Case Study: FERGUSON AND SON MANUFACTURING COMPANY

I. Introduction

Budgeting is a beneficial planning and controlling tool in a project. The primary goal
of budgeting is to understand and control expenditures in the firm. The business could
use a budget to prioritize competing tasks for limited resources. It also allows the
corporation to set the machinery in motion for fulfilling interim values on time and
justifying the deletion of unprofitable projects and the revision of its aims to satisfy the
demand for a manageable task (Miengbeghe, 2012).

The case study about Ferguson and Son Manufacturing Company discusses the
unruly decisions of the company's management towards budgeting. Robert Ferguson, Jr.,
the newly appointed plant manager, establishes a new monthly performance report
evaluation practice. He requested that monthly performance comparisons between actual
and projected expenditures for each department be conducted to urge supervisors to
minimize inefficiencies and look for cost-cutting alternatives. Furthermore, he directed the
comptroller to "tighten" each department's budget if it met its budget in a particular month
to cut expenditures even more.

Notwithstanding the fact of the situation, various information was presented as

strategies to facilitate understanding and provide action plans to minimize the occurrence
of these actions as the business stretches its boundaries of stability in the market. Activity-
based costing remained unparallel for Ferguson and Son Manufacturing Company as it
helps leaders in the industry to plan and manage all operation-related activities
adequately. The overhead costs are assigned concerning certain organization activities
under the activity-based costing approach. Adopting the activity-based costing method
results in a refinement of the information used for the top management in decision-making
challenges.

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 II. Discussion

Budgeting is a necessary task, without which a company or corporation would not

achieve anything. Almost every business, regardless of size, complexity, or industry,
relies heavily on budgets and budgetary systems to achieve strategic goals because they
require the establishment of predetermined objectives, the reporting of actual
performance results, and the evaluation of performance concerning the objectives
(Kamau et al., 2017). The case analysis presented by the team outlines rational solutions
that the management has someway overlooked. The issue of budget planning is a
significant factor that has to be taken into account for a business to be able to continue
with the stretch of its market stability.

The insights presented by the group were remarkable. It has provided a clearer
picture of things that can be done and avoided to allow the business to grow. Specific
points were also elaborated that may contribute to alleviating the company’s situation.
However, it would have been best if the presentation demonstrated an in-depth analysis
and provided a walkthrough process of how they have formulated the solution. As
discussed on the report, the company's situation has been a misfortune. Instead of having
the camaraderie and building a unified decision for the firm's success, the board's points
are irrational as they have become sparingly economical in any way, which puts much
pressure on the downline. Employees are demotivated to perform at their best when the
budget is cut despite satisfactory performance. This is due to a lack of respect for an
arduous effort, which created a bottleneck of emotions on the personnel and made them
think about leaving their responsibilities and seeking employment elsewhere when the
opportunity arises, potentially harming the company's production and sales.

Robert Ferguson is analyzing the performance of each department using a static

planning budget. According to Garrison et al. (2012), a planning budget is one that is
prepared before the period begins and is only applicable for the planned level of activity.
Robert is basing his evaluations on a budgeted level of activity and comparing it to the
actual level of activity. The information obtained from this type of review will be
misleading. A genuine comparison is unattainable since the budgeted level of activity is
not necessarily the same as the actual level of activity. For example, a firm that
manufactures safety belts for automobiles with a budget based on a 5000-unit activity
level for the time. The actual level of activity for the time is 4000 units, resulting in lower
expenditures and revenue than expected. If the organization compares expenses, the
costs will differ merely because the activity level differs from the unchanging budgeted
amount, and the findings will not provide definitive evidence for performance and
efficiency because there is no actual controlled component (Garrison et al., 2012).

The ideas laid out by the group were essential to create a sound business plan
and allow areas for the organization’s growth without taking a chunk toll on employees’
mental state of being. Activity-Based Costing (ABC) is a mechanism for allocating
overhead costs more precisely by assigning them to activities. Costs can be applied to
cost objects that use activities once costs have been assigned. The technology can be
used to reduce overhead costs in a targeted manner. ABC excels in complicated

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 environments with several equipment and products, as well as convoluted processes that
are difficult to decipher. It is less practical in a streamlined environment where production
procedures are shortened, and costs are easier to assign (AccountingTools, Inc., 2022).
The use of this procedure can create a pathway for Ferguson and Son Manufacturing
Company to outgrow its current financial state and help maneuver in achieving its goals.
The new business structure also promotes employees to work hard, puts peer pressure
on those who may otherwise slack off, and motivates departments to exert their best
efforts.

The fundamental objective during budget implementation is to guarantee that the

financial and economic aspects of budget outlays are met. Financial chores include
budgeting and spending money for the defined purposes, as well as avoiding lapses or a
rush of spending near the conclusion of the fiscal year. Budgetary implementation entails
enforcing specified objectives and taking appropriate actions to bring performance in line
with predetermined goals (Miengbeghe, 2012). An excellent method to illustrate is the
Activity-based costing (ABC). A component of cost accounting theory and a component
of management accounting that has the potential to improve organizational performance
(OP) by providing information critical to managing organizational resources, controlling
costs, improving organizational processes, adding value, and enabling strategic decision-
making (Vetchagool et al., 2020). ABC is acknowledged as a management tool that
provides for more control over the production process, emphasizes cost-causing
elements, contributes to cost reduction or even elimination in a specific activity, and aids
managers in the difficult decision-making process. Thus, the ABC approach has been
employed in recent decades since it is a strategy that attempts to decrease distortions in
the determination of product costs while still being practical (Quesado & Silva, 2021).

