Use In-House Labor & Materials

Just as there are times when outside specialists are needed, there are other times when outside labor and materials are a major waste of money. A firm should attempt to utilize its workforce and materials as completely and thoroughly as possible. Unfortunately, many times funds are spent unwisely due to internal cost accounting pricing structures and the need to meet projected budgets.

While auditing a major television network, I observed the following series of events that took place at a televised professional golf tournament. The network needed six television monitors for four days. The unit manager rented the television sets from a local supplier for $360 (a daily charge of $15 per set).

The network has numerous television sets in its central equipment warehouse. Had the units been transported with the other equipment in the network's trucks, the golf broadcast would have been charged an internal fee of $1,500 ($25 per unit for each of the ten days that the six television sets were "rented" from the warehouse). The network should have reprimanded the unit manager for wasting $360 of actual monies. Instead, he was praised for saving $1,140 ($1,500 internal cost accounting charge less $360).

Many companies' cost accounting systems cause managers to fall into the same trap. The cost system should be designed so that it differentiates real funds from "funny money" (i.e. internal charges).