Question

The Bonwire Kente Company Case

Your friend, Kwame Nkrumah from Ghana knows that you are taking graduate classes and asks for your opinion on an issue he faces as owner/manager of the Bonwire Kente Company which he started 5 years ago with 20 employees. The Company has grown by leaps and bounds to the point where it now employs over five hundred persons and has become a nightmare to manage.

The Company weaves the cotton it grows on its 4,000- acre farm into Kente cloth, which it dyes and sells both locally and abroad. The process from farm to market is complex and varied. At present he has identified the following five major phases:

Phase I - Planting, growing, reaping, transporting, storing the cotton employs three hundred (300) persons

Phase II - Dyeing and weaving process employs one hundred (100) persons

Phase III - Quality control employs twenty (20) persons

Phase IV - Marketing and Sales employs seventy (75) persons

Phase V – Distribution employs forty (40) persons

Phase VI – Administration, Accounting, Collection and Cash Management employs thirty (30) persons

The major issue he faces is managing growth for maximum profitability and reduced costs.

Required:

Part A

From what you have learned about agency costs and responsibility centers, write a detailed letter to Kwame explaining how he might organize his company. Assume that he knows nothing about responsibility centers and agency costs and make your recommendations applicable to the Bonwire Kente Company.

Answer 1

Any organizational or functional unit headed by a manager who is responsible for the activities of that unit is called a responsible center. The manager is responsible or accountable for the accomplishments of the tasks set in his unit.

The total organizational task is divided into sub-tasks, which are performed by different departments. In this sense, all departments in an organization are responsibility centers and in this question it is six phases covering about 500 employees.All responsibility centers use resources to produce something [output or revenues]. Typically responsibility is assigned to a revenue, expense, profit or investment center.The decision usually will depend on the activity performed by the organizational unit and on the manner in which inputs and outputs are measured by organizational control system.

The organizational chart shows the sub-tasks being performed by different departments and also the tasks to be performed by each responsibility center. The size of the responsibility center will, however, is determined by the nature of the task, technology, people and the level in the organization hierarchy.

Each and every departments of the organisation has a responsibilty centre, as in the Phase I- Planting, growing, reaping, transporting, storing the cotton etc which employyes about 300 employees and it is duty of each of these 300 employees to plant, grow, reap etc.

Generally there are 4 responcibility centres which are,

a) Revenue centre:

Revenue centers are those organizational units or segments in which outputs are measured in monetary terms but are not directly compared to input costs. The main focus of management’s efforts will be on revenue generated by it. A sales department is an example for a revenue center. Here phase IV is responsible for marketing and sales.

The effectiveness of the center is not judged by how much sales revenue exceeds the cost of the center. Rather budgets are prepared for the revenue center and the budgeted figures are compared with the actual sales. Generally the costs are not related to output. However, this does not mean that efforts are not taken to control costs in revenue centers. Though the management’s main focus is more on revenues, necessary attempts are made to control costs.

b) Expense Centre:

In expense centers, inputs [cost and expenses] are measured in monetary terms but outputs are not. The main focus of the management will be on the control of the expenses or costs incurred by the responsibility center. In the question Phse VI employees are to be considered as the expense centre.

So budgets will be devised only for the input portion of these centers’ operations. Organizational units commonly considered expense centers include administration service, and research departments.

c) Profit Centre:

A profit center generally refers to a segment of an organization that generates revenue. It is a responsibility center, the manager of which is responsible for the amount of profits earned. In a profit center, performance is measured by the numerical difference between revenues [outputs] and expenditures [inputs].

The managers in the profit center are therefore, responsible for both revenues and costs. Such a measure is useful to determine the economic efficiency of the center and individual efficiency of the manager in charge of the center.

d) Investment Centre:

An investment centre is a responsibilty centre whose manger is responsible for earning a raatae of return for the assets used in his responsibility centre. In an investment centre, the control system again measures the monetary value of inputs and outputs, but it also assesses how those outputs compar with the assets employed in producing them.

It is imprtant to realise that any profit center can also be considered an investment center, because its activities require some frm of capital investment. In other words, an investment center can be considered as a special type of profit center, in which focus is also on assets employd.