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Case 2 - Vershire Company (Version 2.1)

1. The document analyzes the budgeting and performance evaluation systems of Vershire Company's Aluminum Can division. It finds issues with classifying plants as profit centers rather than expense centers. 2. Key problems include plant managers being held accountable for profitability despite having no control over sales, and an inefficient budgeting process involving too many steps. 3. Recommendations are made to reclassify plants as expense centers, alter incentives to focus on costs for plant managers and sales for sales managers, improve forecasting and communication through budget meetings, and enhance manufacturing comparisons.

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424 views3 pages

Case 2 - Vershire Company (Version 2.1)

1. The document analyzes the budgeting and performance evaluation systems of Vershire Company's Aluminum Can division. It finds issues with classifying plants as profit centers rather than expense centers. 2. Key problems include plant managers being held accountable for profitability despite having no control over sales, and an inefficient budgeting process involving too many steps. 3. Recommendations are made to reclassify plants as expense centers, alter incentives to focus on costs for plant managers and sales for sales managers, improve forecasting and communication through budget meetings, and enhance manufacturing comparisons.

Uploaded by

shielamae
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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GROUP 2: Alegre, Zia Irra / Apalis, Shiela Marie / Manuel, Ruby

Lauren / Pinza, Chelnani


CASE 2: VERSHIRE COMPANY
Point of View
In the analysis of this case, the group will take the point of view of
Vershires headquarter controller staff who conducts plant visit in Aluminum
Can division.
Statement of the Problem
What is the proper management control structure that the Aluminum Can
division must design for it to have an effective and efficient budgeting and
performance evaluation systems?
Analysis
Vershire Company, one of the largest manufacturers of aluminum
beverage cans in the United States, still has a lot to improve in its planning and
control system, specifically on the budgeting and performance measurement
processes.
The companys major concern is that each manufacturing plant within the
Aluminum Can division is treated as a profit center rather than an expense
center. This error in classification is the root of many other control,
communication, and performance measurement problems. It is significant to
know that profit is made up of two components: revenue and expense. A plant
does not generate direct revenue; the sales district does. The formers output is
quantifiable in terms of number and amount of units produced while the latter
is in terms of number and amount of units sold. The objective of each
manufacturing plant is to produce the translated units of the sales budget at
the minimum cost as possible. The plant manager has direct control over the
incurrence of expenses only (i.e., production costs - direct materials, direct
labor, variable and fixed manufacturing overhead), and therefore, is
accountable, responsible, and measured only for such activities.
Moreover, the case stated that the sales department has the sole
responsibility for the price, sales mix, and delivery schedules. These
components have a direct impact on profitability, specifically on sales.
However, the plant managers are the ones who would be ultimately held
responsible for the budgeted profit number even if actual sales fell below the
projected level. In addition, any difference in the opinion between production
and sales departments is always favored with the latter. Production can be
disrupted by the sales manager if there are rush orders to deliver, affecting the
plants efficiency that might result to higher production costs. This reduces the
plant managers ability to maintain control over profitability in their respective

plants; therefore, it is not appropriate to hold them entirely accountable for


profitability.
It is also noted that the budgeting process of the Aluminum Can division
is not efficient because it involves too many procedures wherein the data gets
back and forth either to or from the division manager, corporate headquarters,
district manager, and plant manager. Lastly, the initial sales forecast uses
assumptions such as inventory carryovers, forward buying, packing trends,
etc., which are entirely derived from the corporate headquarters analyses. This
process decreases the overall accuracy of the initial forecast since it is the
divisional manager who has the first-hand information in the operations, and
not the corporate headquarters.
Recommendations
1. Corporate headquarters to remove the profit responsibility from the plant
managers and enforce the appropriate performance responsibility
(engineered expense center) to them.
The plant manager has direct control over the incurrence of
expenses only but not over revenues. Proper delegation of responsibilities
is an important factor when evaluating the management performance,
and motivating the managers with the tied-up incentives.
2. Corporate Headquarters to alter top management incentive program
Assign management incentives as follows: a) plant manager to cost
or manufacturing efficiency; b) district sales manager to generated sales;
and c) division managers to profits. This incentive scheme will surely
motivate managers since the criteria measured is a variable that they
can control. It will enable the plant managers, sales managers, and
division heads to collaborate towards maximizing the bottom line
(profits).
For the division general manager, we suggest an incentive scheme
based on a 60/40 weight distribution between the marketing and
manufacturing targets respectively.
3. Corporate Headquarters to redesign the divisions budgeting process
Since the division general manager is in charge of managing both
the manufacturing and marketing side, he should be given the
responsibility of making his own detailed sales forecast consolidated from
the marketing district managers, and getting approval from corporate
head office on the final numbers. This will increase the overall accuracy
of the initial forecast, making it less subject to change during subsequent
reviews of the budget and creating a more efficient process.
4. Corporate headquarters, division general manager, manufacturing
manager, and marketing manager to hold a budget meeting

Holding a budget meeting will be of great help in order to discuss


the upcoming years sales budget instead of the headquarters making
general assumptions alone. The company should create more channels of
communication among the managers.
With this, division general managers will be reminded of the overall
goals of the company. It is a great channel to provide a holistic view of
the company, to facilitate brainstorming of new products or ideas, to
discuss similar issues plaguing several divisions, and to minimize errors
in the sales budget.
5. Manufacturing manager to improve comparisons of manufacturing
efficiency among plants
Compare manufacturing efficiency between plants and divisions
using a more comparable metric. There should be a set standard
variable manufacturing cost specifically tailored for plants with similar
product lines, so as to address the concern on inherent unfairness in
comparing plants that produced different products.

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