Management Accounting Case Assignment
Case 8-28. Evaluating a Company’s Budget Procedures.
1. Identify the problems that exist in Ferguson & Sons Manufacturing Company’s budgetary control system and explain how the problems are likely to reduce the effectiveness of the system. The overall company’s strategy is not well defined by executives and communicated to the management. There is no goal other the cost reduction at total company level as well as at departmental level. Managers don’t see connection between expenses, revenues and overall company’s profitability. As a result managers are frustrated because instead of help that budget is suppose to bring it creates problems.
Managers don’t participate in budget’s development; it is purely a task of an accounting department which sets up performance goals for the company as a whole and all its divisions. Accounting department also controls the execution; other departments’ managers are completely removed from that process, they are only informed about their department’s performance at the monthly meeting.
It turns out that department managers are accountable for the results that they never truly committed to. This approach would lower company’s performance on the long run, when managers loose motivation they are not interested to deliver good results.
Accounting departments has a very distant relationship with other operational departments; they concentrate on evaluating only financial goals, looking strictly at the numbers. They are only concerned with the cost reduction and continue to tighten the individual budgets once performance goal is met. At the same time it looks like budget tightening strategy may become unreasonable because at some point the only way the department can meet the budget is by sacrificing its quality for quantity. If quality becomes an issue, it may lose customers and potentials profits.
The way the managers’ performance is being evaluated does not seem to be fair. Managers are not recognized well enough
1. Identify the problems that exist in Ferguson & Sons Manufacturing Company’s budgetary control system and explain how the problems are likely to reduce the effectiveness of the system. The overall company’s strategy is not well defined by executives and communicated to the management. There is no goal other the cost reduction at total company level as well as at departmental level. Managers don’t see connection between expenses, revenues and overall company’s profitability. As a result managers are frustrated because instead of help that budget is suppose to bring it creates problems.
Managers don’t participate in budget’s development; it is purely a task of an accounting department which sets up performance goals for the company as a whole and all its divisions. Accounting department also controls the execution; other departments’ managers are completely removed from that process, they are only informed about their department’s performance at the monthly meeting.
It turns out that department managers are accountable for the results that they never truly committed to. This approach would lower company’s performance on the long run, when managers loose motivation they are not interested to deliver good results.
Accounting departments has a very distant relationship with other operational departments; they concentrate on evaluating only financial goals, looking strictly at the numbers. They are only concerned with the cost reduction and continue to tighten the individual budgets once performance goal is met. At the same time it looks like budget tightening strategy may become unreasonable because at some point the only way the department can meet the budget is by sacrificing its quality for quantity. If quality becomes an issue, it may lose customers and potentials profits.
The way the managers’ performance is being evaluated does not seem to be fair. Managers are not recognized well enough