Case 1 Divisional managers of SIU Incorporated have been expressing growing dissatisfaction with the current methods used to measure divisional performance. Divisional operations are evaluated every...

Case 1

Divisional managers of SIU Incorporated have been expressing growing dissatisfaction with the current methods used to measure divisional performance. Divisional operations are evaluated every quarter by a comparison with the static budget prepared during the prior year. Divisional managers claim that many factors are completely out of their control but are included in this comparison. This results in an unfair and misleading performance evaluation.
The managers have been particularly critical of the process used to establish standards and budgets. The annual budget, stated by quarters, is prepared six months prior to the beginning of the operating year. Pressure by top management to reflect increased earnings has often caused divisional managers to overstate revenues, understate expenses, or do both. In addition, once the budget had been established, divisions are required to "live with the budget." Frequently, external factors, such as the state of the economy, changes in consumer preferences, and actions of competitors, have not been adequately recognized in the budget parameters that top management supplied to the divisions. The credibility of the performance review is curtailed when the budget cannot be adjusted to incorporate these changes.

Top management, recognizing the current problems, has agreed to establish a committee to review the situation and to make recommendations for a new performance evaluation system. The committee consists of each division manager, the corporate controller, and the executive vice president (who serves as the chairman). At the first meeting, one division manager outlines an achievement-of-objectives system (AOS). In this performance evaluation system, divisional managers would be evaluated according to three criteria:

• Doing better than last year: Various measures would be compared to the same measures of the prior year.


• Planning realistically: The actual performance for the current year would be compared to realistic plans, realistic goals, or both.


• Managing current assets: Various measures would be used to evaluate the divisional management's achievements and reactions to changing business and economic conditions.

A division manager believes this system would overcome many of the inconsistencies of the current system because divisions could be evaluated from three different viewpoints. In addition, managers would have the opportunity to show how they would react to and account for changes in uncontrollable external factors.
A second division manager is also in favor of the proposed AOS. However, he cautions that the success of a new performance evaluation system would be limited unless it had the complete support of top management. Further, this support should be visible within all divisions. He believes that the committee should recommend some procedures that would enhance the motivational and competitive spirit of the divisions.
Tasks:

• Explain whether or not the proposed AOS would be an improvement over the measure of divisional performance now used by SIU Incorporated.


• Analyze specific performance measures for each of the three criteria in the proposed AOS that can be used to evaluate divisional managers.

Case 2

Chadd Fisher was recently appointed vice president of operations for Cary Corporation. He has a manufacturing background and previously served as operations manager for Cary's building products division. The business units of Cary Corporation include divisions that manufacture building products, process food, and provide financial services.

In a recent conversation with Drew Williams, Cary's chief financial officer, Chadd suggested evaluating unit managers on the basis of the business unit data in Cary's annual financial report. This report presents revenues, earnings, identifiable assets, and depreciation for each business unit for a five-year period. He believes that evaluating business unit managers by criteria similar to that used to evaluate the company's top management is appropriate. Drew has reservations about using information from the annual financial report for this purpose and suggested that Chadd should consider other criteria to use in the evaluation.
Tasks:

• Justified why the business unit information prepared for public reporting purposes might not be appropriate for the evaluation of unit managers' performance.


• Analyze several types of financial information that would be more appropriate for Chadd Fisher to use when evaluating the performance of unit managers.

Submission Guidelines:

Name your document SU_ACC6345_W3_CP_LastName_FirstInitial.doc.

Submit your 3- to 5-page Microsoft Word document to the Course ProjectSubmissions Areabythe due date assigned.