Case 8-22

Group 11: Nguyen Thi Thu Huyen Nguyen Thi Dieu Linh Mai Ngoc Tam Nguyen Lan Anh Case 8-22: Evaluating a company’s budget procedures 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. Ferguson & Son Manufacturing Company has appointed Robert Ferguson, Jr.

, the son of the president as the plant manager. He directed the company’s focus on budgetary control system. The prime aims of the system were reducing inefficiencies and seeking cost reductions.However, the results extracted from the conversation of Tom Emory – manager of the machine shop in the company’s factory and Jim Morris – manager of the equipment maintenance department shown the contrary consequences. Emory pointed out that every time they attained the budget the accounting department tightened it slightly. It means that the workers were required to perform tasks at a faster speed but still hold the quality!!! Further, the scheduling department being harassed by sales for special orders assigned too much things for machine shop.Of all, this was nothing more like unrealistic targets.

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All things were the same – equipments, number of machinists, while others were variable such as amount of rush orders, the requirement for each orders. It seems that the budget was a burden rather than a target. This could be seriously seen in various aspects of the issue. First, work efficiency had gradually reduced at an alarming level.

Due to time limit, the period of machine setup and adjustment the frequency of which had been increasing parallel with the number of orders made the machinists annoyed and threatened to break the budget.Though, in fact, this step of process should be paid more attention as it decided all the following steps and even the quality of the products. What’s more, the coordination among departments in the company was less united as each just focused on reaching its target rather than the whole target of the company. For example, when the hydraulic press of the machine shop got broken down, the people from equipment maintenance department were nowhere to be found. At that time, they made the scheduled inspections of the forklift trucks.The reasons implied that it was scheduled and it would save more time than checking the hydraulic press.

Finally, this could happily lead to each department fulfill the budget, however, “did the company ever increase efficiency and cooperation” was still in question. As a result, employee morale had to suffer quite a bit. The pressure and budget-based compensation system discouraged the two managers rather than gave them motivation. They were vague by the performance of their own department whether it did well or not.

The way the top managers treated them when the budget had not been attained also made them disrespected, even though they turned out to be the most experienced staff in the company and had been distributing more than little to the current success of the company. Consecutively, the employees under the two managers’ line felt under stress. In the machine shop, craftsmen had an intention to quit trying reaching the budget. The others tended to do the jobs which required less efforts and time. Thus, budget could be easily fulfilled, while, in fact, nothing better was done.Moreover, people’s mere attention to the productivity caused a serious problem in the field of resources. The less united between machine shop and maintenance department, the more likely the machines got out of order.

If the situation incurred for a long period, the quality of the product and even the long-term strategy of the company could be harshly threatened. Idle time created from each time machine broke down also made staff got stuck. Plus, due to work efficiency, department managers found ways to waste more resources than expected. The thing was that no trace of this waste had been ever reported.Finally, quality diminishing was what department managers would give up in exchange for productivity. This could significantly damage the reputation of the company as well as make it lose trust from loyal customers.

To sum up, the budgetary control system had its advantage of knowing in advance what was happening in each department. While instead of improvement, budgetary control system adopted in Ferguson & Son Manufacturing Company had made the whole working process more worsened. 2. Explain how Ferguson & Son Manufacturing Company’s budgetary control system could be revised to improve its effectiveness.Budgetary control system is an essential management tool that communicates management’s plans throughout the organization, allocates resources, and coordinates activities. Besides, unwise system can have the negative effects on the performance of the company.

Thus, it is vital to develop a compatible budgeting system which can assist managers in fulfilling long-term goals and strategic plans. First, drawn from the situation of Ferguson & Son Manufacturing Company, it is pointed out that feasible targets play the first priority in designing the budgeting system.If the goal is too high as in the case of Ferguson & Son Manufacturing Company, then, in the following steps, the whole process automatically gets into trouble. The company should be realistic when setting any benchmark among the periods of manufacturing. The conditions of equipment, employees, orders, sales, and the coordination among other departments should be taken into account to jump to the most suitable targets. These targets should be tailored to each department when considering how they affect each other during production.Moreover, the target setting not only depends on the estimation from the accounting department but also refers to the consistent agreement from both department managers and top executives. How and at what frequency to raise the level of budget should be discussed thoroughly to avoid any unexpected objection from lower manager lines.

As a consequence, by setting practicable goals, the company can improve the whole system which is built to reach those goals. What’s more, the cooperation among department in the company can be enhanced more as now they share the shame targets.Second, in more detail, responsibility accounting is concerned as an important part in implementing budgetary control system.

The basic idea underlying responsibility accounting is that a manager should be held responsible for those items – and only those items – that the manager can actually control to o significant extent. The two managers in Ferguson & Son Manufacturing Company with unclear border between their duties and disconnection among their tasks made the job more inefficient as well as produced more waste.Though, the fault was merely blamed on the supervisor of the machine shop. Thus, implementing appropriate responsibility accounting in the whole process control can aware managers of their duty and to what extent they should revise action to keep the job on track.

Further, when responsibility accounting is put into a well connected network where one performance has an influence on the others, it will lead to more cooperation. It is required that each manager become more committed to their tasks and understands the reasons behind any discrepancies falling into their control.One thing that should be paid attention to is responsibility accounting aims for clear duty, more commitment and coordination rather than penalization for any unattainable budget plan. Third, paralleled with responsibility accounting is encouraging compensation system. It was not clearly mentioned in the case, nevertheless, we can draw out that, harsh punishment was implemented when one department had not fulfilled the budget. The pressure breeds hostility, tension and disappointment among staff.To fix this problem, any improvement in manufacturing performance should be appraised properly in the form of salary, position, etc… The top managers should express their intention that compensation system is designed to motivate employees’ job.

It makes them see and correct the problems not blaming the problem on them. Fourth, the conflict between department managers and top managers stemmed from one-side target setting, therefore, self-imposed budget is necessary to tailor into the Ferguson & Son Manufacturing Company’s budgetary control system.A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels. The beneficial points of this system can help the company to fix some of its problems by enhancing motivation and creating commitment among employees as they understand what they need to do. Likewise, when the individuals at all levels of the organization together decide the goal, the decision will be more realistic and profound. Specific knowledge from front-line managers and strategic views from top executives will develop an integrated budget.

In terms of resources wasting, the controlling or supervising process needs to be aware of. The company should establish a group of supervisors consisting of top-level and middle-level managers to regular check the performance of each department, how they use resources and in what way they coordinate with each other. The supervision should aim for tracking the problem and finding the best solution rather than a way to put pressure on front-line managers. When integrating all the methods above, employee morale and work efficiency will gradually improve. Thanks to that, the quality itself will be brought into full play.



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