Ferguson & Son Manufacturing

Topics: Cost, Costs, Activity-based costing Pages: 6 (2107 words) Published: October 10, 2012
Justin Girouard
Managerial Accounting

Module 6 Assignment 2

Ferguson & Son Manufacturing company is attempting to increase efficiency and reduce cost by introducing monthly performance reports for each department. Robert Ferguson Jr is trying to introduce this new type of accounting system and when you try something like this you will always run into some problems, but Robert is creating a culture of resentment.

Robert Ferguson is using a static planning budget to analyze the performance of each department. Garrison, Noreen & Brewer (2012) define a planning budget as a budget “prepared before the period begins and is valid for only the planned level of activity (p.385)” Robert is using a budgeted level of activity and comparing it to the actual level of activity as the basis for the evaluations. The information that is received from an evaluation done in this manner is going to be misleading. The budgeted level of activity is not always going to be the same as the actual level of activity, so a true comparison is impossible. For example my company manufactures safety belts for motor vehicles and the budget is based on an activity level of 5000 units for the period. The actual level of activity for the period is 4000 units and in result costs and revenue are lower than the budget amount. If our company compared the costs are going to be different simply because the activity level is different then the unchanged planned amount and the results will not provide conclusive data for performance and efficiency because there is no true controlled factor. Garrison, Noreen & Brewer describe this as comparing apples to oranges.

This type of system is going to provide incorrect data for performance, in result the company will not be able to understand their costs and true revenue potential. The planning budget system is going create discrepancies in the spending variance. According to Garrison, Noreen & Brewer (2012) the spending variance is “the difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost (p.391)” The spending variance can be evaluated as favorable or unfavorable, and this could effect how the product is priced or even purchasing new high tech equipment. You can not effectively utilize a spending variance in a planned budget system because you do not use the same activity level to compare cost. These are big decisions that can make a big impact on a companies revenue and if the system is not using the actual activity level and costs and comparing to the actual levels, the spending variance will be evaluated incorrectly.

The planning budget system is going to effect the morale of the supervisors and employees dramatically. Robert Ferguson Jr is evaluating the performance of the supervisors and departments monthly based on amounts and activities that they have budgeted. This budget could be completely unrealistic and this will cause the entire staff to feel hopeless and bitter. Once people begin to feel hopeless, their work performance will fall, production and efficiency will naturally follow. Their work performance will take into consideration the quantity of their work, but more importantly the quality of their work. If your employees feel they have to cut corners to meet budget to keep their jobs, they will do so and the company could begin to alienate their customers. To continue the seat belt example, if my company had to produce 5000 units and this was impossible unless the workers cut a few corners; now the company has faulty seat belts going to car companies. This could cause a large recall on the cars that our clients produce and those clients are going to find a new company to work with for these products. In this example, my company just lost a tremendous amount of money due to an accounting system that demands so much of their workers that the quality of their work has to be sacrificed. This is...
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