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ASSIGNMENT 1 Vikram Rana, PDM-03-027

Case 4-1 Vershire Company


(Solution)
QUESTION 1.
OUTLINE THE STRENGTHS AND
WEAKNESSES OF VERSHIRE COMPANYS PLANNING AND
CONTROL SYSTEM.

Vershire Company was a diversified packaging company having a large amount of division
including aluminium can division. Aluminium can the industry get huge growth rate in the
previous 30-year due to is an advantage over steel can in weight and production process.

STRENGTH AND WEAKNESS OF COMPANYS PLANNING SYSTEM


Strength
During the formulation of sales budget, divisional managers are assigned to
predict the market condition and their capital expenditure.
An overall forecasting is done at the corporate level in corporate headquarter
and is then sent to the divisional managers for fine-tuning and rectification.
Before the plant budget submitted Corporate controllers from a head office visit
each plant for half a day prior to the final submission of the budget, to see for
themselves how the employee and plant were doing.
Weakness
They use assumptions for their initial forecast which are entirely driven from
corporate headquarters analyses.
They use the same type of forecasting technique and methods for their all
product line.
The district sales manager come up with the sales budgets instead of plant
manager. Whether plant manager should do.

STRENGTH AND WEAKNESS OF VERSHIRES CONTROL SYSTEM


Strength
The Divisional managers are assigned full control over their divisions except in
the areas of raising capital and labour relations.
There is periodic communication between the various hierarchies of the
company as there are not that many tiers.
There is constraint oversight for meeting the budget
Weakness

1 Management Control System by Prof. E N Reddy


Vikram Rana, PDM-03-027

Profit plays an important measure for assessing plant managers performance


and their determining bonuses.

QUESTION 2. TRACE THE PROFIT BUDGETING PROCESS


AT VERSHIRE, STARTING IN MAY AND ENDING WITH
THE BOARD OF DIRECTORS MEETING IN DECEMBER.
BE PREPARED TO DESCRIBE THE ACTIVITIES THAT TOOK
PLACE AT EACH STEP OF THE PROCESS AND PRESENT
THE RATIONALE FOR EACH.

Each Divisional Manager submits the preliminary report to


May
corporate management.

The Central market research staff at corporate headquarter


began to develop a more formal market assessment.
Next
A sales forecast was then prepared for each division and these
were combined to create a forecast for the entire company.

The complete forecast were prepared at head office and in


order to ensure that forecasts were both reasonable and
Next achievable.
Forwarded to their respective division for fine tuning and
criticism.

All district sales forecasts are consolidated at division level for


Next review by the vice president.
This process was then repeated at the corporate level.

Process of making manufacturing budget


After Sales Budget Cost standards and cost reduction target were developed
Before submission, controller staff visits the plant for half days

Plant budget were submitted to the division head office.


September 1 After satisfaction of the divisional general manager, the budget
was sent to the CEO.

Final Consolidated budget was submitted for approval by the


December
Board of Directors meeting.

2 Management Control System by Prof. E N Reddy


Vikram Rana, PDM-03-027

QUESTION 3. SHOULD THE PLANT MANAGERS BE HELD


RESPONSIBLE FOR PROFITS? WHY? WHY NOT?

Not Fully, because profit is made up of two component revenue and expenditure. Plant
manager should responsible for the area which can control by them i.e. expenditure.
Expenditure includes direct materials, direct labour, variable manufacturing, and fixed overhead
budget.

Revenue is the concern of sales department whether they meet their obligation of customers
demand fulfilment or not. The sales department has sole responsibility for the price, sales mix,
and delivery schedules. Any difference of opinions between sales and production is always
favoured with the sales department as Vershire wants to satisfy the customer since they can
easily switch to a competitor.

QUESTION 4. HOW DO YOU ASSESS THE PERFORMANCE


EVALUATION SYSTEM CONTAINED IN EXHIBIT 2 AND 3?

The focus of Exhibit 2 is Net Profit. which is influenced by sales and expenditure. The exhibit
includes variances regarding sales price, sales mix, and sales volume. These are items that the
sales department has responsibility for, rather than plant manager. Therefore, they are
evaluating plant managers based on parameter over which the plant managers have no direct
control. Vershire fails to properly evaluate not only efficiency but also effectiveness.

The cost variances present in Exhibit 2 would be a more accurate performance measure, they
are viewed in terms of sales rather than production. As plant managers cannot control sales,
these variances then become irrelevant.

Overall, the performance evaluators contained within exhibit 2 do not accurately measure the
effectiveness of efficiency of the aluminium can manufacturing plants.

The exhibit 3 give more detailed analysis of the variances of exhibit 2. The division level reports
focus on net sales, including price and mix changes, as well as gross margin. Net sales are
controlled by sales and costs. Plant managers only can control costs, and as such these reports
also lack relevance in terms of evaluating their performance.

The manufacturing division level report also is an adequate performance evaluation report, as it
compares plants that produce different products and that have varying setup times. This makes
any analysis unreliable.

3 Management Control System by Prof. E N Reddy


Vikram Rana, PDM-03-027

QUESTION 5. ON BALANCE, WOULD YOU REDESIGN THE


MANAGEMENT CONTROL STRUCTURE AT VERSHIRE
COMPANY? IF SO, HOW AND WHY?
Yes, the management control structure at Vershire Company must be redesign due to lots of
weakness in management control system, which are: -

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.
The companys treatment of its Plant or Manufacturing Department, as being a Profit
Centre. 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.
Performance Evaluation measurement of the plant managers. Since the Plant
Department is treated as a profit centre, the plant managers promotion and
compensation are 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 labour for production. The cost can be varied based on
the price.

Based on above weaknesses and their justification now we should look on the few aspects on
which improvement can be done, few recommendations are: -

Performance measurement technique must be redesigned according to their


responsibility and their achieving.
Set manufacturing unit as the cost centre & marketing unit as the profit centre
Redesign structure for effective Management Control System
Communication & coordination should be improved

4 Management Control System by Prof. E N Reddy