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Macs integrated goutham girish raghu ranjini joel


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Vershire company case study and responsibility centers

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Macs integrated goutham girish raghu ranjini joel

  1. 1. GOUTHAM G SHETTY GIRISH DEYANNAVAR JOEL ROSHAN RAGHU GOWDA RANJINI Responsibility Centers: Revenue and Expense Centers
  2. 2. Definition: <ul><li>A responsibility center is an organization unit that is headed by a manager who is responsible for its activities </li></ul><ul><li>Responsibility centers for a hierarchy </li></ul><ul><ul><li>Lowest level :Sections, work shifts other organisational units </li></ul></ul><ul><ul><li>Departments or Business units comprises smaller units </li></ul></ul><ul><ul><li>Senior management and Board of Directors </li></ul></ul>
  3. 3. Nature of Responsibility Centers <ul><li>Accomplish one or more purpose or goal </li></ul><ul><li>Senior management decides on set of strategies or goal </li></ul><ul><li>Responsibility centers should implement these strategies </li></ul><ul><li>Responsibility centers receive inputs in form of material, labor and service </li></ul><ul><li>Revenues are amounts earned from providing these outputs </li></ul>
  4. 4. Measuring Inputs and Outputs <ul><li>Inputs are measured in hours of labor, quarts of oil, reams of paper, and kilowatts hours of electricity </li></ul><ul><li>Monetary value is calculated by multiplying a physical quantity by a price per unit (Cost) </li></ul><ul><li>Cost is monetary measure of amount of resources used by a responsibility center </li></ul>
  5. 5. Performance Measurement <ul><li>Efficiency is the ratio of outputs to inputs, or the amount of output per unit of input </li></ul><ul><li>A responsibility center is more efficient if it uses fewer resources than responsibility Center </li></ul><ul><li>Else if it uses the same amount of resources but produces a greater output </li></ul>
  6. 6. <ul><li>Efficiency is measured by comparing actual cost with standard cost </li></ul><ul><li>Effectiveness is measured by relationship between a responsibility center’s output and its objectives </li></ul><ul><li>A organisation is efficient if it does things right and it is effective if it does the right things </li></ul>
  7. 7. Role of Profit <ul><li>Profit can be used to measure both Effectiveness and Efficiency </li></ul><ul><li>But there may be conflict between the two </li></ul>
  8. 8. Types of Responsibility Centers <ul><li>Revenue Centers : Output are measured in monetary terms </li></ul><ul><li>Expense Centers: Inputs are measured in monetary terms </li></ul><ul><li>Profit centers: both inputs and outputs are measured in monetary terms </li></ul><ul><li>Investment centers: Relationship between investment and profit is measured </li></ul>
  9. 9. Types of Expense centers <ul><li>Engineered Expense centers </li></ul><ul><li>Discretionary Expense centers </li></ul>
  10. 10. Engineered Expense centers <ul><li>Characteristics: </li></ul><ul><li>Input can be measured in monetary terms </li></ul><ul><li>Output can be measured in physical terms </li></ul><ul><li>Usually found in manufacturing operations </li></ul><ul><li>Eg. Distribution, trucking, warehousing and similar units </li></ul>
  11. 11. Discretionary Expense Centers <ul><li>Includes administrative and support units </li></ul><ul><li>Eg. (Accounting, legal, industrial relations, public relations, human resources) </li></ul><ul><li>These expenses are mostly based on the managements expenses </li></ul><ul><li>In discretionary expense the difference between budget and actual input and does not incorporate the value of the output </li></ul>
  12. 12. General Control Characteristics <ul><li>Budget Preparation </li></ul><ul><li>Incremental Budgeting </li></ul><ul><li>Zero Base Budgeting </li></ul><ul><li>Cost Variability </li></ul><ul><li>Type of Financial Control </li></ul><ul><li>Measurement of Performance </li></ul>
  13. 13. Budget Preparation <ul><li>Discretionary expense centers categories: continuing and special. </li></ul><ul><li>Continuing work is done consistently from year to year </li></ul><ul><li>Special work is a “one shot” project </li></ul><ul><li>A technique often used in preparing a discretionary expense center's budget is management by objectives, a formal process in which a budgetee proposes to accomplish specific jobs and suggests the measurement to be used in performance evaluation. </li></ul>
