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5. Leveraging the Power of Modern Information Systems

In this chapter you have seen how various reporting methods can be employed to facilitate managerial decision making. Before departing, you should consider that the same internal data can often be generated and displayed in many ways. There is not a single correct method for "slicing and dicing" a company's overall results into unitized information sets. And, there is no reason to think that a manager should be forced to make decisions based upon a single display of data. Modern information systems empower managers to look at the same data from multiple perspectives, and good managers will avail themselves of these tools as they consider data and make decisions based thereon.

5.1. Line Item VS. Object of Expenditure

Factory

$16,247,500

Sales

3,772,000

General

1,515,000

Administrative

3,285,000

$24 819 500

For instance, consider the data set at left. It reveals that $24,819,500 was spent on compensation. Of that amount, $16,247,500 was spent on factory labor, and so forth. Each line item corresponds to an employee grouping, and those lines roughly relate to the individual categories that would be compiled in developing an overall income statement. Suppose you were the manager for this business, and charged with reducing total compensation costs to $24,000,000. What category would you consider cutting? Would it be wise to cut each category in equal proportion to "spread the pain?" Is there a better way? Indeed, it is difficult to say by reviewing the data from a single perspective. Consider the same data, rearranged in a different fashion below. Here, you can see the same total cost of $24,819,500, this time distributed to match the object of expenditure:

Salaries and wages

$15,000,000

Health insurance

1,500,000

Unemployment taxes

359,000

FICA taxes

858,000

Retirement contributions

975,000

401K matching contributions

562,000

Workers' compensation insurance

1,542,000

Bonuses and stock-based compensation

2,150,000

Vacation accruals

1,125,000

Sick leave accruals

629,500

Reimbursed employee tuition/training

119,000

$24 819 500

Perhaps the revised display provides added insight into cost control opportunities. Some specific expenditure category might be targeted for reduction if it is viewed as discretionary or not critical to the productive mission of the entity.

The data might be further arranged into an even more detailed matrix format for an even closer inspection:

Factory

Sales

General

Administrative

Total

Salaries and wages

$10,500,000

$ 2,300,000

$ 1,000,000

$ 1,200,000

$15,000,000

Health insurance

1,050,000

230,000

100,000

120,000

1,500,000

Unemployment taxes

315,000

23,000

15,000

6,000

359,000

FICA taxes

735,000

69,000

30,000

24,000

858,000

Retirement contributions

525,000

230,000

100,000

120,000

975,000

401K matching contributions

210,000

92,000

80,000

180,000

562,000

Workers' compensation insurance

1,470,000

46,000

20,000

6,000

1,542,000

Bonuses and stock-based compensation

25,000

575,000

50,000

1,500,000

2,150,000

Vacation accruals

787,500

172,500

75,000

90,000

1,125,000

Sick leave accruals

577,500

23,000

20,000

9,000

629,500

Reimbursed employee tuition/training

52,500

11,500

25,000

30,000

119,000

$16 247 500

$ 3 772 000

$ 1 515 000

$ 3 285 000

$24 819 500

The column totals correspond to the information in the first report, and the row totals correspond to the information in the second report. The individual cells within the matrix bring to light a number of areas where added cost control might be effectively implemented. For instance, workers' compensation insurance for factory labor is $1,470,000. Perhaps a different insurance carrier might provide a better rate for this policy, contributing a significant amount of the targeted overall cost reduction. Or, maybe the bonus plan for administrative staff ($1,500,000) should be targeted; perhaps this category is in "runaway mode" since it exceeds the base amount for administrative salaries. Examine the data yourself and you will likely see other areas that peek your interest for potential cost reduction.

The key point is that managers should be prepared to consider alternative or expanded data sets as they contemplate difficult decisions. Viewing data only by line item or only by object of expenditure can greatly limit insight into business operations. Modern accounting systems enable organizing and rearranging data sets with relative ease. These modern systems are usually costly to design and implement, but they can pay great returns when managers take advantage of the robust information they are capable of producing. As a business manager, it is well worth your time to study and understand the full range of capabilities of the business information system you have at your disposal!

 
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