Budgeting Process and Performance Measurement of Vershire Company

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Management Control Systems 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.

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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 also responsible to submit the preliminary report to Corporate Management. The Central Market Research Staff has to examine the next budget year in detail and use the Divisional General Manager’s forecasts to develop a more formal market assessment. Next they have to examine the following two years in general terms and to prepare a sales forecast for each division After that they will aggregate divisional forecasts into a company forecast and submit he forecasts to the respective Divisional General Managers. Divisional General Manager will then compile the new sales forecasts and request input from District Sales Managers. District Sales Manager estimates the sales forecasts for the upcoming year and submits sales forecasts back to Divisional General Manager who will consolidate the changes and submits the forecast to Vice President of Marketing. He reviews the consolidated sales forecasts and makes amendments with approval of district manager and submits this to the corporate level.

The headquarter will review the consolidated sales forecasts and also make amendments with approval of district manager. Then the approve budget is seen as a fixed objective. After that they will translate consolidated budget into a sales budget for each plant from which the finished goods would be shipped and submit the plant sales budgets to Plant Managers who categorize the budget according to price, volume, and end use and request the cost budget from the plant’s Industrial Engineering Department.

The IED will then develop cost standards and cost reduction targets including budgeted cost reductions, allowances for unfavorable variances from standards, and fixed costs such as maintenance labor and submit this to the Plant Manager. The Plant Manager compiles input from Industrial Engineering Department into the budget. Then the Head Office Controller Staff visits the plant and makes a walkthrough to review the budget with plant manager and any supervisors .

In September Plant Managers have to submit the plant budgets to Division Head Office which consolidates the plant budgets to a division budget and submit this to the different Divisional General Managers. They again review the division budget and return the budget to Plant Manager for revisions like additional savings before it goes back to the Divisional General Manager. Finally he approves the budget and submits to the Chief Executive Officer who request modifications if necessary or also approves the budget. In December the CEO will submit the final budget to the Board of Directors which also has to approve. . Regarding the responsibility of the plant managers for the profit I have to say that they should only be responsible for the expenses they can control as they are not able to control revenue and also the plant does not generate revenue as the sales department does. Even if the visit of the head office controller gives the plant manager a chance to express his or her concerns about the budget he has a lack of control over the sales side. Therefore it is not appropriate to hold the plant manager responsible for profitability. 4.

Regarding the performance evaluation system contained in Exhibit 2 the main focus is again the net profit, which is also influenced by factors like sales price, sales mix, and sales volume. These are items that the sales department has responsibility over, rather than the plant manager. While the cost variances present in Exhibit 2 would be a more accurate performance measure, they are viewed in terms of sales rather than production. The performance evaluation system contained in Exhibit 3 with its individual plant level reports gives a more detailed analysis of the variances in Exhibit 2.

The division level reports focus on net sales, including price and mix changes, as well as gross margin. But again as Plant managers only have the ability to control costs and as such these reports also lack relevance in terms of evaluating their performance. Also the manufacturing division level report is an inadequate performance evaluation report; as it compares plants that produce different products and that have varying setup times. Alternatively, the company is also rewarding the plant managers when the sales department is able to negotiate favorable contracts for the company.

When looking at the metrics within the exhibits, they would be excellent measures if they were used to evaluate the performance of those individuals that have direct control over the metrics rather than for evaluating the plant managers. 5. There have to be made several improvements to the management control structure to set up an effective system. For example more communication and meetings between corporate HQ and among division general managers would help to ensure that managers never lose the focus on the corporate goals and also facilitates the sales budget planning process.

Secondly I would alter how plant managers are compensated and reassign responsibility over profits and tie their compensation stronger to costs. Also I would tie the district sales managers’ compensation packages to profits. This would lead to a better motivation. Additionally I would improve comparisons of manufacturing efficiency between divisions and plants with different product lines. Therefore probably a new metric or KPI has to be found in order to make different product lines comparable. Then you can also reward the most efficient plant and division.

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Budgeting Process and Performance Measurement of Vershire Company. (2019, May 01). Retrieved from


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