  14. 14. Incremental Budgeting <ul><li>In this model, the discretionary expense center's current level of expenses is taken as a starting point. This amount is adjusted for inflation, anticipated changes in the workload of continuing job, special job, and—if the data are readily available—the cost of comparable jobs in similar units. </li></ul><ul><li>Limitations : </li></ul><ul><li>Discretionary expense center's current level of expenditure is accepted and not reexamined during the budget preparation process. </li></ul><ul><li>Managers of these centers typically want to increase the level of services, and thus tend to request additional resources, as a result overheads cost increases </li></ul>
  15. 15. Zero Base Review <ul><li>An alternative budgeting approach is to make a thorough analysis of each discretionary expense center on a rolling schedule, so that all are reviewed at least once every five years or so. Such analysis is often called a zero-base review. </li></ul><ul><li>Advantages: </li></ul><ul><li>It can help for comparative analysis with the benchmark </li></ul><ul><li>Limitation: </li></ul><ul><li>Zero-base reviews are time-consuming </li></ul><ul><li>Traumatic for the managers whose operations are being reviewed (this is one reason for scheduling such reviews so infrequently). </li></ul>
  16. 16. Cost variability <ul><li>Cost in engineered expense centers, which are strongly affected by short-run volume changes, costs in discretionary expense centers are comparatively insulated from such short-term fluctuations. </li></ul><ul><li>This difference stems from the fact that in preparing the budgets for discretionary expense centers, management tends to approve changes that correspond to anticipated changes in sales volume </li></ul>
  17. 17. <ul><li>for example, allowing for additional personnel when volume is ex­pected to increase, and for layoffs or attrition when volume is expected to decrease. Personnel and personnel-related costs are by far the largest expense items in most discretionary expense centers; thus, the annual budgets for these centers therefore tend to be a constant percentage of budgeted sales volume. </li></ul><ul><li>Limitations: </li></ul><ul><li>Managers cannot adjust the work force for short-run fluctuations; hiring and training personnel for short-run needs is expensive, and temporary layoffs hurt morale. </li></ul>
  18. 18. Type of Financial control <ul><li>Financial control in discretionary expense centre is primarily exercised at the planning stage before the cost are incurred where as in engineered expense centre is different </li></ul><ul><li>Measurement of performance </li></ul><ul><li>The primary job of a discretionary expense center's manager is to obtain the desired output </li></ul><ul><li>The financial report is not means to evaluate the performance of the manager </li></ul><ul><li>If these two types of responsibility centers are not carefully distinguished, management may erroneously treat a discretionary expense center's performance report as an indication of the unit's efficiency, thus motivating those making spending decisions to expend less than the budgeted amount, which in turn will lower output For this reason, it is unwise to reward ex­ecutives who spend less than the budgeted amount </li></ul><ul><li>Control over spending can be exercised by requiring the superior's approval before the bud­get is overrun. Sometimes, a certain percentage of overrun (say, 5 percent) is permitted </li></ul>
  19. 19. Administrative and Support Centers <ul><li>Control Problems </li></ul><ul><ul><li>Difficulty in measuring output </li></ul></ul><ul><ul><li>Lack of goal congruence </li></ul></ul><ul><ul><li>Budget Preparation </li></ul></ul>
  20. 20. Research & Development Centers <ul><li>Control Problems </li></ul><ul><ul><li>Difficulty in relating results to inputs </li></ul></ul><ul><ul><li>Lack of goal congruence </li></ul></ul><ul><ul><li>The R&D continuum </li></ul></ul><ul><ul><li>Annual Budgets </li></ul></ul><ul><ul><li>Measurements of Performance </li></ul></ul>
  21. 21. Marketing Centers <ul><li>Logistics Activities </li></ul><ul><li>Marketing Activities </li></ul>
  22. 22. Vershire Company Case study <ul><li>In 1996 Vershire Company Was a diversified packaging company with several major divisions, including the Aluminum Can division. </li></ul><ul><li>This Aluminum Can division was one of the largest aluminum beverage cans manufacturers in united states. </li></ul>
  23. 24. <ul><li>The division had plants scattered throughout the United States. Each plant served customers in its own geographic region, often producing several different sizes of cans for a range of customers that included both large and small breweries and soft drink bottlers. </li></ul>
