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How does an engineered cost differ from a discretionary cost?

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Engineered costs are directly related to the production process and vary in proportion to the output, making them easier to predict and trace. Discretionary costs are not directly tied to production and depend on management decisions, making them more flexible and less predictable. Examples of engineered costs include raw materials and labor costs, while discretionary costs include marketing expenses and employee training.
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Step 1: Definition of Engineered Costs

Engineered costs are expenses related to the production process that has a clear and direct relationship with the level of output or production of goods or services. These costs can be easily traced and measured, and usually increase or decrease in proportion to the level of output.

Step 2: Definition of Discretionary Costs

Discretionary costs are expenses that are not directly tied to the production of goods or services. These costs are incurred based on management decisions and can be changed, reduced, or eliminated without directly impacting the production output. Examples of discretionary costs include advertising, employee training, and research and development.

Step 3: Comparing Engineered and Discretionary Costs

Engineered costs differ from discretionary costs in the following ways: 1. Relationship to production: Engineered costs are directly tied to the production process, while discretionary costs are not directly linked to production. 2. Predictability: Engineered costs are easier to predict as they are directly proportionate to the output. Discretionary costs, however, are based on management decisions, making them harder to predict. 3. Flexibility: Discretionary costs can be more easily adjusted, reduced, or eliminated compared to engineered costs, which are necessary for the production process. 4. Examples: Engineered costs might include raw materials, labor costs, and depreciation of machinery. Discretionary costs might include marketing expenses, training, and research and development. In conclusion, engineered costs are directly related to the production process and are necessary for the production of goods or services, while discretionary costs are incurred based on management decisions and can be adjusted without impacting production.

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Chapter 12

Balanced scorecard. (R. Kaplan, adapted) Petrocal, Inc., refines gasoline and sells it through its own Petrocal gas stations. 0 n the basis of market research, Petrocal determines that \(60 \%\) of the overall gasoline market consists of "service-oriented customers," medium- to high-income individuals who are willing to pay a higher price for gas if the gas stations can provide excellent customer service, such as a clean facility, a convenience store, friendly employees, a quick turnaround, the ability to pay by credit card, and high-octane premium gasoline. The remaining \(40 \%\) of the overall market are "price shoppers" who look to buy the cheapest gasoline available. Petrocal's strategy is to focus on the \(60 \%\) of service-oriented customers. Petrocal's balanced scorecard for 2017 follows. For brevity, the initiatives taken under each objective are omitted. $$\begin{array}{lccc} & \text { Target } & \text { Actual } \\ \text { 0bjectives } & \text { Measures } & \text { Performance } & \text { Performance } \\ \hline \text {Financial Perspective} & & & \\ \text { Increase shareholder value } & \text { Operating-income changes from } & & \\ & \text { price recovery } & \$ 80,000,000 & \$ 85,000,000 \\ & \text { Operating-income changes from } & & \\ & \text { growth } & \$ 60,000,000 & \$ 62,000,000 \\ \text {Customer Perspective} & & & \\ \text { Increase market share } & \text { Market share of overall gasoline } & & \\ & \text { market } & 4 \% & 3.8 \% \\ \text { Internal-Business-Process Perspective} & & & \\ \text { Improve gasoline quality } & \text { Quality index } & \text { 92 points } & \text { 93 points } \\ \text { Improve refinery performance } & \text { Refinery-reliability index (\%) } & 91 \% & 91 \% \\ \text { Ensure gasoline availability } & \text { Product-availability index (\%) } & 99 \% & 99.5 \% \\ \text { Learning-and-Growth Perspective } & & & \\ \text { Increase refinery process capability } & \text { Percentage of refinery processes } & & \\ & \text { With advanced controls } & 94 \% & 95 \% \end{array}$$ 1\. Was Petrocal successful in implementing its strategy in \(2017 ?\) Explain your answer. 2\. Would you have included some measure of employee satisfaction and employee training in the learning-and-growth perspective? Are these objectives critical to Petrocal for implementing its strategy? Why or why not? Explain briefly. 3\. Explain how Petrocal did not achieve its target market share in the total gasoline market but still exceeded its financial targets. Is "market share of overall gasoline market" the correct measure of market share? Explain briefly. 4\. Is there a cause-and-effect linkage between improvements in the measures in the internal-businessprocess perspective and the measure in the customer perspective? That is, would you add other measures to the internal-business- process perspective or the customer perspective? Why or why not? Explain briefly. 5\. Do you agree with Petrocal's decision not to include measures of changes in operating income from productivity improvements under the financial perspective of the balanced scorecard? Explain briefly.

Chapter 12

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Chapter 12

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Chapter 12

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Chapter 12

Gianni \& Sons buys T-shirts in bulk, applies its own trendsetting silk-screen designs, and then sells the T-shirts to a number of retailers. Gianni wants to be known for its trendsetting designs, and it wants every teenager to be seen in a distinctive Gianni T-shirt. Gianni presents the following data for its first two years of operations, 2016 and 2017 . Administrative costs depend on the number of customers Gianni has created capacity to support, not on the actual number of customers served. Gianni had 3,600 customers in 2016 and 3,500 customers in 2017 1\. Is Gianni's strategy one of product differentiation or cost leadership? Explain briefly. 2\. Describe briefly the key measures Gianni should include in its balanced scorecard and the reasons for doing so.

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