Question

Case 8-30 Evaluating a Company's Budget Procedures

Presentation 2

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 plan department heads. These meetings had 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 eve 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 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 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 important 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 encourae the supervisors to reduce inefficiencies and seek cost reduction opportunities. The company controller was instructed to have 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 those small rush orders. All that setup and machine adjustment time is killing us. And quite frankly, Jim, you were no help. When our hydrautic 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 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.

Emory: Well, Jim, at least you have some options. I'm locked into what the scheduling department assigns to me and you 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 everyhing 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 iprove its effectiveness.

Answer 1

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Answer-

(1) The budgetary control system is imperfect, its flaws reduces its effectiveness. In addition, such flaws can also interfere with 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. 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. (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-

(2) The improvements in the budgetary control system should correct the flaws in lack of coordinated goals, influence of uncontrollable factors, the short run perspective, and non- motivating system. The system should: • More clearly define the company's objectives. • Develop an accounting reporting system that better matches controllable factors with supervisor responsibility and authority. Establish budgets for appropriate time periods that do not change monthly simply as a result of a change in the prior month's performance. The entire company from top management down should be educated in sound budgetary procedures.