standard to reinforce the importance of performing high-quality inspections regardless of the time required.
If Ace Engineered Products must hire only full-time employees on a salaried basis, analyzing inspection costs in the above manner is not very helpful. In a third type of analysis, it is assumed that part-time help will be needed in addition to full-time staff, and the flexible budget is used as the center column measure in the diagram below. Ace Engineered Products prepares a flexible budget for its fixed inspection cost based on a normal processing volume of 7,200 inspections and $10 per hour for part-time workers.
The adverse spending variance occurred because part-time employees had to be hired at approximately $0.31 more per hour than normal. To determine the implications of these numbers, Ace Engineered Products management would need to know which employees did and did not complete the 15 inspections per hour. For example, assume that $76,000 is spent on the salary of an additional systems analyst in the systems department.
Before determining that the discretionary costs were justified, top management should review the system manager's activity reports for the analysts in the department. In other words, post-performance audits of discretionary expenses are important in determining the value of expenditures.
Control Using the Budget
Regardless of the levels of variance or the explanations given, managers should always consider whether the activity itself and thus the costs were adequately justified. The discretionary spending would not be considered efficient if the new analyst spent a significant portion of the period performing small tasks. Comment: These explanations reflect an understanding of long-term behavior with variable costs and of the long-term quality considerations of having well-trained employees.
Comment: The first part of the explanation reflects an understanding of the nature of variable costs: additional hours worked caused additional costs to be incurred. The depreciation increase was related to the purchase and installation of the new EDI system. A set of comparisons of each cost line of the original budget with its counterpart's actual cost indicates an increase in expenditures of $40,930.
This section introduces activity-based budgeting as an extension of activity-based management, focusing on the planning phase of the operating cycle. On the left side of the exhibition is a traditional budget; on the right is the activity-based budget. The traditional budget provides an excellent delineation of the expected costs of various resources for the.
However, it leaves the reader without an understanding of how these resources specifically support the activities necessary for the business to achieve its goals; and it does not lead to strategies for how costs can be reduced without harming the achievement of objectives. CASH MANAGEMENT Of all organizational resources, cash is one of the most important and challenging.
What Variables Influence the Optimal Level of Cash?
The level of cash should be sufficient to cover all needs (i.e. prevent stockouts), but should be low enough to limit the opportunity costs associated with alternative uses of cash (freight costs).
What Are the Sources of Cash?
Inventory levels can be reduced if products can be produced more quickly after receiving customer orders. In addition to reducing inventory levels, the collection of cash can be accelerated to increase cash levels. The turnover of receivables can be directly affected by terms given for credit sales, policies for credit approval, discounts given for early payment and the use of services from financial intermediaries specialized in the purchase or factoring of receivables.
Other practices can be developed to expedite customer payments, including the use of electronic payments, customer debit cards, lock boxes, and bank courier services. Centralizing cash collection functions also allows accounts receivable to be converted into cash more quickly. Instead of paying factory employees weekly, a bimonthly or monthly pay plan can be set up.
Furthermore, decentralizing cash disbursement functions will increase the interval from when a check is issued until it is cleared.
What Variables Influence the Cost of Carrying Cash?
The more investment opportunities available to the company, the greater the incentive to convert idle money into other assets. Even if there are few investment opportunities available, managers can always return money to investors by reducing debt or buying back shares.
REVISITING
The program budgeting process requires a thorough analysis of alternative activities that can achieve an organization's objectives. Which of the above costs can be either committed or discretionary based on management philosophy. Committed vs. Discretionary Costs) Choose the letter C (for incurred cost) or D (for discretionary cost) to indicate which type of cost each of the following sentences is best associated with.
Which seems to be the source of most of the complexity associated with the purchase order. These consequences of corporate problems have put a strain on the plant's repair and maintenance program. A copy of the completed work order would be the basis of the charge for the department in which the repair or maintenance activity occurred.
Indicate whether each of the above items is indicative of cost understanding (CE), cost control (CC), cost avoidance (CA) or cost reduction (KB). Temporary or part-time employees may be used instead of full-time employees in each of the following situations: Indicate the potential advantages and disadvantages of using temporary in each of the above situations.
Estimate the company's energy cost savings or loss due to the machine's efficiency level in the first month of operation. The average size of the company's sales force during the year was expected to be 100 people. Cost Control) The following graph shows where each portion of the dollar a student pays for a new textbook goes.
Cost Control Analysis) The financial results of BusEd Corporation's continuing education division for November 2001 are presented in the schedule at the end of the case.
