Page 59 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Engineered expense centres/ Standard cost centres: They have the following characteristics:
1. Their input can be measured in monetary terms.
2. Their output can be measured in physical terms.
3. The optimal rupee amount of input required to produce one unit of output can be
established.
In an engineered expense centre/standard centre, the output multiplied by the standard cost of
each unit produced represents what the finished product ‘should’ have costed. When this cost is
compared to actual costs, the difference between the two represents the efficiency of the
organizational unit being measured.

Example: Manufacturing operations that employ some form of standard cost,
warehousing, distribution and similar units within the marketing organizations. Similarly,
certain responsibility centres within administrative and support departments for instance,
accounts receivable, accounts payable and payroll sections in the controller’s department;
personnel records and canteen in the human resources department, shareholders’ records in the
corporate secretary department and company motor pool; perform repetitive tasks for which
standard costs can be developed. These engineered expense centres are located within departments
that are discretionary expense centres.
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.

Notes 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 imply that valued engineering estimates can be made for each
and every cost item.

4.3.1 Discretionary Expense Centres

The word discretionary means that management has decided on certain policies that should
govern the operations of the company. For example, manufacturer may grant an advertising
allowance to a regional distributor of 10% per 1000 pieces of some products.

Example: Administration and support centres, R&D Centres and marketing centres.
Management view about the proper level of discretionary cost is subject to change. Dramatic
changes may occur when a new management takes over.
There are three points in the control of discretionary expense centres. First, the management
control system helps only in expense control. The budget for this type of expense centres
represents the planned inputs to the expense centre.

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