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Chapter 12: Problem 12

How does an engineered cost differ from a discretionary cost?

Short Answer

Expert verified
Engineered costs are directly related to the production process and vary in proportion to the output, making them easier to predict and trace. Discretionary costs are not directly tied to production and depend on management decisions, making them more flexible and less predictable. Examples of engineered costs include raw materials and labor costs, while discretionary costs include marketing expenses and employee training.

Step by step solution

01

Definition of Engineered Costs

Engineered costs are expenses related to the production process that has a clear and direct relationship with the level of output or production of goods or services. These costs can be easily traced and measured, and usually increase or decrease in proportion to the level of output.
02

Definition of Discretionary Costs

Discretionary costs are expenses that are not directly tied to the production of goods or services. These costs are incurred based on management decisions and can be changed, reduced, or eliminated without directly impacting the production output. Examples of discretionary costs include advertising, employee training, and research and development.
03

Comparing Engineered and Discretionary Costs

Engineered costs differ from discretionary costs in the following ways: 1. Relationship to production: Engineered costs are directly tied to the production process, while discretionary costs are not directly linked to production. 2. Predictability: Engineered costs are easier to predict as they are directly proportionate to the output. Discretionary costs, however, are based on management decisions, making them harder to predict. 3. Flexibility: Discretionary costs can be more easily adjusted, reduced, or eliminated compared to engineered costs, which are necessary for the production process. 4. Examples: Engineered costs might include raw materials, labor costs, and depreciation of machinery. Discretionary costs might include marketing expenses, training, and research and development. In conclusion, engineered costs are directly related to the production process and are necessary for the production of goods or services, while discretionary costs are incurred based on management decisions and can be adjusted without impacting production.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Engineered Costs
Engineered costs are essential and unavoidable expenses within the production process. These costs have a strong correlation with the amount of goods or services produced. Imagine a factory that makes toy cars. The more toy cars produced, the more raw materials, like plastic and metal, are required. Thus, costs for these materials are engineered costs. They often grow with each additional unit produced. Engineered costs are predictable and measurable, making them easier to manage. They ensure that the production continues smoothly without disruption. Common examples include:
  • Raw materials needed to create products.
  • Direct labor involved in manufacturing.
  • Maintenance and depreciation of machinery used in production.
Understanding engineered costs helps businesses set prices and plan budgets efficiently. It is vital for cost accounting, ensuring profitability and operational effectiveness.
Discretionary Costs
Discretionary costs arise primarily from management decisions. Unlike engineered costs, they do not have a direct connection to the level of production. These costs are flexible and can be adjusted without severely impacting the output. A company decides how much to spend on these based on its goals and strategies.
For instance, a company may invest in advertising to boost brand recognition or spend on employee training programs to enhance skills. These decisions are strategic, reflecting long-term visions rather than immediate needs. Examples of discretionary costs include:
  • Advertising and promotional activities.
  • Employee training and development.
  • Research and development projects.
Discretionary costs allow for flexibility in budgeting, providing room to scale back in tough times or increase during growth phases. They reflect a company's priorities and future-oriented decisions.
Production Process
The production process is the backbone of any manufacturing venture. It incorporates all the steps taken to transform raw materials into finished goods. This includes planning, organizing, directing, and overseeing the production activities that need to be engineered carefully.
Each step in the production process requires specific resources, which fall into engineered costs or sometimes touch on discretionary expenses if improvements or optimizations are suggested. Here are basic stages of the production process:
  • Input: Gathering raw materials and resources.
  • Processing: Converting raw materials into products utilizing labor and machinery.
  • Output: The finished goods are ready for market.
Engineered costs dominate this process due to their necessity for continuity and efficiency. By understanding production's phases, businesses can optimize costs and enhance productivity.
Management Decisions
Management decisions play a critical role in how a business allocates its resources effectively. These decisions determine how discretionary costs are spent and sometimes how well-engineered costs are managed.
An efficient management team evaluates both internal and external factors to decide where to allocate funds. Key considerations include market trends, consumer demands, and available resources or innovations that could improve production. These decisions impact a company's growth, innovation, and competitive edge.
  • Deciding on budget allocations between different departments.
  • Identifying areas for cost-cutting or investment.
  • Setting short-term and long-term business strategies.
Through informed decision-making, management can significantly influence business success, balancing engineered and discretionary costs wisely for overall financial health.

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Most popular questions from this chapter

Gable Company manufactures wallets from fabric. In 2016 , Gable made 2,160,000 wallets using 1,600,000 yards of fabric. In \(2016,\) Gable has capacity to make 2,448,000 wallets and incurs a cost of \(\$ 8,568,000\) for this capacity. In \(2017,\) Gable plans to make 2,203,200 wallets, make fabric use more efficient, and reduce capacity. Suppose that in 2017 Gable makes 2,203,200 wallets, uses 1,440,000 yards of fabric, and reduces capacity to 2,295,000 wallets at a cost of \(\$ 7,803,000\) 1\. Calculate the partial-productivity ratios for materials and conversion (capacity costs) for 2017 , and compare them to a benchmark for 2016 calculated based on 2017 output. 2\. How can Gable Company use the information from the partial-productivity calculations?

What is a customer preference map, and why is it useful?

