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Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company's factory; Jim is...

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Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company's factory; Jim is manager of the equipment maintenance department.

The men had just attended the monthly performance evaluation meeting for plant department heads. These meetings had been held on the third Tuesday of each month since Robert Ferguson, Jr., the president's son, had become plant manager a year earlier.

As they were walking, Tom Emory spoke: “Boy, I hate those meetings! I never know whether my department's accounting reports will show good or bad performance. I'm beginning to expect the worst. If the accountants say I saved the company a dollar, I'm called ‘Sir,’ but if I spend even a little too much—boy, do I get in trouble. I don't know if I can hold on until I retire.”

Tom had just been given the worst evaluation he had ever received in his long career with Ferguson & Son. He was the most respected of the experienced machinists in the company. He had been with the company for many years and was promoted to supervisor of the machine shop when the company expanded and moved to its present location. The president (Robert Ferguson, Sr.) had often stated that the company's success was due to the high-quality work of machinists like Tom. As supervisor, Tom stressed the importance of craftsmanship and told his workers that he wanted no sloppy work coming from his department.

When Robert Ferguson, Jr., became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and to seek cost reduction opportunities. The company controller was instructed to have his staff “tighten” the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the plant manager's desire to reduce costs. The young plant manager often stressed the importance of continued progress toward attaining the budget; he also made it known that he kept a file of these performance reports for future reference when he succeeded his father.

Tom Emory's conversation with Jim Morris continued as follows:

Emory: I really don't understand. We've worked so hard to meet the budget, and the minute we do so they tighten it on us. We can't work any faster and still maintain quality. I think my men are ready to quit trying. Besides, those reports don't tell the whole story. We always seem to be interrupting the big jobs for all those small rush orders. All that setup and machine adjustment time is killing us. And quite frankly, Jim, you were no help. When our hydraulic press broke down last month, your people were nowhere to be found. We had to take it apart ourselves and got stuck with all that idle time.

Morris: I'm sorry about that, Tom, but you know my department has had trouble making budget, too. We were running well behind at the time of that problem, and if we had spent a day on that old machine, we would never have made it up. Instead, we made the scheduled inspections of the forklift trucks because we knew we could do those in less than the budgeted time.

Emory: Well, Jim, at least you have some options. I'm locked into what the scheduling department assigns to me and you know they're being harassed by sales for those special orders. Incidentally, why didn't your report show all the supplies you guys wasted last month when you were working in Bill's department?

Morris: We're not out of the woods on that deal yet. We charged the maximum we could to other work and haven't even reported some of it yet.

Emory: Well, I'm glad you have a way of getting out of the pressure. The accountants seem to know everything that's happening in my department, sometimes even before I do. I thought all that budget and accounting stuff was supposed to help, but it just gets me into trouble. It's all a big pain. I'm trying to put out quality work; they're trying to save pennies.

Review the case. Respond to the following:

  • Identify the problems that appear to exist in Ferguson & Son Manufacturing Company's budgetary control system and explain how the problems are likely to reduce the effectiveness of the system. (approximately 1 page)
  • Explain how Ferguson & Son Manufacturing Company's budgetary control system could be revised to improve its effectiveness. (approximately 1–2 pages)
  • Explain how the use of an activity-based costing system could change the results of the budget, if utilized. (approximately 1 page)
  • As stated in the case, many employees have “quit trying” and have altered behavior on the job. Provide specific ways for how you would use a budget to change employee behavior and align goals in the organization. Explain how goal alignment can improve profitability and overall return to the shareholders of the company. (approximately 1 page)
  • Synthesize data to explain the concept of ROI and describe how the use of an activity-based costing system can improve the company’s ROI and the potential impact on free cash flow. (approximately 1 page)

Write a 5–6-page report in Word format. Apply APA standards to citation of sources. Use the following file naming convention: Please make sure all sources are listed if online sources are used need websites.

Answered Same Day Dec 23, 2021

Solution

David answered on Dec 23 2021
119 Votes
Ferguson & Son manufacturing company budgetary control system
Budgeting is a wide term and it includes various types of budgets depending upon the
equirement of the organization, collectively they are called as the master budget. Master budget
is the summary of various plans of company. Master budget includes sales budget, purchase
udget, raw material budget, labor budget, cash budget, Selling and admin budget,
manufacturing overhead budget.
Master budget is created by combining different budgets in different functional areas.
Budgets can be prepared for different duration depending upon the requirement for example
udgets can be prepared on monthly, quarterly, semi-annually and yearly basis. Management
uses master budget as a planning and control tool to manage various activities in the
organization. Master budget is further divided in two parts one is operational and another
financial. Operational part includes income statement and the budgets supporting it such as sales
udget, operating expense budget etc. whereas financial budget analyzes the impact of operating
udget on the cash of the organization and includes cash budget, balance sheet etc.
As per the conversation of Tom Emory and Jim Mo
is the budgetary control system of
company is very poor, management keeps on creating the pressure on departmental heads for
performing better and better. Every time a department excels its performance management
tighten the budget more to make sure that thing are not easy for the departments and they keep
educing the costs and increasing the efficiency regardless of what they are cu
ently doing.
As per Tom even if they perform well than there is no use of it because it will make
coming time more difficult, thus the biggest setback in Ferguson & Son manufacturing company
udgetary control system is that they do not use reasonable standards for setting the budgetary
controls for a department.
Steps to improve effectiveness in the budgetary control system
Analysis of the cu
ent scenario of Ferguson & Son manufacturing company makes one
thing very clear that company must adopt different approach towards budgeting to make it more
effective. Analysis of cu
ent situation signals that company must adopt Zero Based Budgeting
as it will help the company to not to analyze the departments on the basis of their past
performance only.
Zero based budgeting is a method of budgeting wherein, the expenses for each period
should be justified. Zero base budgeting always starts from a base zero, and all the function in
organization are analyzed on the basis of the cost and need and not on the basis of past year
esult only. Zero base budgeting helps the top management to implement the strategic goals, by
comparing with the past results. On the contrary, traditional budgeting includes planned revenues
and expenditure. It holds a lot of limitations such...
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