Purchase Solution

Manufacturing Budget Analysis: Ferguson & Son Manufacturing

Not what you're looking for?

Ask Custom Question

Manufacturing Budget Analysis

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 muchâ?"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.

â?¢ 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.
â?¢ Explain how Ferguson & Son Manufacturing Company's budgetary control system could be revised to improve its effectiveness.
â?¢ Explain how the use of an activity-based costing system could change the results of the budget, if utilized.
â?¢ 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.
â?¢ 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.

Purchase this Solution

Solution Summary

Your tutorial is 872 words and two references and gives you several ideas about what is very wrong with this situation and how to fix it. The response describes how activity-based costing reduces both profits and capital and therefore improves return on investment (ROI). The response is practitioner oriented and not a scholarly review of this topic.

Solution Preview

â?¢ 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.

The current system has a number of flaws. First, the data collection should never leave the manager in the dark. Why is it that accounting knows what is going on and the manager does not? That is not a well-designed system or the manager needs training on how to read the reports. Second, a system that only rewards cost reductions is going to reward managers for cutting corners. And quality can go down fast. This works in the short run but in the long run product returns and customer satisfaction are hurt. And the equipment that is begin maintained are the ones that are easy and cheap so that maintenance costs are low. Eventually product costs will rise as defects from poorly maintained equipment begin to cause trouble. Finally, jobs that are stopped for small rush orders, increasing the setup times should be charged to the jobs that create the extra burden and so that extra cost should not be charged against the manager's initial budget. The current budgeting system creates incentives to behave in ways that are not productive or likely to lead to long term success. And it does not give the front-line managers insight into what is working effectively and what needs follow up. The current budget is only an instrument of random torture or reward, without any feedback value. Managers should know whether things have gone well or not long before accounting compiles the ...

Solution provided by:
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
Recent Feedback
  • "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
  • "Thank, this is more clear to me now."
  • "Awesome job! "
  • "ty"
  • "Great Analysis, thank you so much"
Purchase this Solution


Free BrainMass Quizzes
Operations Management

This quiz tests a student's knowledge about Operations Management

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.