Case 4-1 Vershire Company
The case 4-1 deals with the control system, budgeting process and performance measurement of Vershire Company, a large business in the metal can industry. Vershire experienced a strong pressure as they have to meet the customers` expectations about quality, customer service and prices because otherwise they will take another supplier. This situation leads to a very high demand for efficiency and effectiveness and therefore a good planning and control system. The biggest problem in this process is that each of the different plants in the U.S. are treated as profit centers rather than engineered expense centers.
1. The planning and control system also presents several strength and weaknesses which are going to be explained in the following paragraph: Strengths of the planning system:
* Divisional managers are required to predict market conditions and capital expenditures five years in advance and prepare a forecast for the subsequent two years. This is a good way for the divisions and the company as a whole to anticipate sales, income, and capital requirements that are necessary to make future decisions and remain competitive. * After the forecast is made by the head office divisional managers are allowed to give their input regarding the budget, which enhances the quality of the budget since divisional managers have a more realistic outlook on what sales will be for the coming year. * During the visit of the corporate controllers, plant managers have the opportunity to explain their situation and discuss in detail specifics that affect their plants. This will allow for a more accurate and complete budget to be produced. Weaknesses of the planning system:
* The initial sales forecast and its underlying assumptions shouldn´t be made by the head office as divisional managers are in charge of managing the operations of each division, they should be given the responsibility of making their own detailed sales forecast and getting approval from corporate head office on the final numbers. * The forecasting method for the different product lines shouldn´t be the same as each division or product line has different factors that affect its sales like demand of customer base, industry trends, product characteristics, etc. * Plant managers should prepare the sales budget as they are held responsible for the budgeted profit numbers as their performance is tied to the profit that their plant generates even if they do not have control over all the profit components, mainly the sales side of the equation. Strength of the control system:
* Leaving labor relations and capital to the corporate head office allows the company to enjoy the benefits of operating as a large organization and economies of scale, such as the ability to obtain preferred interest rates from financial institutions. The divisions are then also able to focus on activities more central to the profit objectives emphasized by the company. * There is timely communication between the various hierarchies of the company as there are not that many tiers - plant managers report to the divisional managers who then report to the corporate office. Weaknesses of the control system:
* Profit shouldn´t be the main factor when evaluating plant managers since there are other factors that determine the capabilities of a plant manager. Even if sales fall below the budgeted levels, it is still the plant manager’s responsibility to achieve the budgeted profit levels. Also comparing different plants with different product lines is not appropriate.
2. In the following the profit budgeting process is presented which starts in May and ends in December with the final approval: In May Divisional General Manager have to summarize the outlook for sales, income, and capital requirements for the next budget year. He also has to evaluate trends anticipated in each category over the subsequent two years and is...