Page 61 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes corresponds to changes in budgeted sales volume i.e., additional personnel are budgeted
when volume is expected to increase, and lay-offs are planned when volume is expected to
decrease. Since personnel costs and personnel-related costs are by far the largest expense
item in most discretionary expense centres; the annual budgets for these cost centres tend
to be a constant percentage of budgeted sales volume.
2. Type of financial control: Financial control exercised through an operating expense budget
in an engineered expense centre/standard centre attempts to minimize operating costs by
setting a standard and reporting actual costs against this standard. Costs are minimized by
motivating line managers to attain maximum efficiency and by giving higher management
a means of evaluating the efficiency of departmental management. The main purpose of a
discretionary expense budget, on the other hand, is to allow the superior to control costs
by participating in the planning. Costs are controlled primarily by deciding what tasks
should be undertaken and what level of effort is required. Thus, in a discretionary expense
centre, financial control is exercised at the planning stage before the amounts are incurred.

4.3.2 Control Aspects of some Discretionary Expense Centres

Admin and support centres: These include senior corporate management and business unit
management alongwith the managers of the supporting staff units. Support centers are units
that provide services to other responsibility centres.
The control of admin and support centres is difficult because of:

Problems inherent in measuring output: Some staff activities such as payroll accounting are so
routine that their units are in fact, engineered expense centres. In other activities, the principal
output is advice and service - functions that are virtually impossible to quantify, much less
evaluate, since output cannot be measured, it is not possible to set standards against which to
measure financial performance. Thus, a budget variance cannot be treated as either efficient or
inefficient performance.
Lack of goal congruence: Typically, managers of administration, staff officers strive for functional
excellence but to develop ideal system or programmes or function will become too costly
relative to the additional profits that perfection may generate.
The proposed budget for an admin or support centre usually consists of list of expense items
within the current years’ actual expenses. Some companies have a more elaborate presentation
with the following components:
1. A section covering the basic costs of the centre including the costs of being in business plus
the costs of an intrinsically necessary activities for which no general management decisions
are required.
2. A section covering the discretionary activities of the centre including a description of the
objectives and estimated costs of each.

3. A section fully explaining all proposed increases in the budget other than those related to
inflation.

Self Assessment

Multiple Choice Questions:

3. Which of the following is a type of expense?
(a) Discretionary expense (b) Engineered cost
(c) Both (a) and (b) (d) Neither (a) or (b)

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