Responsibility Centers-

Discretionary Exp. Center

2. Expenses Center –
b) Discretionary Expenses Center -e.g. R&D,
Advt. Dept
i) Administrative and Support Centers- senior
management units at corporate level
• Inherent control problem is the output can not be
measured

• goals before these interacting units are different -

e.g. a legal advisory unit may be striving for a
perfect contract document but at what cost? Money/
time involved may lead to loosing the deal itself.

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Responsibility Centers-
Discretionary Exp. Center

2. Expenses Center –
b) Discretionary Expenses Center -e.g. R&D,
Advt. Dept
ii) Research and Development Centers - basic
question is what should be the optimum size of
R&D budget?
• very difficult to relate inputs with output
• the input and output may span over different and
uneven time periods.
ii) Marketing Centers -
• these RC’s are responsible to bring the order to
the company and to execute the orders. They are
not concerned with what profits their efforts give
but more interested in what revenues they bring.
Therefore their input is expenses incurred for
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getting the sales and output is what sales they
Committed cost & Budget –

• The expenses that can not be changed by the RC or

BU manager during the budget year. OR expenses that
can be changed only in extra ordinary circumstances
• .e.g. Depreciation Lease rentals, salaries of Key
Personnel– it can not be changed during the FY. But
it can be changed if any addition or disposal of
assets is made during the FY.
• They are beyond control of BU/RC manager at
least during the FY, one cannot apply management
control over such expenses.
• The committed cost are budgeted cost, they
represent fixed cost burden on RC . So budget
reflects the said costs as it is.

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Engineered cost & Budget –

• Since these are the costs which can be pre-

determined scientifically. Budgeting becomes a easier
process/exercise.
• e.g. cost of production- material cost, labor cost,
overheads.

• Determine the level of activity desired.

• Determine the standard cost for a unit.

• Establish the budget for desired level of activity.

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Discretionary cost and Budget –

• Theses are the managed expenses, and can not be

arrived at easily. Establishing relationship between
Input and output is very difficult.
• While formulating the budget for this kind of
expenses, management’s main task is to decide on
the magnitude of job/task to be done. Based on this
magnitude, resources can be allocated and budget
is set.
• The projects involving such kind of expenses are
divided into two categories – On Going Projects and
Special projects.