According to this technique, the budget has a section which explains the activities that can be undertaken if the budget is increased. Another method used to understand the appropriate level of spending in a discretionary expense center is sensitivity analysis. The progress towards these objectives is periodically reviewed and the rewards are allocated on the basis of performance.

Management by objectives is a technique where the objectives of performance are jointly determined by subordinates and their superiors.

Management by objectives is a useful technique in preparing budgets for a discretionary expense center. Continuing tasks take place year after year (like financial statements) while special tasks are one-time tasks, for example, developing a profit budgeting system for a newly acquired division. These tasks are of two types-continuing and special. However, in a discretionary expense center, the principal task is to decide on the magnitude of the job that has to be performed. In engineered expense centers, the costs are determined by the management, taking into view the operating budget required to perform the task effectively in the future. Budget preparation: The decisions regarding the budget of expenses for a discretionary expense center is different from that for an engineered expense center.The management control systems for expense centers are discussed, taking into consideration factors like budget preparation, cost variability, financial control and measurement of performance. The decisions related to such activities depend on the way a company operates.Ĭontrol Characteristics for Expense Centers These relate to the amount of money that should be spent on R&D, financial planning, public relations, etc. In discretionary expense centers the management decides on certain policies that should govern the company’s operation. Here, the efficiency is not the difference between budgeted and actual expense, but the difference between the budgeted input and actual input. Discretionary expense centers include administrative and support units like legal, accounting, industrial and public relations units. Discretionary expense centers: In discretionary expense centers, the output cannot be measured in monetary terms.Its efficiency is measured by comparing the actual cost with the standard cost. In these centers, the cost of the product is determined by multiplying the output of each unit with its standard cost.

There are certain responsibility centers within administrative and support departments that actually are engineered expense centers. These centers are usually found in the manufacturing units that use a standard cost system. Engineered expense centers: In these centers, inputs or expenses are measured in monetary terms and outputs are measured in physical terms.There are two types of expense centers – engineered expense centers and discretionary expense centers. In expense centers, inputs or expenses are measured in monetary terms whereas the outputs are not measured in monetary terms.

Discretionary expenses