DIFFICULTIES IN PERFORMANCE EVALUATION OFDISCRETIONARY EXPENSE CENTRES
Meaning of Discretionary Cost
Discretionary cost can be explained with the help of following two importantfeatures.
They arise from periodic (usually yearly) decisions regarding themaximum outlay to be incurred.
They are not tied to a clear cause and affect relationship betweeninputs and outputs
Based on the nature of the financial input and/or output that are measuredfor control purposes, four basic types of responsibility centres, Revenue, Cost,Profit and Investment, are generally distinguished (Anthony andGovindarajan, 2004)
Meaning of Discretionary Cost Centre
A discretionary cost centre (corporate overhead department) are subunitsthat arises from yearly appropriation decisions and have no well specifiedfunction relating to outputs or inputs. Such examples include but are notlimited to; R&D, legal, public relations, advertising, executive training, healthcare, and internal consulting.
Types of tasks
Repetitive (e.g. Accounting, Budgeting)Special (e.g. Projects appraisals)
Choose the tasks to be executed and level of effortEconomic performance: Budget controlOperational performance: Quality and level of service (opinions)
DIFFICULTIES IN PERFORMANCE EVALUATION OF DISCRETIONARY EXPENSECENTRES
Difficult for budgetingDifficult to guarantee congruence between department and companyobjectives.
Discretionary Cost Centres have limited to zero measurement on the actualoutput. Investing time into training an employee,Example - Yields increased knowledge, perhaps more efficiency, but byaccounting standards is hard to quantify. Similarly, it becomes just as difficultto measure the actual quality of the output. In this example, how much did