Question

File Home Insert Draw Page Layout Formulas PROTECTED VIEW Be careful-files from the Internet can contain vir A1 fx Case 8-30 Evaluating a Co F G H M Case B30 valuating a company's Budget Procedures Presentation 2 Tom Tmory 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 4 company's factory, dim is manager of the equipment maintenance department The men had just attended the monthly performance evaluation meeting for plan department heads. These meetings had held on the third Tuesday of each month since 5 Robert Ferguson, the president's son, had become plant manager a year earlier As they were walking Tom Emory spole: "Boy, I hate those meetings never know whether my department's accounting reports will show good or bad performance. I'm beginning to expect the worst of the accountants say saved the company a dollar. I'm called "Sir, but if I spend eve a little too much-boy do pet in trouble. I don't know it 6 can hold on until retire." Tom had just been given worst evaluation he had ever received in his long career with Perguson & Son. He was the most respected of the experienced machinists in the company. He had been 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, rhad other stated that the company's success was due to the high-quality work of machinists like Tom. As supervisor, Tom stressed the important of craftsmanship and told his workers that he wanted no sloppy work coming 7 rom his department When Robert Ferguson, Ir, 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 encoure the supervisors to reduce inefficiencies and seek cost reduction oportunities. The company controller was instructed to have this was done to reinforce the plant manager's desire to reduce costs. The young lant manager en stressed the importance of continued progress toward attaining the budent he also made it known that he kept a file of these 8 performance reports for future reference when he succeeded his father Tommary's cornersation with sim Morris continued as follows: Emery really don't understand. We've worked so hard to meet the budget and the minute w do so they en 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 bus for those wall rush orders that up and machine adjustment time is killing us and out frankly, you hele When our hydraulic press broke down last month your people were nowhere to be found we had to take it ortourselves and get stuck with all that idle time Mark I'm sorry about that, Tom, but you know my dearment has had trouble making button we were running well behind at the time of the problem and if we'd sent day on the old machine, we would never made it. I made the scheduled Inspections of the forces because we do these in less than the 10 budgeted time for well, mast you have someone locked into what the schedule deatment assignato and you they're being and sales for those social orders, trident, why do your report show all the sous wested last More we're not out of the woods that deal. We charged 12 other work and have torted some of it moweveryhing that's happening departmentsome even before

Answer 1

1.   The budgetary control system has several important shortcomings that reduce its effectiveness and may cause it to interfere with good performance. Some of the shortcomings are explained below.

      a.   Lack of Coordinated Goals. Emory had been led to believe high-quality output is the goal; it now appears low cost is the goal. Employees do not know what the goals are and thus cannot make decisions that further the goals.

      b.   Influence of Uncontrollable Factors. Actual performance relative to budget is greatly influenced by uncontrollable factors (i.e., rush orders, lack of prompt maintenance). Thus, the variance reports serve little purpose for performance evaluation or for locating controllable factors to improve performance. As a result, the system does not encourage coordination among departments.

      c.   The Short-Run Perspectives. Monthly evaluations and budget tightening on a monthly basis results in a very short-run perspective. This results in inappropriate decisions (i.e., inspect forklift trucks rather than repair inoperative equipment, fail to report supplies usage).

      d.  System Does Not Motivate. The budgetary system appears to focus on performance evaluation even though most of the essential factors for that purpose are missing. The focus on evaluation and the weaknesses take away an important benefit of the budgetary system—employee motivation.