Chapter 4 Case 4-1. Vershire Company Questions: 1. Outline the strengths and weaknesses of Vershire Company’s planning and control system. Vershire’s planning system Strengths: When formulating the sales budget, divisional managers are required to predict market conditions and capital expenditures. The frocasting is done at the corporate level and is then sent to the divisional managers for fine-tuning. Corporate controllers visit each plant for half a day prior to the final submission of the budget. Weakness The initial sales forecast uses assumptions which are entirely derived from corporate headquarters’ analyses. The forcasting method is the same for all product lines. Plant managers do not come up with the sales budgets – the district sales manager do. Vershire’s control system Strengths Divisional managers are given full control over their divisions except in the ares of raising capital and labor relations. There is timely communication between the various hierarchies of the company as there are not that many tiers. There is constant oversight on meeting the budget. Weakness Profit is the main measure for assessing plant managers’ performance and determining bonuses. 2. Trace the profit budgeting process at Vershire, starting in May and ending with the Board of Directors’ meeting in December. Be prepared to describe the activities that took place at each step of the process and present the rationale for each.
3. Should the plant managers be held responsible for profits? Why? Why not?
Profit made up of two components: revenue and expenditure. Plant managers should be responsible only for the measures that they can directly control, which are the expenditure. Expenditure includes direct materials, direct labor, variable manfacturing, and fixed overhead budget. The plant managers was held responsible for the budgeted profit number even if actual sales fell below the projected level. Sales deparment has sole responsibility for the price, sales mix, and delivery schedules. Any difference of opinions between sales and production is always favoured with the sales department as Vershire wants to satisfy the customer since they can easily switch to a competitor. This reduce the plant manager’s ability to maintain control over profitability in the plant since production can be disrupted by the sales manger and hurt efficiency of outputs, resulting in higher profit. 4. How do you assess the performance evaluation system contained in Exhibit 2 and 3? Main focus exhibit 2 is net profit, which is influenced by sales and expense. The exhibit includes variances regarding sales price, sales mix, and sales volume. These are items that the sales department has responsibility over, rather than plant manager. Therefore, they are evaluating plant managers based on metrics over which the plant managers have no direct control. Vershire fails to properly evaluate not only efficiency, but also effectiveness. In a manufacturing environment, both elements use output as a means of evaluation. By looking at output in terms of profit rather than the quantity produced, the evaluations become irrelevant. While the cost variances present in Exhibit 2 would be a more accurate performance measure, they are viewed in terms of sales rather than production. As plant managers cannot control sales, these variances then become irrelevant. Overall, the performance evaluators contained within exhibit 2 do not accurately measure the effectiveness of efficiency of the aluminium can manufacturing plants. In exhibit 3 give more detailed analysis of the variances in exhibit 2. The division level reports focus on net sales, including price and mix changes, as well as gross margin. Net sales are controlled by sales and costs. Plant managers only have the ability to control costs, and as such these reports also lack relevance in terms of evaluating their performance. The manufacturing division level report also is an adequate performance evaluation report, as it compares plants that produce different products and that have varying setup times. This makes any analysis unreliable.
5. On balance, would you redesign the management control structure at Vershire Company? If so, how and why? Weakness in management control system First is in the style of their budget preparation. Their sales budget preparation had little flexibility when it was already approved before the start of the year and were already fixed objectives. This kind of system has an advantage of pushing its managers to strive and meet the objective budgets. Second is how the company treats its Plant/Manufacturing Department – being a Profit Center. This department only accomplishes orders that the Sales Department dictate, manufacturing the quality products at the lowest reasonable cost possible considering the nature of the competitive industry. Third is how the performance of the plant managers are evaluated. Since the Plant Department is treated as a profit center, the plant managers’ promotion and compensation is based on their profit performance. There can be a misalignment in the objectives in this setup because while the plant managers strive to put down the cost to achieve higher profits given the price set, they may sacrifice quality by choosing the lowest cost of materials or labor for production. In essence, the cost can be varied based on the price. Recommendation: Communication & co-ordination Improve comparisons of manufacturing efficiency between divisions and plants Flexibility in operation Set manufacturing unit as the cost centre & marketing unit as the profit centre Redesign structure for effective Management Control System
