P3-36; Identifying Discretionary and Committed Fixed Costs
Identify and compute TOTAL DISCRETIONARY FIXED COSTS and TOTAL COMMITTED FIXED COSTS from the following list prepared by the accounting supervisor for the Huang Building Supply.
Health insurance for the company's employees 15,000
Management salaries 85,000
Payment on long-term debt 50,000
Property tax 32,000
Grounds maintenance 9,000
Office remodeling 21,000
Research and Development 36,000
They are of two types engineered or committed cost center and discretionary cost center. Here two things are measured: Efficiency and Effectiveness - Many services must be delivered in an efficient and effective manner. For example, timeliness is often a good indicator of efficiency. If you do the "right things," this should get reflected in the form of effectiveness. In case of discretionary cost center they are not directly related with the production as they provide support services. Thus it's the discretionary cost center; for which the important thing is the relationship of output with the objective, instead of input with the output. Thus the ...
This solution distinguishes the two different types of engineered cost centers, and also give examples of each type and how it should be a model of efficiency and efficacy. It also provides the discretionary and committed fixed costs. All references used are included.