Large increases in postal expense at wdi


Case Scenario:

WDI is an engineering and construction company that designs, fabricates, and erects various air-pollution control systems. Its customers consist of private industry as well as public utilities. The discussion below illustrates how a company, in this case WDI, can lose control of something as simple as postal cost through inadequate information systems, lack of management interest, and lack of communication.

BACKGROUND:

WDI is structured in three major components: pre-contract operations, post-contract operations, and support groups. A brief description of each group’s functions follows:

Pre-contact:

Sales:  This group performs the traditional function of any sales organization, namely, to locate prospective customers, promote WDI products, and develop long-term marketing strategies.

Application engineering:  This section determines equipment selection, provides the estimate, and interacts with the sales department to provide technical input for various types of sales presentations.

Contracts:  This department develops all nontechnical portions of the pre-contract effort. In addition, the group is responsible for all negotiations with potential customers.

Proposal administration:  This department has the unenviable task of coordinating all of the above groups to ensure that concise, accurate proposals are issued. All outgoing proposals, letters, and so on are processed through this department.

Post-contracts:

Engineering:  Individuals in this group perform all detailed engineering and construction drawings required to execute a contract.

Construction:  Field personnel who actually construct the air-pollution systems are in this group.

Project management:  This department has complete control of and is responsible for coordinating all post-contract activities.

Support Groups

(Note: The labor cots of various departments designated as support groups are charged to overhead under WDI’s accounting system)

Finance:  This department performs all cost-control functions normally associated with such a department.

Legal:  This group provides legal consultation and handles all matters pertaining to litigation.

Administrative services:  This department procures office supplies and operates the mailroom form which all outgoing mail is processed.

The late 1990s were prosperous times for WDI. Public utilities were converting their power-production facilities from oil to coal as a result of the oil shortages of that time, thus expanding the air-pollution control market. Smokestack industries were providing a steady market to supplement the large power-industry market.

In early 2000, the global recession resulted in the disappearance of the industrial marketplace, and the subsequent “oil glut” soon depressed the utility market. Like all companies during depressed economic conditions, WDI looked within to cut costs. This review of internal costs produced some interesting results especially in the area of postal charges.

A group of individuals was given the task of finding areas of excess costs and recommending corrective action. The group was astounded at the huge increases in postal expenses staring in 2001. To determine why this startling increase developed, they questioned mailroom personnel. They were informed that proposal activity accounted for approximately 80% of documents processed through the mailroom. Hence, proposal activity for 1997-2003 was investigated.

These results further confused the situation. Not only did postal expenses soar beginning in 2001, but proposal activity (which comprises approximately 80% of postal expenses) dramatically decreased during this period.

The group’s next step was to interview the vice president of finance and the controller. Surely they would have noted the increased expenses incurred and could provide some insight as to the cause. To the group’s surprise, neither person was aware that any significant change in postal expense had taken place. Two problems were now obvious: (1) What caused the large increase? and (2) How could such a dramatic increase avoid the scrutiny of upper management?

One possibility immediately became apparent to all the members of the group. Was it possible that fraudulent postal expenses were being submitted? If so, management’s ignorance of the problem could suggest complicity. Before alleging any wrongdoing, the group had to ensure that no other reasonable alternative existed.

On reviewing the quarterly expense reports, the group noticed that postal expense was not identified as a particular line item. Instead, it was included under the expense category miscellaneous administrative expenses, which consisted of postal expenses, office supplies, and printing costs. The group then researched the office supply and printing expenses from 1997-2003.

The office supply and printing e3xpenses were directly proportional to the level of proposal activity, exactly as would be expected. It was apparent that the decreasing office supply and printing expense offset the increase in the postal expenses. Thus the miscellaneous administrative expense reported on the quarterly management expense summaries showed minimal changes.

The group still had on idea what caused the increased postal expense. Mailroom personnel were interviewed again. While one of the mailroom staff was discussing how the mailroom had changed over the years, he mentioned the dramatic increase in the use of express mail services. On reviewing the records, the group found that WDI had started using express mail service (other than those offered by the U.S. Postal Service) in May 2000.

In order to confirm their suspicions, the group reviewed a significant number of past proposals. They found that within two months of the establishment of express mail service at WDI, approximately 65% of all proposals were sent via this method; within six months this percentage had increased to 85%. Furthermore, the use of express mail service had proliferated to 50% of all written correspondence. The investigation was extended to the post-contract group, and it was found that nearly 90% of all engineering drawings required for contract execution were sent via express mail.

When various departments were asked why they had dramatically expanded their use of express mail service, the following responses were received:

“It is the most reliable and cost-efficient method to transmit a proposal, document, or such material that must be received across the country the following day.”

“Utilizing express mail enables us to gain one or tow days of in-house effort that would normally be wasted transmitting by regular mail”

“We feel express mail lessens the chances of correspondence getting lost in the mail.”

Finally, one of the interviewees, who was hired after 2001, stated, “I though it was standard procedure.”

A complete review of the office records supported the group’s hypothesis that the rampant use of this premium mail service had indeed caused the problem. For example, the cost of mailing a single-page letter in 2003 was 33 cent (postage only). That same letter mailed via express mail service cost $7.00. This cost differential is even greater when proposal packages, which weigh 5 to 10 pounds, are considered. The group’s investigation indicated that if proposal activity again reached the levels of 1999, postal expenses could exceed $500,000. This would be an absurd amount of money to spend on postage for a company that employs only 225 people.

Required to do:

Q1. What caused the large increases in postal expense at WDI? How could such large increases have escaped management's scrutiny?

Q2. Suggest changes in WDI's accounting system to prevent similar situations from occurring in the future.

Q3. What steps should WDI take to bring postal expenses under management control?

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