Case Study Presentation On

Vershire Company s Management Control System

Subject Management Control System

Mohan Maheshwaram ´ Vishal Shete ´ Yuvarani Shoke ´ Arpita Amin

75 94 95 103

´ It influences the behavior of organizational resources to implement organizational strategies. . ´ MCS might be formal or informal. financial and also the organization as a whole considering the organizational strategies. physical.MANAGEMENT CONTROL SYSTEMS ´ It is a system which gathers and uses information to evaluate the performance of different organizational resources like human.

´ ´ ´ . The hierarchy normally consisted of a divisional manager being reported to by two line managers. This division is one of the largest manufacturers of aluminum beverages cans in the United States.VERSHIRE COMPANY ´ Large business in the packaging industry with several major divisions. Customers loyalty was always at stake.

steel cans accounted for 88% but by 1990 s aluminum cans started dominating. steel. containers were made from one of several materials: aluminum. glass. . fiber-foil or plastic.INDUSTRY BACKGROUND ´ Traditionally. ´ In 1970. ´ For beverage processors. the cost of the can usually exceed the cost of the contents.

VERSHIRE S PLANNING SYSTEM ´ Strengths: « When formulating the sales budget. « « . the forecasting is done at the corporate level and is then sent to the divisional managers for fine-tuning. divisional managers are required to predict market conditions and capital expenditures. corporate controllers visit each plant for half a day prior to the final submission of the budget.

plant managers do not come up with the sales budgets the district sales managers do. « « .VERSHIRE S PLANNING SYSTEM ´ Weakness « The initial sales forecast uses assumptions which are entirely derived from corporate headquarters analyses. the forecasting method is the same for all product lines.

there is timely communication between the various hierarchies of the company as there are not that many tiers.VERSHIRE S CONTROL SYSTEM ´ Strengths « Divisional managers are given full control over their divisions except in the areas of raising capital and labor relations. there is constant oversight on meeting the budget « « .

VERSHIRE S CONTROL SYSTEM ´ Weakness « Profit is the main measure for assessing plant managers· performance and determining bonuses. .

. profits.Q. BE PREPARED TO DESCRIBE THE ACTIVITIES THAT TOOK PLACE AT EACH PROCESS & PRESENT THE RATIONALE FOR EACH. A profit center manager is held accountable for both revenues. where the manufacturing & marketing division ( subdivision) are profit centre. and costs (expenses).2) TRACE THE PROFIT BUDGETING PROCESS AT VERSHIRE. and therefore. STARTING IN MAY ENDING WITH THE BOD¶S MEETING IN DECEMBER. What this means in terms of managerial responsibilities is that the manager has to drive the sales revenue generating activities which leads to cash inflows and at the same time control the cost (cash outflows) causing activities. Vershire Company responsibility centre is profit centre based.

Rewards & Recognition . 1:. 3:-Setting Up Of Budget Step No. 6:.Execution Of Action.Delegation of Authority & Setting Up of Responsibility Centre (Profit Centre) ´ ´ Step No. Performance Measurement & Take Corrective Action ´ ´ Step No. 2:. 5:. 4:.Evaluation Step No.Setting Up of Objective Step No.MANAGEMENT CONTROL SYSTEM PROCESS ´ ´ Step No.

district 15 Division GM Profit Centre Manufacturing Manager 1. Plant Manager 2 . Plant Manager 1 «.RESPONSIBILITY CENTRE (PROFIT CENTRE BASE) Vershire Company Division GM (Aluminum Can Division) Marketing manager 1. district 1 «. 7. «. «. 15.

and pre-tax income Industrial Engineering Department Develop cost standards and cost reduction targets Controller Staff Visit plant and walkthrough .2 Setting up of Objective Divisional GM Preliminary Report Central Market Research Staff Market assessment Divisional GM New Sales Forecasts District Sales Manager Estimate sales forecasts for the upcoming year Divisional GM Consolidate sales forecasts Vice President of Marketing Make amendments with approval of district Corporate Approve budget as a fixed objective Plant Manager Budget gross profit. fixed expenses.Answer Q.

