Question

CASE 8-30 Evaluating a Company's Budget Procedures

[LO8-1] image 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's 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's son, had become plant manager a year earlier. As they were walking, Tom Emory spoke: “Boy, I hate those meetings! I never know whether my department's accounting reports will show good or bad performance. I'm beginning to expect the worst. If the accountants say I saved the company a dollar, I'm called ‘Sir,’ but if I spend even a little too much—boy, do I get in trouble. I don't know if I can hold on until I retire.” Tom had just been given the worst evaluation he had ever received in his long career with Ferguson & Son. He was 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's 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 “tighten” the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the plant manager's 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's conversation with Jim Morris continued as follows:

Emory: I really don't understand. We've worked so hard to meet the budget, and the minute we do so they tighten it on us. We can't work any faster and still maintain quality. I think my men are ready to quit trying. Besides, those reports don't 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'm 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'd 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.Page 390

Emory: Well, Jim, at least you have some options. I'm locked into what the scheduling department assigns to me and you know they're being harassed by sales for those special orders. Incidentally, why didn't your report show all the supplies you guys wasted last month when you were working in Bill's department?

Morris: We're not out of the woods on that deal yet. We charged the maximum we could to other work and haven't even reported some of it yet.

Emory: Well, I'm glad you have a way of getting out of the pressure. The accountants seem to know everything that's 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's all a big pain. I'm trying to put out quality work; they're trying to save pennies.

Required:

1.-Identify the problems that appear to exist in Ferguson & Son Manufacturing Company's budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.

2.-Explain how Ferguson & Son Manufacturing Company's budgetary control system could be revised to improve its effectiveness.

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Answer 1

Answer:

Identify the problems that appear to exist in Ferguson & Son Manufacturing Company's budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.

The Major problem in budgetary control system and the reduction to do so as to ensure the effcetivness is explained as below :

• emory has believed that highquality output is goal but now it appears to be such that low cost as goal. As the employees are unaware of such facts so they cannot make decisions that will help further knows as lacking in coordination about goals
• At times the actual performance in relation to budgetary reports is affected to a greater extent by many external or internal unknown factors which are not controllable.. So, the variance reports will serve little purpose for all such performances evaluations or for improving such uncontrollable factors. So, the system doesnt encourage cordination amaong all the departments.
• The short run aspects will affect overall performances so monthly evaulations and tighting of budgets to be not done on montly basis.
• The main of budgetary system is to focus on the evaulation of performances though many factors arent considered. So as this system doesnt motivate the employees So should be considerate when coming into such aspects.

The current system has a number of flaws. First, the data collection should never leave the manager in the dark. Why it is that accounting knows what is going on and the manager does not? That is not a well-designed system or the manager needs training on how to read the reports. Second, a system that only rewards cost reductions is going to reward managers for cutting corners. And quality can go down fast. This works in the short run but in the long run product returns and customer satisfaction are hurt. And the equipment that is begun maintained are the ones that are easy and cheap so that maintenance costs are low. Eventually product costs will rise as defects from poorly maintained equipment begin to cause trouble. Finally, jobs that are stopped for small rush orders, increasing the setup times should be charged to the jobs that create the extra burden and so that extra cost should not be charged against the manager's initial budget. The current budgeting system creates incentives to behave in ways that are not productive or likely to lead to long term success. And it does not give the front-line managers insight into what is working effectively and what needs follow up. The current budget is only an instrument of random torture or reward, without any feedback value. Managers should know whether things have gone well or not long before accounting compiles the data!

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Explain how Ferguson & Son Manufacturing Company's budgetary control system could be revised to improve its effectiveness.

First, the static budget should be adjusted for actual activity so that small jobs that create set up costs will be factored into the flexible budget and performance is not downgraded for these additional costs. Second, when the budget is met, that should be a good thing and not a reason to reduce the budget. Third, there should be quality measures that also balance out the product costs measures so there is no temptation to cut product costs to the bone and let quality costs swing out of control. Finally, there should be some incentive for maintenance to keep the product costs down by reducing downtime and so some measure of downtime should be in their performance measures. In other words, the system should not have such a narrow focus and should not be a surprise measure that makes no sense to the team.

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Really hope this helps! Thankyou!

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