To bring upon the reality, a study conducted in Thailand to evaluate the impact of
ABC on organizational performance shows that the extensive use of this procedure for
cost analysis, cost strategy, and cost evaluation enhances operational performance and,
as a result, improves financial performance. Manufacturing and non-manufacturing
organizations and large and small-medium enterprises (SMEs) show similarities
(Vetchagool et al., 2020). Another study conducted by Alsayegh (2020) shows that
activity-based costing companies show signs of increased profitability and
competitiveness. In theory, activity-based costing suggests to achieve all of the proposed
goals. Despite the advantages this system can deliver, it is known that the adoption of
ABC varies by country and industry, and that it does not look the same in every
organization. Many studies demonstrate that, in comparison to Asian countries, the
adoption rate of ABC has increased in Western countries during the last decade
(Alsayegh, 2020).

Activity-based costing extended quickly from the United States to Europe, Canada,
Australia, and other industrialized countries. In a research done by Innes & Mitchell (1991)
in the United Kingdom, just 6% of respondent companies were adopting ABC, but 33%
of respondents expected to use ABC in the future. In research conducted by Drury and
Tayles (1994), the adoption rate was increased to 13%. Innes & Mitchell (1995) did follow-
up research in 2000, finding that 40.7% of financial firms, 14.3% of manufacturing firms,

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 and 12.1% of service organizations have adopted the procedure. According to a recent
study by Tayles and Drury (2002), adoption rates in the United Kingdom are around 23%.

The adoption of ABC was flanking in developing countries with adoption rates
being lower. As cited by Alsayegh (2020), Ngongang performed a survey in Cameroon in
2010 and discovered that 9.3% of businesses have used activity-based costing
methodologies, with these businesses reporting higher levels of satisfaction with the
system. According to a research conducted by Moalla (2007), the adoption rate of ABC
in Tunisia is 23.75% among the total respondents. ABC adoption rates in South Africa
were reported to be 12% in a study undertaken by Kamala, Sartorius, and Eitzen (2007).

According to Alsayegh (2020), Ruhanita and Daing in 2007 conducted a study that
included a population of Malaysian manufacturing enterprises, and they discovered that
36% of the total respondents used an activity-based costing approach. Chongruksut and
Brooks (2005) conducted a survey in Thailand and discovered that the adoption rate is
35%. According to a poll done by Chen et al. (2001) in the Hong Kong context, 11% of
the total respondents had adopted it, and 5% planned to do so in the near future. Finally,
the studies found that ABC adoption rates are rising in both developed and developing
countries.

The implementation of ABC varies from one country to another due to technical,
behavioural, and system-related challenges that may develop during the practice in
various settings, which can also be characterized. ABC's failure may not reflect a lack of
understanding of how to use and control accounting systems in practice. According to
Innes and Mitchell (1991), several organizations rejected ABC because it was
inappropriate for their operations. Several of the issues described were are related to
ABC's technological, practical, and system difficulties. Inadequacy of requested
resources, problems in data collecting for cost derivers, lack of top management support,
shortage of ABC software packages, and personnel resistance to ABC are among the
primary challenges ABC users face during implementation, according to ABC adopters.
In other words, organizations that do not implement the ABC system do so because the
cost of doing it is too high. They lack the necessary knowledge and resources for
implementation, and the top management is not interested in doing so because they are
content with their current costing method (Alsayegh, 2020).

III. Conclusion

Therefore, ABC approach as a budgeting tool show signs of increased profitability

and competitiveness for those firms that use it. In the case of Ferguson and Son
Manufacturing Company, this is the most suited method that will allow them to leverage
on market stability, thus, demonstrates that ABC implementation was a viable option in
the altered situation. The information offered by traditional costing systems was
insufficient for management in a competitive context. Many ABC users reported higher
levels of satisfaction, particularly in terms of better performance measurement, more
precise product costing, improved cost control, continuous business improvement, and

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 increased profitability, as well as increased competitive capabilities. ABC's successful
implementation can result in effective behavioral, organizational, and technical elements.
According to many research, ABC's failure may not be a reflection of a lack of
understanding of how accounting systems are used and controlled in practice. A number
of problems covered in relevant publications are related to ABC's technical, practical, and
system challenges. Many businesses fail due to cultural and organizational challenges,
as strategies must be modified when utilized in diverse situations.

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 IV. References

AccountingTools, Inc. (2022). Activity-based costing definition. Retrieved February 23,

2022, from AccountingTools: Accounting CPE Courses & Books:
https://www.accountingtools.com/articles/activity-based-costing
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Chongruksut, W., & Brooks, A. (2005). he adoption and implementation of activity-based
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Drury, C., & Tayles, M. (1994). Product costing in UK manufacturing organizations.
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Quesado, P., & Silva, R. (2021). Activity-Based Costing (ABC) and Its Implication for Open
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Vetchagool, W., Augustyn, M. M., & Tayles, M. (2020). Impacts of activity-based costing
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