ENGINEERED COSTS Engineered costs are elements of cost for which the 'right' or 'proper' amount of costs that should be incurred can be estimated with a reasonable degree of reliability. For example: Costs incurred in a factory for direct labor, direct material, components, supplies, and utilities.
What Is Value Engineering?
Value engineering is a systematic and organized approach to providing the necessary functions in a project at the lowest cost. Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality. It is focused solely on the functions of various components and materials, rather than their physical attributes. Value engineering is also called value analysis.
Understanding Value Engineering
Value engineering is the review of new or existing products during the design phase to reduce costs and increase functionality in order to increase the value of the product. The value of an item is defined as the most cost-effective way of producing an item without taking away from its purpose. Therefore, reducing costs at the expense of quality will simply be a cost-cutting strategy.
With value engineering, cost reduction should not affect the quality of the product being developed or analyzed.
The concept of value engineering evolved in the 1940s at General Electric, in the midst of World War II. Due to the war, purchase engineer Lawrence Miles and others sought substitutes for materials and components, since there was a chronic shortage of them. These substitutes were often found to reduce costs and provided equal or better performance.
Special Considerations
Miles defined product value as the ratio of two elements: function to cost. The function of an item is the specific work it was designed to perform, and the cost refers to the cost of the item during its life cycle. The ratio of function to cost implies that the value of a product can be increased by either improving its function or decreasing its cost. In value engineering, the cost related to production, design, maintenance, and replacement are included in the analysis.
Pokemon emerald online. For example, consider a new tech product is being designed and is slated to have a life cycle of only two years. The product will thus be designed with the least expensive materials and resources that will serve up to the end of the product’s lifecycle, saving the manufacturer and the end-consumer money. This is an example of improving value by reducing costs.
Another manufacturing company might decide to create added value by maximizing the function of a product with minimal cost. In this case, the function of every component of the item will be assessed to develop a detailed analysis of the purpose of the product. Part of the value analysis will require evaluating the multiple alternate ways that the project or product can accomplish its function.
The different ways that are listed are narrowed down to a few basic and secondary feasible options that may be implemented into the project. For example, a dish liquid bottle that becomes slippery after some of the liquid soap has leaked to the sides may be improved by redesigning the shape of the bottle and the opening spout to improve grip and minimize leakage. This could lead to increased sales without incurring additional advertising costs.
Key Takeaways
- Value engineering is a systematic and organized approach to providing the necessary functions in a project at the lowest cost.
- Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality.
- It is focused solely on the functions of various components and materials, rather than their physical attributes.
What is a Discretionary Expense?
A discretionary expense is a cost that a business or household can get by without, if necessary. These expenses are often defined as things that are 'wants' rather than 'needs.' For example, a business may allow employees to charge certain meal and entertainment costs to the company. This is done in order to promote goodwill with employees, rather than to ensure the firm's survival.
Key Takeaways
- A discretionary expense is a cost that is not essential for the operation of a home or a business.
- In a corporate environment, discretionary expenses are usually costs linked with improving a company’s standing with its customers and employees.
- Tracking discretionary expenses enables businesses and households to identify where they can save money in times of financial difficulties.
- Discretionary expenses vary, depending on the business or person.
Understanding Discretionary Expenses
When times are hard and short-term cash flow issues emerge, managers of companies will first look to weed out any costs deemed unnecessary. Discretionary expenses, the costs associated with business activities that are not directly tied to operational procedures, will be first to go as stopping them is unlikely to impact the company’s ability to function and produce goods.
In a corporate environment, discretionary expenses are usually costs linked with promoting or boosting a company’s standing with its customers and employees. Buying the raw materials used to produce goods will likely be considered essential. Spending less on employee training programs perhaps less so.
Everyday people also encounter moments when it is necessary to consider which of their expenses they can live without. A sensible person who runs into financial difficulties is more likely to prioritize paying utility bills over financing a vacation.
Businesses and individuals pay for discretionary expenses with discretionary income: the amount of money left over after paying for taxes and necessities.
Essential Expenses vs. Discretionary Expenses
Households incur two types of expenses. Certain expenses they must either pay by law (such as taxes and health insurance) or pay to keep the household running (such as rent, food, and transportation costs). These expenses are essential expenses, as the income earner does not have the option of not paying them in any given month without incurring consequences.
Other expenses, such as vacation costs and luxury items, are not necessary to maintain a household and, thus, are classified as discretionary expenses. In other words, the income earner can pay for these goods or services at his own discretion.
Advantages of Discretionary Expenses
In tough economic times, it may be necessary for households and businesses to cut expenditures in response to decreases in income. Thus, it is often desirable to track discretionary expenses separately from essential expenses so that it is easy to see where and to what degree expenses can be reduced.
One helpful budgeting tactic is to rank discretionary expenses in order of importance from the least to most important. Therefore, if a job loss or income reduction forces household budget cuts, household members can easily identify the first discretionary expense to place on the chopping block.
Special Considerations
The concept of what is discretionary is subjective and may differ considerably among individuals and businesses.
For example, if needs must, a stable, well-established company could probably get away with slashing its advertising budget for a while. In contrast, a new company facing hardship would probably look to make cut backs elsewhere, mindful that boosting exposure and getting its name out there is imperative to keeping it afloat.