Tom Emory and Jim Morris strolled back to their plant from the administrative of
ID: 2376510 • Letter: T
Question
Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson
& Son Manufacturing Company. Tom is manager of the machine shop in the company%u2019s factory;
Jim is manager of the equipment maintenance department.
The men had just attended the monthly performance evaluation meeting for plant department
heads. These meetings had been held on the third Tuesday of each month since Robert Ferguson,
Jr., the president%u2019s son, had become plant manager a year earlier. As they were walking, Tom Emory spoke: %u201CBoy, I hate those meetings! I never know whether my department%u2019s accounting reports will show good or bad performance. I%u2019m beginning to expect the worst. If the accountants say I saved the company a dollar, I%u2019m called %u2018Sir,%u2019 but if I spend even a little too much%u2014boy, do I get in trouble. I don%u2019t know if I can hold on until I retire.%u201D
Profit Planning 381
Tom had just been given the worst evaluation he had ever received in his long career with Ferguson & Son. He as the most respected of the experienced machinists in the company. He had been with Ferguson & Son for many years and was promoted to supervisor of the machine shop when the company expanded and moved to its present location. The president (Robert Ferguson, Sr.) had often stated that the company%u2019s success was due to the high-quality work of machinists like Tom. As supervisor, Tom stressed the importance of craftsmanship and told his workers that he wanted no sloppy work coming from his department. When Robert Ferguson, Jr., became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and to seek cost reduction opportunities. The company controller was instructed to have his staff %u201Ctighten%u201D the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the plant manager%u2019s desire to reduce costs. The young plant manager often stressed the importance of continued progress toward attaining the budget; he also made it known that he kept a file of these performance reports for future reference when he succeeded his father.
Tom Emory%u2019s conversation with Jim Morris continued as follows:
Emory: I really don%u2019t understand. We%u2019ve worked so hard to meet the budget, and the minute we do so they tighten it on us. We can%u2019t work any faster and still maintain quality. I think my men are ready to quit trying. Besides, those reports don%u2019t tell the whole story. We always seem to be interrupting the big jobs for all those small rush orders. All that setup and machine adjustment time is killing us. And quite frankly, Jim, you were no help. When our hydraulic press broke down last month, your people were nowhere to be found. We had to take it apart ourselves and got stuck with all that idle time.
Morris: I%u2019m sorry about that, Tom, but you know my department has had trouble making budget, too. We were running well behind at the time of that problem, and if we%u2019d spent a day on that old machine, we would never have made it up. Instead we made the scheduled inspections of the forklift trucks because we knew we could do those in less than the budgeted time.
Emory: Well, Jim, at least you have some options. I%u2019m locked into what the scheduling department assigns to me and you know they%u2019re being harassed by sales for those special orders. Incidentally, why didn%u2019t your report show all the supplies you guys wasted last month when you were working in Bill%u2019s department?
Morris: We%u2019re not out of the woods on that deal yet. We charged the maximum we could to other work and haven%u2019t even reported some of it yet.
Emory: Well, I%u2019m glad you have a way of avoiding the pressure. The accountants seem to know everything that%u2019s happening in my department, sometimes even before I do. I thought all that budget and accounting stuff was supposed to help, but it just gets me into trouble. It%u2019s all a big pain. I%u2019m trying to put out quality work; they%u2019re trying to save pennies.
Required:
1. Identify the problems that exist in Ferguson & Son Manufacturing Company%u2019s budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.
Based on the information presented provide suggestions for improving the effectiveness of the budgetary system for this company.
Explanation / Answer
Budgetary control system is one of the tools for planning and control. The success of the company depends on how well the planning is done.
===========================================================================In this process the budgeted figures are compared with the actual figure. It seems that the fixed budgeted figures are compared with the actual budget without flexing it. Therefore there is a problem with the company%u2019s employee.
===========================================================================It seems that the focus is on the dollar amount not on the volume of the goods is being produced. For example, the company has set target of 2000 units with fixed cost of $20000 and variable cost of $60000. It means that the total budgeted cost is $80000. It is compared with the actual figures without looking at the volume.
=========================================================================== Now suppose that the actual cost incurred is $90000 and the volume is 2500 units. If $90000 is compared with $80000, it looks that the spending is more by $10000, which is wrong.
===========================================================================Because the actual cost should have been spent for 2500 units is $20000 fixed and $75000 for variable, therefore the flexible budget for actual volume should be $95000. Now compare it with $90000, which shows there is saving of $5000 not overspending of $10000. It means that overspending always is not a bad thing.
======================================================================================================================================================
The company should compare the actual figures with the flexible budget not the static budget. Company should also take into consideration the work to be done in future.
=========================================================================== The company should also revise its estimate, if the estimate is for less work to be done the budget will be on the lower side, but if the work is according to the capacity of the company then the budget will be reasonable, which will not create problem for departmental head to work more when their budgets have been attained, if they would have been made on unrealistic estimate.
===========================================================================
The company may also use standard cost technique for control purpose, they set standard for each activity and then multiply that standard rate with actual activity carried on to compare with actual cost in dollars incurred.
===========================================================================For example, the standard cost to produce one unit is $20 per unit and the company produces 5000 units, the standard cost allowed for actual production is $100000, then it should be compared with the actual cost incurred, it the cost incurred is $90000, it means the company has saved $10000 and if it is $105000, it shows overspending of $5000
===========================================================================
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