Gardini Chocolates makes custom-labeled, high-quality, specialty candy bars for special events and advertising purposes. The company employs several chocolatiers who were trained in Germany. The company offers many varieties of chocolate, including milk, semi-sweet, white, and dark chocolate. It also offers a variety of ingredients, such as coffee, berries, and fresh mint. The real appeal for the company's product, however, is its custom labeling. Customers can order labels for special occasions (for example, wedding invitation labels) or business purposes (for example, business card labels). The company's balanced scorecard for 2017 follows. For brevity, the initiatives taken under each objective are omitted. $$\begin{array}{lccc} & \text { Target } & \text { Actual } \\ \text { 0bjectives } & \text { Measures } & \text { Performance } & \text { Performance } \\ \hline \text {Financial Perspective} & & & \\ \text { Increase shareholder value } & \text { Operating-income changes from } & & \\ & \text { price recovery } & \$ 1,000,000 & \$ 1,500,000 \\ & \text { Operating-income changes from } & & \\ & \text { growth } & \$ 200,000 & \$ 250,000 \\ & \text { cost savings due to reduced } & & \\ & \text { packaging size } & \$ 40,000 & \$ 50,000 \\ \text { Customer Perspective} & & & \\ \text { Increase market share } & \text { Market share of overall candy bar } & & \\ & \text { market } & 8 \% & 7.8 \% \\ \text { Increase the number of new } & \text { Number of new product offerings } & & \\ \text { product offerings } & & & \\ \begin{array}{c} \text { Increase customer acquisitions } \\ \text { due to sustainability efforts } \end{array} & \begin{array}{c} \text { Percentage of new customers } \\ \text { surveyed who required recycled } \end{array} \\ \text { Internal-Business-Process Perspective } & \text { paper options } & 35 \% & 40 \% \\ \begin{array}{c} \text { Reduce time to customer } \\ \text { Increase quality } \end{array} & \begin{array}{c} \text { Average design time } \\ \text { Internal quality rating (10-point } \\ \text { scale) } \end{array} & \begin{array}{c} \text { Recycled materials used as a } \\ \text { percentage of total materials used } \end{array} & \text { points } \\ \begin{array}{c} \text { Increase use of recycled as } \\ \text { materials } \end{array} & \begin{array}{c} \text { Leaction of the ore of the paction of the some } \\ \text { Learning-and-Growth Perspective } \end{array} \\ \begin{array}{l} \text { Increase number of professional Number chocoration } \\ \text { chocolatiers } \end{array} \end{array}$$ 1\. Was Gardini successful in implementing its strategy in \(2017 ?\) Explain your answer. 2\. Would you have included some measure of customer satisfaction in the customer perspective? Are these objectives critical to Gardini for implementing its strategy? Why or why not? Explain briefly. 3\. Explain why Gardini did not achieve its target market share in the candy bar market but still exceeded its financial targets. Is "market share of overall candy bar market" a good measure of market share for Gardini? Explain briefly. 4\. Do you agree with Gardini's decision not to include measures of changes in operating income from productivity improvements under the financial perspective of the balanced scorecard? Explain briefly. 5\. Why did Gardini include balanced scorecard standards relating to environmental and social performance? Is the company meeting its performance objectives in these areas?

Comtex Company provides cable and Internet services in the greater Boston area. There are many competitors that provide similar services. Comtex believes that the key to financial success is to offer a quality service at the lowest cost. Comtex currently spends a significant amount of hours on installation and post-installation support. This is one area that the company has targeted for cost reduction. Comtex's balanced scorecard for 2017 follows. $$\begin{array}{lccc} & & \text { Target } & \text { Actual } \\ \text { 0bjectives } & \text { Measures } & \text { Performance } & \text { Performance } \\ \hline \text {Financial Perspective} & & & \\ \text { Increase shareholder value } & \text { Operating-income changes from } & & \\ & \text { productivity } & \$ 2,400,000 & \$ 800,000 \\ & \text { 0perating-income changes from } & & \\ & \text { growth } & \$ 520,000 & \$ 250,000 \\ & \text { Increase in revenue from new } & & \\ & \text { customer acquisition } & \$ 50,000 & \$ 24,000 \\ \text { Customer Perspective} & & & \\ \text { Increase customer satisfaction } & \text { Positive customer survey } & & \\ & \text { responses } & 70 \% & 65 \% \\ \text { Increase customer acquisition } & \text { New customers acquired through } & & \\ & \text { company sponsored } & & \\ & \text { community events } & 475 & 350 \\ \text { Internal-Business-Process Perspective } & & & \\ \text { Develop innovative services } & \text { Research and development } & & \\\ & \text { costs as a percentage } & & \\ \text { Increase installation efficiency } & \text { of revenue } & 5 \% & 6 \% \\ \text { Increase community involvement } & \text { Installation time per customer } & 5 \text { hours } & 4.5 \text { hours } \\ & \text { Number of new programs with } & & \\ \text { Decrease workplace injuries } & \text { community organizations } & 12 & 15 \\ & \text { Number of employees injured } & & \\ \text { Learning-and-Growth Perspective } & & & \\ \text { Increase employee competence } & \text { in the workplace } & <3 & 7 \\\ \text { Increase leadership skills } & \text { Number of annual training-hours } & & \\ \text { Increase employee safety } & \text { per employee } & 10 & 11 \\ \text { awareness } & \text { Number of leadership workshops } & & \\ & \text { fffered } & 2 & 1 \\ & \text { Percent of employees who have } & & \\ & \text { completed safety certification } & & \\ & \text { training } & 100 \% & 95 \% \end{array}$$ 1\. Was Comtex successful in implementing its strategy in \(2017 ?\) Explain. 2\. Do you agree with Comtex's decision to include measures of developing innovative services (research and development costs) in the internal-business- process perspective of the balanced scorecard? Explain briefly. 3\. Is there a cause-and-effect linkage between the measures in the internal- business-process perspective and the customer perspective? That is, would you add other measures to the internal-business-process perspective or the customer perspective? Why or why not? Explain briefly. 4\. Why do you think Comtex included balanced scorecard measures relating to employee safety and community engagement? How well is the company doing on these measures?

What is a partial-productivity measure?
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