  24. 25. <ul><li>Most of these customers had between two and four suppliers and spread purchases among them. </li></ul><ul><li>All Aluminum can producers employed essentially the same technology, and the division's product quality was equal to that of its competitors. </li></ul>
  25. 26. <ul><li>Containers were made from one of several materials: aluminum, steel, glass, fiber-foil (paper and metal composite), or plastic. </li></ul><ul><li>The metal container industry consisted of the hundred-plus firms that produced aluminum and tin-plated steel cans. </li></ul><ul><li>Aluminum cans were used for packaging beverages (beer and soft drinks). </li></ul><ul><li>While tin-plated steel cans were used primarily for food packaging, paint and aerosols . </li></ul>
  26. 27. <ul><li>In 1970 steel cans accounted for 88% of the metal can production. </li></ul><ul><li>In 1996 aluminum cans accounted for over 75% of metal can production. </li></ul><ul><li>Than soft drinks bottlers were purchased by small independent franchises of coco-cola and pepsi cola . </li></ul><ul><li>Five beverage container manufactures accounted for 88% of the market. </li></ul>
  27. 28. <ul><li>Minimum efficient scale for a container plant was 5 lines and it cost $ 20 million in equipment per line </li></ul><ul><li>Raw Materials :64% </li></ul><ul><li>Other cost (includes labour) : 15% </li></ul><ul><li>Marketing and General administration 9% </li></ul><ul><li>Transportation 8% </li></ul><ul><li>Depreciation 2% </li></ul><ul><li>R & D 2% </li></ul>
  28. 29. <ul><li>In beverage processes container accounting for approximately 40% of total manufacturing cost </li></ul><ul><li>In early 1970’s can were produced by rolling a steel soldering and cutting it to size. </li></ul><ul><li>In 1970 the industry was revolutionized when aluminum producers perfected a 2 piece process in which a flat sheet of metal was pushed into a deep cup and top was attached . </li></ul><ul><li>By 1996 manufacturing had become even more efficient, by producing over 2,000 cans per minute </li></ul>
  29. 30. Advantages of aluminum over steel <ul><li>It was easier to shape </li></ul><ul><li>It reduced the problem of flavouring </li></ul><ul><li>It permitted more attractive packaging </li></ul><ul><li>Reduced transportation cost </li></ul><ul><li>More attractive recycling material </li></ul><ul><li>Scrap value </li></ul>
  30. 31. Questions <ul><li>1- Outline the strengths and weaknesses of Vershire Company planning and control </li></ul><ul><li>2. Trace the profit budgeting process at Vershire, starting in May and ending with the Board of Directors' meeting in December. Be prepared to describe the activities that took place at each step of the process and present the rationale for each. </li></ul><ul><li>3. Should the plant managers be held responsible for profits? Why? Why not? </li></ul><ul><li>4. How do you assess the performance evaluation system contained in Exhibits 2 and 3? </li></ul><ul><li>5. On balance, would you redesign the management control structure at Vershire Company? If yes, how and why? </li></ul>
  31. 32. Sales Budget Corporate Management (Central Market Research Staff) District Sales Manager District Sales Manager District Sales Manager Divisional General Manager Vice President Marketing Sales Forecast Sales Forecast Sales Forecast May Preliminary Report for 2 years General Report
  32. 33. <ul><li>Sales budget was broken down according to plants from which finished goods were shipped. </li></ul><ul><li>Estimate sales </li></ul><ul><li>Profit=sales-variable overhead- fixed overhead </li></ul><ul><li>Visit by controller staff from head office </li></ul>
  33. 34. Marketing Budget Board of Directors C.E.O Divisional General Manger Divisional Head Office Plant Managers Plant Managers Plant Managers September 1st By December
  34. 35. MANAGEMENT INCENTIVES <ul><li>Based on profit </li></ul><ul><li>Only capable managers were promoted </li></ul><ul><li>Plant manager’s compensation packages were tied to achieving profit </li></ul><ul><li>Chart showing manufacturing efficiency was displayed </li></ul>
  35. 36. Items Actual $ Variance $ Year-to-Date Variances Total Sales Variances doe to 5 axes mix Sales price Sates volume Total Variable Cost of Sales Variances due to Material Labor Variable overhead Total Fixed Manufacturing Cost Variances in fixed cost Net Profit Capital Employed Return on Capital Employed
  36. 37. <ul><li>Thank you </li></ul>