1. Liberty management is apparently using a cost center for its claims department because it generates no revenues. Because management has chosen not to adjust the number of clerks for the changing number of claims each month, it appears to be using a discretionary-cost method to budget these costs. That is, management has determined it is more effective to provide a reasonable resource (12 clerks) for the claims processing area and has chosen not to be concerned directly with the clerks’ efficiency, the slack during slow times, or the hectic pace at peak load times. Management’s view is that the work averages out over time
2. If Liberty uses the discretionary-cost method, the budget would be the same each month and would not depend on the level of claims to be processed. The budget would include the costs to provide the number of clerks that management judges to be adequate for the job (12 clerks × $2,400 = $28,800 per month)
3. If Liberty uses the engineered-cost method, each claim that is processed has a budgeted cost based on the average time used as determined by a work flow study. Assume that each clerk works an 8-hour day except for 40 minutes of break time; the number of claims a clerk can process each month (assuming 22 working days) is
The unfavorable variance for January using the engineered-cost method is $1,350 ($28,800 actual expenditure less $27,450 budgeted expenditure). This unfavorable variance is best interpreted as the cost of unused capacity for processing claims. Because the capacity for processing claims is 80 × 12 = 960 claims, the department has unused capacity of 45 claims (960 – 915 = 45 claims), or approximately one-half of one clerk.
4. Chuck could make the strategic argument that the claims processing department should be staffed for peak capacity rather than for average capacity to ensure promptness and accuracy during the busy months and to provide a better basis for employee morale, which is an important factor in performance during the low-volume months as well.