An organization must have a goal to be achieved. To achieve those goals companies must be able to determine what strategy will be used in achieving these goals. The company can be considered as the responsibility centers if there is a manager who can take responsibility in managing the company. The company must be able to monitor the effectiveness and assess the performance of each manager. To help companies conduct performance evaluation that is needed is considering specific character of each responsibility centers.
Researchers interested in conducting research in the Westport Electric Corporation because researchers want to learn more about the responsibility centers in the company. And Westport Electric Corporation is one of the companies that have responsibility of revenue and expense centers. The operating activities of the corporation are divided into four groups, each headed by a group vice president. These groups are: the Electrical Generating and Transmission Group, the Home Appliance Group, the Military and Space Group, and the Electronics Group.
Each of these groups is comparised of a number of relatively independent divisions, each headed by a divisional manager. The division is the basic operating unit of the corporation, and each is a profit center. The divisional manager is responsible for earning an adequate profit on his investment. There are 25 divisions in the corporation. Due to too many divisions existing in the company, the company had difficulty in determining a budget. So the result make discrepancy of budget. The company gained revenue from product sales and investment results.
While expenses must paid by the company are professional salaries, clerical salaries, supplies, consulting services, utilities, and so forth. In the Westport Electric Corporation, researchers found a problem that too many divisions that exist in the company. So the company have difficulty in determine the budget. And an increase in expenditure proposed by the staff of the administration offices. These improvements could not be justified. The glaring discrepancy eventually led to the existence of a budget within the company. 2. Motivation
Motivation researchers in doing research is to be able to understand how to make the appropriate budget and see how companies can implement to make good budget so as to responsible at the revenue and expense centers. The study examines the problems that occur in the company, researchers can gain a clearer picture of how to conduct a proper evaluation and find out what steps that must be done if the above problem occurs. 3. Research Question Related with responsibility centers in revenue and expense centers, there are a few questions: 1. What should be done to address the glaring discrepancy there on the company budget? . What revisions must be made in the budget approval procedure administration staff? 4. The Aim / Objectivity Analysis of the Westport Electric Corporation case study in expected to contribute:
1. To evaluate what needs to be done in overcoming the discrepancies existing in the company budget. 2. To find out what revision should be made in the procedure of approval anggran staff administration. CHAPTER II LITERATURE REVIEW The purpose of this part, the researchers wanted to describes and gives an overview about the theory of what is needed to solve the problems raised and theories that are used are as follows: . 1 Responsibility Centers Charles T. Horngren (1993:542) stated that one of the segments or sub-unit and each organization and manager responsible for a set of specified activities. Higher level managers, wider accountability center which managed and the greater number of subordinates reporting to him. Anthony and Govindarajan (2007:128) stated that responsibility center is an organization unit that is headed by a manager who is responsible for its activities. In a sense, a company is a collection of responsibility centers, each of which is represented by a box on the organization chart.
These responsibility centers from a hierarchy. Abdul Halim dan Bambang Supomo (1999:134) stated that Center for accountability is part of the unit or organization led by a manager who is responsible for the unit strived Based on the theory that has been put forth experts, researchers can infer that responsibility centre is a unit of organization responsibility were headed by the manager in charge of the company and the responsible is full of activity that happened in the company. 2. 2 Efficiency Efficiency is the ratio of outputs to inputs, or the amount of output per unit of input (Anthony and Govindarajan, 2007:130).
Efficiency is an important attribute because all inputs are scarce. Time, money and raw materials are limited, so it makes sense to try to conserve them while maintaining an acceptable level of output or a general production level (www. investopedia. com). Researchers use this theory because researchers saw many glaring inefficiency that occurred in the Westport Electric Company. According to our company should be able to using resources relative low but it can produce ouput maximally. 2. 3 Types of Responsibility Centers
There are four types of responsibility centers, classified according to the nature of the monetary inputs and outputs that are measured for control purposes: revenue centers, expense centers, profit centers, and investment centers (Anthony and Govindarajan, 2007:131). However in the literature review content four types of responsibility centers researchers more focus on revenue and expense centers. This is explaination about two types are used: a. Revenue Centers In a revenue center, output is measured in monetary terms, but no ormal attempt is made to relate input to output. (If expense was matched with revenue, the unit would be a profit center). Typically revenue centers are marketing or sales units that do not have authority to set selling prices and are not charged for the cost of the goods they market. Actual sales or orders booked are measured against budgets or quotas, and the manager is held accountable for the expenses incurred directly within the unit, but the primary measurement is revenue (Anthony and Govindarajan, 2007:133).
