Though Vershire Company does not have explicit problems, it has a number of weaknesses in its systems. First is in the style of their budget preparation. Their sales budget preparation had little flexibility when it was already approved before the start of the year and were already fixed objectives. This kind of system has an advantage of pushing its managers to strive and meet the objective budgets. However, it is a disadvantage when there are unforeseen relevant costs that are inevitable and must be incurred during the year since there is a meticulous process in covering these costs, which also requires an explanation to the bosses why the budgets have not been met. Second is how the company treats its Plant/Manufacturing Department – being a Profit Center. This department only accomplishes orders that the Sales Department dictate, manufacturing the quality products at the lowest reasonable cost possible considering the nature of the competitive industry. However, their performance is evaluated through the profits that the department generates via its cost standards and cost reduction targets which is determined by the Industrial Engineering department. The assignment of the department as a cost center may be inconsistent with its objectives since the department itself is not the one determining the price and selling the products. Third is how the performance of the plant managers are evaluated. Since the Plant Department is treated as a profit center, the plant managers’ promotion and compensation is based on their profit performance. There can be a misalignment in the objectives in this setup because while the plant managers strive to put down the cost to achieve higher profits given the price set, they may sacrifice quality by choosing the lowest cost of materials or labor for production. In essence, the cost can be varied based on the price. Moreover, the performance of the plants are compared to each other regardless of...
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