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It is necessary to note that apart from cost above, there are other important
tasks for engineered expenses centres to perform i.e., the type and level of
production are specified with specific quality standards, so that manufacturing
costs may not be minimized at the expense of quality. Further, managers of
engineered expense centres are responsible for activities such as: training
and employee development that are not related to current production; their
programme reviews include an appraisal on how well they carry out these
responsibilities.
It may also be noted, that there are few, if any, responsibility centres in which
all costs items are engineered. Process in highly automated production
departments, the use of indirect labour and various services can vary with
management’s discretion. Thus, the term engineered expense centre refers to
responsibility centres in which engineered costs predominate, but it does not
P O LY T E C H N I C U N I V E R S I T Y O F T H E P H I L I P P I N E S 2
imply that valued engineering estimates can be made for each and every cost
item.
2. Discretionary costs: (also called managed costs) are those for which no
such engineered estimate is feasible, the amount of costs depends on
management’s judgement about the amount that is appropriate under the
circumstances.
of spending. The budgetee adjusts these amounts for anticipated inflation, cost
implications of the changes in the job to be done and in some cases for anticipated
productivity improvements. In some companies, the preparation of budget is
preceded by a zero base review.
In the case of discretionary cost centre, while formulating the budget, managements’
principal task is to decide on the magnitude of the job that should be done, because
based on such job expenses/resources are budgeted. The following questions are
asked about a discretionary expense budget proposal:
1. What are the precise decisions that management should make?
2. Does the proposal include all the available information pertinent to making
these decisions?
3. Does the proposal include irrelevant information which, at best, will tend to
observe the real issues?
These tasks can be divided into two types: continuing and special. Continuing tasks
are those that continue from year to year, for example, financial statement
preparation by the controller’s office. Special tasks are one-time projects, for
example, developing and installing a profit budgeting system in a newly acquired
division.
engineers can devote the part of their line for basic research subject
only to the informal agreement of their supervisor.
The true power of benchmarking lies in the ability to apply the insight
gained from another organization’s best practices – with the full
understanding that it is adapting them or not adapting them. No single
best practice works anywhere. In fact, the term “best practices” is
something of a misnomer.
Incremental Budgeting:
Selling expenses were budgeted on a
“fixed” or “appropriation” basis.
the accounting department sent
records of actual expenses for the
preceding year and for the current
year -to- date.
Guided by this record, department
heads drew up & submitted estimates
of the expenses of their department
for the succeeding year.
Final approval is in Budget
Committee
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The new method drastically reduce most of the unfavorable expenses in budget
report
Q1. From the information given in Exhibits 1, determine insofar as you can whether
each item of expense is
a. variable with sales volume
b. partly variable with sales volume
c. variable with some other factors or
d. not related to output volume at all.
Answer:
The old system, Exhibit 1, the figures of selling expenses are fixed or
appropriation based on the previous year and managers use it to estimate the
selling expense budget for succeeding year.
However the result is that the selling expenses budgeting as an input are
not match with the expected output.
So, the answer is (D). The old system, expenses are not related to output
volume at all.
P O LY T E C H N I C U N I V E R S I T Y O F T H E P H I L I P P I N E S 10
Q2. What bearing do your conclusions in question 1 have on the type of budgeting
system that is most appropriate?
Answer:
After evaluate the old method and starting all from the scratch to find the
most suitable method for budgeting, The new method for budgeting is
most appropriate since attends to be more accurate in representing
between the flexible budget and the actual budget.
Q3. Should the proposed sales expense budgeting be adopted? Why or Why not?
Answer:
It should be adopted.
The new method, which is able to determine the flexible budget with
more accuracy and efficiently for predicting future demands for the
business and adjusting for unexpected external factors than can affect
productivity.
Q4. What other suggestions do you have regarding the sales expense reporting
system for Whiz Calculator?
Answer:
Since the flexible costs are based on an amount per sales $ which it
doesn’t consider the nature of each selling territory , order size, or
consumer behavior.
Plus, not all highlighted selling expenses are variable to sales and some
are only partly variable to sales.
The company should learn to gather more data about market demands
for each region and do some research about consumer behavior analysis
or trend.