Responsibility budgeting is the stock answer given by students of management accounting and control to the question of how to empower managers to manage and, at the same time, motivate them to use their collective intelligence to create value through exchange in product and financial markets and by establishing and sustaining mutually beneficial relationships with customers, suppliers, and especially other members of their organizations (www. willamette. edu). Revenue centers is contain that is used in processing company revenues. Here is said to be from where the company earn income. b. Expense Centers
Expense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not. There are two general types of expense centers: engineered and discretionary. These labels relate to the two types of cost. Engineered cost are those for which the “right” or “proper” amount can be estimated with reasonable reliability. Discretionary costs are those for which no such engineered estimate is feasible. In discretionary expense centers, the costs incurred depend on management’s judgment as to the appropriate amount under the circumstances (Anthony and Govindarajan, 2007:133).
A department within an organization that does not directly add to profit, but which still costs an organization money to operate. Expense centers only contribute to a company’s profitability indirectly, unlike a profit center which contributes to profitability directly through its actions. This type of department is likely to be one of the first targets for downsizing because, on the surface, it has a negative impact on profits (www. investopedia. com). Expense centers is the organization that manages the load units that exist in the company.
This is a description two types of expense centers: 1. Engineered Expense Centers Engineered expends centers have the following characteristics: • Their input can be measured in monetary terms • Their output can be measured in physical terms • The optimum dollar amount of input required to produce one unit of output can be determined. Engineered expense centers are usually found in manufacturing operations. In a engineered expense center, output multiplied by the standard cost of each unit produced measures what the finish poduct should have cost. 2. Discretionary Expense Centers
Discretionary expense centers include administrative and support units (e. g. , accounting legal, industrial relations, public relations, human resources), research and development operations, and most marketing activities. The output of these centers cannot be measured in monetary terms. 2. 4 Budget An itemized forecast of an individual’s or company’s income and expenses expected for some period in the future. With a budget, an individual is able to carefully look at how much money they are taking in during a given period, and figure out the best way to divide it among a variety of categories.
When making a personal budget, an individual will typically designate the appropriate amount of money to fixed expenses such as rent, car payments, or utility bills, and then make an educated estimation for how much money they will spend in other categories, such as groceries, clothing, or entertainment. By keeping track of where one’s money goes, one may be less likely to overspend, and more likely to meet their financial goals (www. investorwords. com). An estimation of the revenue and expenses over a specified future period of time.
A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a micro economic concept that shows the tradeoff made when one good is exchanged for another (www. investopedia. com). Budgeting is essential to the sustainability and growth of a business. Management must forecast business results, such as sales revenue, capital expenditures, expenses, investments and debt management. These projections are based on market analysis, research, growth targets and experience.
Done properly, these budgets save time, effort and money in determining how to best (www. ehow. com). 2. 5 Organizational Chart An organizational chart is a diagram that shows the structure of an organization and the relationships and relative ranks of its parts and positions/jobs. The term is also used for similar diagrams, for example ones showing the different elements of a field of knowledge or a group of languages. (www. wikipedia. com). CHAPTER III CASE ANALYSIS 3. 1 Background Case (Westport Electric Corporation) Westport Electric is one of the giant US corporations that manufactures and sells electric and electronic products.
The company has multidivisional organizational structure thus each division and administrative staff section gives their separate budget. These budgets are approved by the President and Exe. Vice President of the company. In a meeting, James King, the supervisor of administrative staff budget section of Wesport Electric Company, was discussing his displeasure about the proposed increase in budget of the administrative staff offices with Michael Kelly (Manager – Budgeting Department) and Peter Ensign (Controller – W. E. C. ).
According to him, the increases in budget are not justified and are clear indications of faults in the company’s budgeting system. The company currently has six staff offices like those mentioned and they are tasked whith providing advice to top management and operating divisions as well as other staff offices. They also coordinated among the divisions depending on their areas of activity. These staff offices are budgeted according to the company’s budget approval procedure, which according to some of each officer like King, needs a lot of improvement. Persons involved in the case are: 1. Mr.
Hoover (The President) 2. Peter Ensign (Controller) 3. Michael Kelly (Manager of the Budgeting department) 4. James King (Supervisor of the Administrative staff Budget section) At the Westport Electric Corporation there are many divisions such as that reflected in the organizational chart at the top. Each Division is headed by a divisional manager. At the Westport Electric Corporation was the 25 divisions. On the organizational chart above we can see the glaring discrepancy liability on the 25 divisions. The division may supposed 25 responsible as its performance on the part of the staff.
