Question

Case – Bromiis Inc.

Bromiis Inc., is an international ethical medical research drug manufacturer that specializes in antibody science and the development and marketing of cancer treatment products. The 15 wholly owned subsidiaries and separate divisions that constitute the organization are highly decentralized, but they receive overall direction from a small corporate staff at parent-corporation headquarters in Menlo Park, California. The laboratories division, research division, and all corporate offices are located at the home- office site. Each of the divisional staff areas operates as a cost 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 provide their services to Research, Labs, and other divisions as necessary.

Until recently, no costs of the corporate service cost centers were allocated to the divisional cost centers; they were simply lumped together as central corporate overhead. Recently, however, it was decided to start charging the operating units (that is, the cost centers) for their EDP usage. Prior to this time, EDP services were simply requested as desired by the cost centers; priorities were determined by negotiations, with ultimately recourse to an EDP control committee (each cost center was represented); and all charges were absorbed as corporate overhead.

EDP systems contain both systems programming services and computer operations. In the current “charge-back” systems, the EDP director prepares a budget at the start of each quarter based upon his estimates of user demand. Using full absorption costing, he/she then computes an hourly charge rate, which he/she promulgates to the user cost centers. The users prepare their budgets utilizing his charge rate and their estimates of the services they think they will be needing. When a user desires to undertake any specific project or use EDP services, he/she negotiates an agreement with EDP on the hours (thus cost) that he/she will be charged. The user is free to reject the EDP “bid” and obtain outside services if he/she does not feel the EDP job estimates are reasonable. Also, since many projects last a year or more but service agreements are arranged on a quarterly basis, the user can drop a project in midstream at the end of a quarter if his/her overall budget should become too tight. If the actual hours needed to complete a given job exceed those contracted for, the EDP center must absorb the extra cost as an unfavorable variance.

The performance of all cost centers is evaluated on the basis of how closely their actual results match budget. Thus, the EDP director must ensure not only that his actual expenditures coincide with those that were budgeted but that he is able to bill others centers for all his actual charges. He must be sure that he contracts for enough projects from the users to absorb his budget.

The shift to the charge-back method was imposed by the corporate financial vice-president for the “purpose of putting control and responsibility for expenditures where the benefits are received”. The VP also felt the move was necessary to avoid a “mushrooming of the EDP group” and to make users more aware of the costs they were incurring. An additional factor mentioned was an almost irresistible tide of “allocationism” prevalent in local industry because of the overpowering influence of government

    

contracting there. He/she does feel he/she will resist allocating the other services, however, with the possible exception of printing and production, which has grown to be quite costly in the last few years. The major rationale for not allocating the other services is that they are all uniform, predictable functions, whereas the EDP services are more spasmodic and project-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 the specialized nature of computers” and that the new system is reducing the effectiveness of the EDP group to the corporation as a whole. He/she and several of the users-directors believe the shift was simply a political maneuver on the part of the VP to consolidate the EDP empire under the aegis of the corporate staff. The head of the EDP group believes a nonchargeable system administrated by the EDP control committee would yield better results.

REQUIRED:
Main Problem (s)/Issues

Analysis
Alternatives (3)

Conclusion

Recommendation

Answer 1

In reference to the context we know that the divisional staff areas are working as a cost center and that puts Electronic Data Processing (EDP) to function as individual cost center. We need to know that EDP requires an extensive approach towards information processing as it needs to access and manipulate recorded data and also classify and summarize the data at the same time. Since its nature of processing is faster it helps to identify feasible options for job accomplishment in an on-going project without much delay.

One challenge that the users might face is to identify the exact time of usage of the EDP and the estimated cost of it. This is also because the EDP can be of various nature depending upon the project and might also change as the project progresses. For e.g. it can be a combination of interactive and batch processing but might become distributed processing later.

The EDP director will have to take in account that the finalization of the budget might not refer completely to the expenditure because of the fact that there are several classification of the EDP process as well. In an Interactive Processing of EDP the peak detection might take a considerable amount of time while the integration that follows might go well beyond the finalized budget.

An effective solution to combat the issues is at the very first stage where the collection of data happens, we need to understand that EDP exists in order to reduce costs and secure data from unwanted access, but if the crucial point of gathering data is ineffective then it might result in wrong cost estimation and time prediction. This may also give rise to users leaving the usage of a specific EDP midway and opting to utilize other alternatives because of the quarterly contract design. Though it is highly challenging to make the contract yearly or half-yearly basis, it can easily be transformed into a contract till the project lasts. Now this will help the EDP director as w ell as the users, because in the initial stages the users will be conscious enough to collect data and they will be able to effectively estimate time and cost depending upon the nature of the data gathered.

It must be noted that the EDP system is used in medical research and it is important to keep a check on the misuse of data, the very fact that an alternative exists when costs increase or doesn’t match the allocated budget must be discarded and the company must analyze the aspects of putting it to the hand of the corporate staff who might not know the significance of the data in the system at all.

There is an immediate requirement of training that will help with the two main challenge of time and cost, and once the users and the EDP authority realizes the nature of a project from the very beginning and the various other possibilities of the project in the initial phase in a month or two, then the contract and transferring authority to the corporate staff can be completely eliminated, as the probable users become more adept in understanding the significance of the same.