Question

The current organizational structure of Blue Sky Company, a manufacturer of small sailboats, is presented below. Presented below: 

Required 

a. What operational problems (e.g., inefficiency, errors, or fraud) do you think Blue Sky could experience because of this structure? 

b. Draw a new diagram reflecting an improved structure that solves the problems you identified.  If necessary, you may add up to two new positions. 

 

Answer 1

a.

The production department’s vice president or manager should not supervise the inventory management tasks. The production department uses the raw materials and therefore should not have any custodial tasks over the storage of the inventory items. A separate materials management department should handle the purchasing of inventory items and the warehousing of raw materials. The production department may not take the time (and should not be wasting its time trying) to investigate the best possible prices for a given quality and quantity of goods. Further, the production department may be able to pilfer goods from the production line if a separate department is not controlling the release of raw materials for specific job lots. The production department should not be in charge of cost accounting. The cost accounting department should be separate since this department tracks the costs of the production process. If the cost accountants report to the production manager, they may be influenced to overlook some cost items or alter the amounts to make the cost center look better. Also, the production manager should not be in charge of payroll, he or she may have paychecks written for fictitious employees. The sales department should not be in charge of credit approvals. Salespeople’s compensation is typically tied to their sales figures, and thus salespeople have an incentive to write as many sales as possible without regard to the financial stability of the customer. Poor credit decisions may be made if the credit department reports to the sales manager. Further, the billing department should not report to the sales manager either because the salespeople may be tempted to issue unwarranted and unauthorized discounts to their most valuable customers. The finance department collects and distributes cash; therefore, it should not have custody over the accounts receivable and accounts payable. A separate accounting function should provide a check and balance on the cash collections and disbursements.

 

b.

A reorganization is presented in the following  diagram. Two new positions have been created: VP-Materials Management and VP-Accounting (or Controller). The VP-Finance is a “promotion” given to the financial manager.