You are working in the office of the vice president of administration at International Telecon (IT) as a senior financial planner. IT is a Fortune 500 firm with sales approaching $1 billion. IT provides long-distance satellite communications around the world. Deregulation of telecommunications in Europe has intensified worldwide competition and has increased pressures inside IT to reduce costs so it can lower prices without cutting profit margins.
IT is divided into several profit and cost centers. Each profit center is further organized as a series of cost centers. Each profit and cost center submits a budget to IT's vice president of administration and then is held responsible for meeting that budget. The VP of administration described IT's financial control, budgeting, and reporting system as "pretty much a standard, state-of-the-art approach where we hold our people accountable for producing what they forecast."
Your boss has assigned you the task of analyzing firm-wide supplies expenditures, with the goal of reducing waste and lowering expenditures. Supplies include all consumables ranging from pencils and paper to electronic sub components and parts costing less than $ 1,000. Long-lived assets that cost under $1,000 (or the equivalent dollar amount in the domestic currency for foreign purchases) are not capitalized, (and then depreciated) but are categorized as supplies and written off as expenses in the month purchased.
You first gather the last 36 months of operating data for both supplies and payroll for the entire firm. The payroll data help you benchmark the supplies data. You divide each month's payroll and supplies amount by revenues in that month to control for volume and seasonal fluctuations. The accompanying graph plots the two data series.
Payroll fluctuates from 35 to 48 percent of sales, and supplies fluctuate from l3 to 34 percent of sales. The graph contains the last three fiscal years of supplies and payroll, divided by the vertical lines. For financial and budgeting purposes, IT is on a calendar (January-December) fiscal year.
(See attachment for graph)
Besides focusing on consolidated firm-wide spending, you prepare disaggregated graphs like the one shown, but at the cost and profit center levels. The general patterns observed in the consolidated graphs are repeated in general in the disaggregated graphs.
a. Analyze the time-series behavior of supplies expenditures for IT. What is the likely reason for the observed patterns in supplies?
b. Given your analysis in (a), what corrective action might you consider proposing? What are its costs and benefits?
a) The deviation in the supplies consumption might be explained by the company's policy that each profit and cost center is held responsible for meeting that budget. This policy is encapsulated in the VP's description of the company's system, "pretty much a standard, state-of-the-art approach where we hold our people accountable for producing what they forecast."
An accounting scenario for International Telecon is analyzed.