Question

Granger Stokes, managing partner of the venture capital firm of Halston and Stokes, was dissatisfied with the top management of PrimeDrive, a manufacturer of computer disk drives. Halston and Stokes had invested $20 million in PrimeDrive, and the return on their investment had been below expectations for several years. In a tense meeting of the board of directors of PrimeDrive, Stokes exercised his firm’s rights as the major equity investor in PrimeDrive and fired PrimeDrive’s chief executive officer (CEO). He then quickly moved to have the board of directors of PrimeDrive appoint himself as the new CEO. Stokes prided himself on his hard-driving management style. At the first management meeting, he asked two of the managers to stand and fired them on the spot, just to show everyone who was in control of the company. At the budget review meeting that followed, he ripped up the departmental budgets that had been submitted for his review and yelled at the managers for their “wimpy, do nothing targets.” He then ordered everyone to submit new budgets calling for at least a 40% increase in sales volume and announced that he would not accept excuses for results that fell below budget. Keri Kalani, an accountant working for the production manager at PrimeDrive, discovered toward the end of the year that her boss had not been scrapping defective disk drives that had been returned by customers. Instead, he had been shipping them in new cartons to other customers to avoid booking losses. Quality control had deteriorated during the year as a result of the push for increased volume, and returns of defective disk drives were running as high as 15% of the new drives shipped. When she confronted her boss with her discovery, he told her to mind her own business. And then, to justify his actions, he said, “All of us managers are finding ways to hit Stokes’s targets.”

Required:

Is Granger Stokes using budgets as a planning and control tool?

What are the behavioral consequences of the way budgets are being used at PrimeDrive?

What, if anything, do you think Keri Kalani should do?

Answer 1

Answers:

Is Granger Stokes using budgets as a planning and control tool?

Granger strokes, the managing partner is NOT using the budgets as planning and controlling tool. The purpose of the budgets is to plan the performance of the organization and control the costs a per the budget. He simply instructs the managers to increase the sales by 40%. Instead, detailed budgets should have been prepared which are realistic and achievable.

Some of the budgets that should have been prepared are:

1. Sales Budget

2. Production Budget

3. Raw Material Purchase Budget

4. Direct Labor Budget

5. Cash Budget

6. Selling and Distribution Cost Budget

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What are the behavioral consequences of the way budgets are being used at PrimeDrive?

The budget prepared by Granger strokes, the managing partner will have adverse impact on the organization. This will create tension among employees as they will not be able to achieve the objectives. Also, the employees will start using unethical ways to achieve the objectives. It will lead to mistrust and lack of respect among employees..

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What, if anything, do you think Keri Kalani should do?

The account should do the following:

Disclose to the higher authority about the adverse effects of the activities in the organization.

Write a letter to appropriate individuals who can take care of the matter.

If she could not do the above or the top management does not consider her suggestions, she should resign.