However at the Westport Electric Corporation’s direct 25 divisions performance at responsible as President and Exe. Vice President. This shows the existence of ineffectiveness in the organizational structure of the company. Should each of the parts can be responsible as its performance in accordance with the sequential divisions respectively. Supervisor of the administrative staff and the budget section to find the existence of irregularities in two of the planned budget and irregularities is not justified. This budget covers two legal and training divisions.
On the legal division, asked for an increase in legal staff and 30 percent of their budget to take care of the additional costs resulting from the expansion of their workload. The problem is that, unless we do something, they will get this increase. But what reason President of this company actually approves of such improvement. Where as such improvement is not very efficient. In the training division, the company provides training to its staff. Where as training is not very good quality and are not supposed to do. However, the workers party no one dared complain against training that gives do.
The employees are afraid to rebel against them because it might hurt their chances of promotion. 3. 2 Case Study Analysis (Westport Electric Corporation) No proper attention by top management. The top management don’t have time and knowledge to evaluate performance of the employees. Also they take decisions only on the basis of the kind of treatment they receive from the department and not on the kind of service they providing to the other departments. From this first analysis researchers can provide solutions that the top management should actually pay considerable attention to the fficiency and effectiveness of each business division. Focus only on bottom line numbers currently, it appears that focus is given simply on bottom line numbers, that is each unit’s financial success is assessed solely on the basis of how handsome the profits brought in for the company, without being given much performance evaluation as is needed in any organization. From this second analysis researchers can provide solutions that the finance vice president should have a say and official power to approve or disapprove the budget and before doing so he should consult to his budgeting department.
The concern is only about making accounting figures correct and no attention is paid to do anything about the efficiency represented by the figures While it is likely King is correct that the legal and training divisions of the company are currently inefficient it is unlikely that such inefficiencies are confined to just these two divisions. From this third analysis researchers can provide solutions that being distinct profit centres, both revenues and costs must be calculated for each business segment. These efficiency problems could exist throughout the entire organization and not just in the two departments he highlights.
From this fourth analysis researchers can provide solutions that creating efficiency in entire organization and not just two departments. It is stated in the case that the administrative staff are fulfilling their interests, as each administrative staff officer, at best, wanted to have the “best” operation in the country and, at worst, was simply interested in building an empire. In order to do this the budgeting department’s role in the setting of budgets should be increased and to create a culture of not just figure analysis but also efficiency analysis when setting budgets.
With a lack of control or analysis of each departments budgeting policy, it is likely that each of the departments will be budgeting in their own interests rather than the companies and creating inefficient practices with their department. From this fifth analysis researchers can provide solutions that there should be a proper control or analysis of each departments budgeting policy sothat each of the departments don’t just budgeting their own interests but carry on the entire budgeting in the interest of the company.
The employees of the organisation are afraid to have a say against their superiors or management as they fear it will affect their performance evaluation and thus on promotions. This shows the communication barriers in the organization. From this sixth analysis researchers can provide solutions that at regular intervals usually monthly or quarterly, the company should compare actual expenses with budgeted expenses for all centres and on going projects.
The functions of the budgeting department with respect to administrative staff budgets has been to prescribe the schedules to be submitted and timetable for their submission and to “keep the presentations. ” In fulfilling the last function, the budgeting department analyzed the proposed budgets and made sure that the facts were correctly stated. For instance, they checked to make sure that the increases due to economic changes were accurate, or if some presents activity were to be dropped, they made sure that the cost of this activity was shown as a reduction so that the cost savings could not be used to hide an increase in another activity.
CHAPTER IV CONCLUSION 4. 1 Conclusion From the results of analysis conducted, the conclusions of Westport is facing two major issues in the company are: • Firstly, upper management needs to promote a far more positive organization wide culture based around success for the entire organization instead of individuals. This is to ensure that the goals of the organization are at the fore front of the minds of the employees when they are making decisions. However, this can be a long and difficult process which is difficult to quantify. • The second issue is to change the way budgeting is done from the administrative departments of the organization.
Westport upper management needs to assign more responsibility to the budgeting department and ensure that budget’s figures are not just correct but also that the programs budgeted for will benefit the organization in terms of value. 4. 2 Recommendation Among other things, the group recommends that top management actually pay considerable attention to the efficiency and effectiveness of each business division. Currently, it appears that focus is given simply on bottom line numbers that is each unit’s financial success is assessed solely n the basis of how handsome the profits brought in for the company, without being given much performance evaluation as is needed in any organization. Being distinct profit centers, both revenues and costs must be calculated for each business segment. It is important to note that while the individual divisions may report the most exorbitant of profit figures, the numbers do not carry with them as much meaning as when these are put into context. As in the case of Wesport Electric for instance, Kelly is quick to point out that the company is certain to do better trimming down budgets handed to certain divisions.
