Case – Bromiis Inc.
Bromiis Inc., is an international ethical medical research drugmanufacturer that specializes in antibody science and thedevelopment and marketing of cancer treatment products. The 15wholly owned subsidiaries and separate divisions that constitutethe organization are highly decentralized, but they receive overalldirection from a small corporate staff at parent-corporationheadquarters in Menlo Park, California. The laboratories division,research division, and all corporate offices are located at thehome- office site. Each of the divisional staff areas operates as acost center. That is, labs accounting, labs production, labs sales,research accounting, and computer (Electronic Data Processing: EDP)systems also function as individual cost centers, and they providetheir services to Research, Labs, and other divisions asnecessary.
Until recently, no costs of the corporate service cost centerswere allocated to the divisional cost centers; they were simplylumped together as central corporate overhead. Recently, however,it was decided to start charging the operating units (that is, thecost centers) for their EDP usage. Prior to this time, EDP serviceswere simply requested as desired by the cost centers; prioritieswere determined by negotiations, with ultimately recourse to an EDPcontrol committee (each cost center was represented); and allcharges were absorbed as corporate overhead.
EDP systems contain both systems programming services andcomputer operations. In the current “charge-back” systems, the EDPdirector prepares a budget at the start of each quarter based uponhis estimates of user demand. Using full absorption costing, he/shethen computes an hourly charge rate, which he/she promulgates tothe user cost centers. The users prepare their budgets utilizinghis charge rate and their estimates of the services they think theywill be needing. When a user desires to undertake any specificproject or use EDP services, he/she negotiates an agreement withEDP on the hours (thus cost) that he/she will be charged. The useris free to reject the EDP “bid” and obtain outside services ifhe/she does not feel the EDP job estimates are reasonable. Also,since many projects last a year or more but service agreements arearranged on a quarterly basis, the user can drop a project inmidstream at the end of a quarter if his/her overall budget shouldbecome too tight. If the actual hours needed to complete a givenjob exceed those contracted for, the EDP center must absorb theextra cost as an unfavorable variance.
The performance of all cost centers is evaluated on the basis ofhow closely their actual results match budget. Thus, the EDPdirector must ensure not only that his actual expenditures coincidewith those that were budgeted but that he is able to bill otherscenters for all his actual charges. He must be sure that hecontracts for enough projects from the users to absorb hisbudget.
The shift to the charge-back method was imposed by the corporatefinancial vice-president for the “purpose of putting control andresponsibility for expenditures where the benefits are received”.The VP also felt the move was necessary to avoid a “mushrooming ofthe EDP group” and to make users more aware of the costs they wereincurring. An additional factor mentioned was an almostirresistible tide of “allocationism” prevalent in local industrybecause of the overpowering influence of government
contracting there. He/she does feel he/she will resistallocating the other services, however, with the possible exceptionof printing and production, which has grown to be quite costly inthe last few years. The major rationale for not allocating theother services is that they are all uniform, predictable functions,whereas the EDP services are more spasmodic andproject-oriented.
The head of the EDP group is strongly opposed to the new system.He/she believes that there is “too much lip service paid to thespecialized nature of computers” and that the new system isreducing the effectiveness of the EDP group to the corporation as awhole. He/she and several of the users-directors believe the shiftwas simply a political maneuver on the part of the VP toconsolidate the EDP empire under the aegis of the corporate staff.The head of the EDP group believes a nonchargeable systemadministrated by the EDP control committee would yield betterresults.
REQUIRED:
Main Problem (s)/Issues
Analysis
Alternatives (3)
Conclusion
Recommendation
