- 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. (approximately 1 page)
- Explain how Ferguson & Son Manufacturing Company's budgetary control system could be revised to improve its effectiveness. (approximately 1–2 pages)
- Explain how the use of an activity-based costing system could change the results of the budget, if utilized. (approximately 1 page)
- As stated in the case, many employees have “quit trying” and have altered behavior on the job. Provide specific ways for how you would use a budget to change employee behavior and align goals in the organization. Explain how goal alignment can improve profitability and overall return to the shareholders of the company. (approximately 1 page)
- Synthesize data to explain the concept of ROI and describe how the use of an activity-based costing system can improve the company’s ROI and the potential impact on free cash flow. (approximately 1 page)
Write a 5–6-page report in Word format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M5_A2.doc.
Case
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
plant department heads. These meetings had been 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 even 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 the 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 with the company 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 importance 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
encourage the supervisors to reduce inefficiencies and to seek cost
reduction opportunities. The company controller was instructed to have
his staff “tighten” the budget slightly whenever a department attained
its budget in a given month; 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 all those small rush
orders. All that setup and machine adjustment time is killing us. And
quite frankly, Jim, you were no help. When our hydraulic 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 had spent a day on that
old machine, we would never have 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 know
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 everything 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.