COST SHEET IN % ‡Raw material 64 ‡Direct labour 15 9 8 2 2 Prime cost 79 ‡ Marketing & general administration ‡ Transportation ‡ Depreciation ‡ Research & development Cost of goods 10 0 .

2 Plant Manager Plant budgets to division head office Division Head Office Consolidate plant budgets to a division budge Divisional General Manager Review division budget Plant Manager Budget for any additional savings Divisional General Manager Approve budget Chief Executive Office Modifications to the budget .ANSWER Q.

ANSWER Q.2 Board of Directors Approve final budget .

MANUFACTURING BUDGET ´ At Plant Level: Calculation of Profit= Sales budget-(Budgeted Variable Cost + Budgeted Fixed Overheads) ´ Budgeted Variable Costs included direct Materials. Direct labor and Variable Overhead Budget .

MANUFACTURING BUDGET Role of Plant s Industrial Engineering Dept.: Deciding Cost Standard and Cost Reduction Targets ´ Determining Budget Performance Standards ´ Determining Cost Centers within the Plant: 1) Budgeted Cost reductions 2) allowances for unfavorable Variances 3) Fixed costs ´ .

3) SHOULD THE PLANT MANAGERS BE HELD RESPONSIBLE FOR PROFITS? WHY? WHY NOT? ´ Profit made up of two components: 1) Revenue 2) Expenditure .Q.

direct labor.EXPENDITURE INCLUDES ´ direct materials. variable manufacturing and fixed overhead budget ´ ´ ´ .

RESPONSIBILITY OF SALES DEPARTMENT ´ price. sales mix and delivery schedules ´ ´ .

INCENTIVE PROGRAM FOR PLANT MANAGERS ´ Only capable managers were promoted with profit performance being the main factor ´ Compensation package was tied to achieving profit budgets ´ Plant efficiency reports were highly publicized even though different shops had different set up times .



. manufacturing the quality products at the lowest reasonable cost possible considering the nature of the competitive industry. However.5) ON BALANCE.Q. In essence. it is a disadvantage when there are unforeseen relevant costs that are inevitable and must be incurred during the year since there is a meticulous process in covering these costs. which also requires an explanation to the bosses why the budgets have not been met. Since the Plant Department is treated as a profit center. 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. their performance is evaluated through the profits that the department generates via its cost standards and cost reduction targets which is determined by the Industrial Engineering department. they may sacrifice quality by choosing the lowest cost of materials or labor for production. the cost can be varied based on the price. The assignment of the department as a cost center may be inconsistent with its objectives since the department itself is not the one determining the price and selling the products. 3)WRONG COMPENSATION PLAN Third is how the performance of the plant managers are evaluated. WOULD YOU REDESIGN THE MANAGEMENT CONTROL STRUCTURE AT VERSHIRE COMPANY? IF SO. This kind of system has an advantage of pushing its managers to strive and meet the objective budgets. the plant managers· promotion and compensation is based on their profit performance. 2) WRONG SELECTION Second is how the company treats its Plant/Manufacturing Department ² being a Profit Center. However. Their sales budget preparation had little flexibility when it was already approved before the start of the year and were already fixed objectives. HOW AND WHY? ´ WEAKNESSES IN MANAGEMENT CONTROL SYSTEM 1) LACK OF FLEXIBILITY First is in the style of their budget preparation. This department only accomplishes orders that the Sales Department dictate.

RECOMMENDATION Communication & co-ordination ´ Improve comparisons of manufacturing efficiency between divisions and plants ´ Flexibility in operation ´ Set manufacturing unit as the cost centre & marketing unit as the profit centre ´ Redesign structure for effective Management Control System ´ .

REDESIGN MANAGEMENT CONTROL STRUCTURE Estimate sales forecasts for the upcoming year Setti g U f O jective Budget gross profit. and pre-tax income Make the modification y two way communicati on Market assessment Visit plant and walkthrough Change the evaluation measure for manufacturi ng unit Communication & co.ordination £ Delegati f Auth rity & Setti g U f si ility Res Centre (manufacturin g unit not the rofit centre) Preliminary Report Prepared the udget Draw the alternative plan £ £ Approval of final udget ¢  ¢ ¢¡ £   ¢¡ ¢¡   ¢   £ ¡ . fixed expenses.

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