International Telecon$2$

You are working in the office of the vice president of administration at International Telecon $($IT$)$ as a senior financial planner. IT is a Fortune $500$ firm with sales approaching $$1$ billion. IT provides long$-$distance satellite communications around the world. Deregulation of telecommunications in Europe has intensified

worldwide competition and has increased pressures inside IT to reduce costs so it can lower prices without cutting profit margins.

IT is divided into several profit and cost centres. Each profit centre is further organized as a series of cost centres. Each profit and cost centre submits a budget to IT$$s vice president of administration and then is held responsible for meeting that budget. The VP of administration described IT$$s financial control, budgeting,

and reporting system as $$pretty much a standard, state$-$of$-$the$-$art approach where we hold our people accountable for producing what they forecast.$$

Your boss has assigned you the task of analysing firmwide supplies expenditures, with the goal of reducing waste and lowering expenditures. Supplies include all consumables, ranging from pencils and paper to electronic subcomponents and parts costing less than $$1,000.$ Long$-$lived assets that cost under $$1,000($or the

equivalent dollar amount in the domestic currency for foreign purchases$)$ are not capitalized $($and then depreciated$)$ but are categorized as supplies and written off as expenses in the month purchased. You first gather the last $36$ months of operating data for both supplies and payroll for the entire firm. The payroll data help you benchmark the supplies data. You divide each month$$s payroll and supplies amount by revenues in that month to control for volume and seasonal fluctuations. The accompanying graph plots the

two data series. Payroll fluctuates from $34$ to $45$ percent of sales, and supplies fluctuate from $13$ to $31$ percent of sales. The graph contains the last three fiscal years of supplies and payroll, divided by the vertical lines. For financial and budgeting purposes, IT is

on a calendar $($January$$December$)$ fiscal year.

Besides focusing on consolidated firmwide spending, you prepare disaggregated graphs like the one shown, but at the cost and profit centre levels. The general patterns observed in the consolidated graphs are repeated in general in the disaggregated graphs.

Required

$($a$)$ Analyse the time$-$series behaviour of supplies expenditures for IT$.$ What is the likely reason for the observed patterns in supplies?

$($b$)$ Would the behaviour of supplies expenditures more likely originate from the cost centres or the profit centres? Explain.

$($c$)$ Given your analysis in $($a and b$),$ what corrective action might you consider proposing? What are its costs and benefits? Think about adressing the budget system.