Tom Emory and Jim Morris strolled back to their plant from the administrative offices of the Ferguson

& Son Mfg. Company. Tom is the manger of the machine shop in the companys factory. Jim is the 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 presidents son, had become the plant manager a year earlier. As they were walking, Tom Emory spoke. Boy, I hate those meetings! I never know whether my departments accounting reports will show or bad performance. I am beginning to expect the worst. If the accountants said I saved the company a dollar, Im called Sir, but if I spend even a little too much- boy do I get in trouble. I dont know if I can hold on until I retire. Tom had just been given the worst review 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 Ferguson & Son 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 companys success was due to the high quality of the work of the machinists like Tom. As a 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 supervisors 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 Emorys conversation with Jim Morris continued as follows: Emory: I really dont understand. We worked so hard to get up to budget, and the minute we make it they tighten the budget on us. We cant work any faster and still maintain the quality. I think my men are ready to quit trying. Besides, those reports dont tell the whole story. We always seem to be disrupting the big jobs for the 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 the idle time. Morris: Im 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 wed spent a day on the old machine, we would never had 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. Im locked into what the scheduling department assigns me and you know theyre being harassed by sales for those special orders. Incidentally, why didnt your report how all the supplies you guys wasted last month when you were working in Bills department? Morris: We are not out of the woods yet. We charged the maximum we could to our other work and havent reported some of it yet. Emory: Well, Im glad you have a way of getting out of the pressure. The accountants seem to know everything thats 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 you into trouble. Its all a big pain. Im trying to put out quality work, theyre trying to save pennies.

Required: 1. Identify the problems which appear to exist in Ferguson & Son Mfg. Companys budgetary control system and explain how the problems are likely to reduce the effectiveness of the system. Budgetary control system is one of the tools for planning and control. The success of the company depends on how well the planning is done. In this process the budgeted figures are compared with the actual figure. It seems that the fixed budgeted figures are compared with the actual budget

without flexing it. Therefore there is a problem with the companys employee. It seems that the focus is on the dollar amount not on the volume of the goods is being produced. For example, the company has set target of 2000 units with fixed cost of $20000 and variable cost of $60000. It means that the total budgeted cost is $80000. It is compared with the actual figures without looking at the volume. Now suppose that the actual cost incurred is $90000 and the volume is 2500 units. If $90000 is compared with $80000, it looks that the spending is more by $10000, which is wrong. Because the actual cost should have been spent for 2500 units is $20000 fixed and $75000 for variable, therefore the flexible budget for actual volume should be $95000. Now compare it with $90000, which shows there is saving of $5000 not overspending of $10000. It means that overspending always is not a bad thing.

2. Explain how Ferguson & Son Mfg. Companys budgetary control system could be revised to improve its effectiveness The company should compare the actual figures with the flexible budget not the static budget. Company should also take into consideration the work to be done in future. The company should also revise its estimate, if the estimate is for less work to be done the budget will be on the lower side, but if the work is according to the capacity of the company then the budget will be reasonable, which will not create problem for departmental head to work more when their budgets have been attained, if they would have been made on unrealistic estimate. The company may also use standard cost technique for control purpose, they set standard for each activity and then multiply that standard rate with actual activity carried on to compare with actual cost in dollars incurred. For example, the standard cost to produce one unit is $20 per unit and the company produces 5000 units, the standard cost allowed for actual production is $100000, then it should be compared with the actual cost incurred, it the cost incurred is $90000, it means the company has saved $10000 and if it is $105000, it shows overspending of $5000