问题详情

SectionB–TWOquestionsONLYtobeattempted
Perkinmanufactureselectroniccomponentsforexportworldwide,fromfactoriesinCeeland,foruseinsmartphonesandhandheldgamingdevices.Thesetwomarketsaresuppliedwithsimilarcomponentsbytwodivisions,PhonesDivision(P)andGamingDivision(G).Eachdivisionhasitsownselling,purchasing,ITandresearchanddevelopmentfunctions,butseparateITsystems.Somemanufacturingfacilities,however,aresharedbetweenthetwodivisions.
Perkin’scorporateobjectiveistomaximiseshareholderwealththroughinnovationandcontinuoustechnologicalimprovementinitsproducts.Themanufacturersofsmartphonesandgamingdevices,whousePerkin’scomponents,updatetheirproductsfrequentlyandconstantlycompetewitheachothertolaunchmodelswhicharetechnicallysuperior.
Perkinhasawell-establishedincrementalbudgetingprocess.Divisionalmanagersforecastsalesvolumesandcostsmonthsinadvanceofthebudgetyear.Thesedivisionalbudgetsarethenscrutinisedbythemainboard,andrevisedsignificantlybytheminlinewithtargetstheyhavesetforthebusiness.Thefinalisedbudgetsareoftenapprovedafterthestartoftheaccountingyear.Underpressuretodeliverconsistentreturnstoinstitutionalshareholders,theboarddoesnottoleratefailurebyeitherdivisiontoachievetheplannednetprofitfortheyearoncethebudgetisapproved.Lastyear’sresultswerepoorcomparedtotheannualbudget.Divisionalmanagers,whoareappraisedonthefinancialperformanceoftheirowndivision,havecomplainedaboutthelengthoftimethatthebudgetingprocesstakesandthattheperformanceoftheirdivisionscouldhavebeenbetterbutwasconstrainedbythebudgetswhichweresetforthem.
InPDivision,managershadfailedtoanticipatethehighpopularityofanewsmartphonemodelincorporatingalargescreendesignedforplayinggames,andhadnotmadethenecessarytechnicalmodificationstothedivision’sowncomponents.Thiswasduetothehighcostsofdoingso,whichhadnotbeenbudgetedfor.Basedontheoriginalsalesforecast,PDivisionhadalreadycommittedtomanufacturinglargequantitiesoftheexistingversionofthecomponentandsohadtoheavilydiscounttheseinordertoachievetheplannedsalesvolumes.
AcriticalmaterialinthemanufactureofPerkin’sproductsissilver,whichisacommoditywhichchangesmateriallyinpriceaccordingtoworldwidesupplyanddemand.DuringtheyearsuppliesofsilverwerereducedsignificantlyforashortperiodoftimeandGDivisionpaidhighpricestoensurecontinuedsupply.ManagersofGDivisionwereunawarethatPDivisionheldlargeinventoriesofsilverwhichtheyhadpurchasedwhenthepricewasmuchlower.
Initially,GDivisionaccuratelyforecasteddemandforitscomponentsbasedonthepreviousyears’salesvolumesplusthehistoricannualgrowthrateof5%.However,overallsalesvolumesweremuchlowerthanbudgeted.Thiswasduetoafireatthefactoryoftheirmaincustomer,whichwasthenclosedforpartoftheyear.Reactingtothisnews,managersatGDivisiontookactiontoreducecosts,includingclosingoneofthethreeR&Dfacilitiesinthedivision.
However,whenthecustomer’sfactoryreopened,GDivisionwasunwillingtorecruitextrastafftocopewithincreaseddemand;norwouldPDivisionre-allocatesharedmanufacturingfacilitiestothem,incasedemandincreasedforitsownproductslaterintheyear.Asaresult,PerkinlosttheprestigiouspreferredsupplierstatusfromtheirmaincustomerwhowasunhappywithGDivision’sfailuretoeffectivelyrespondtotheadditionaldemand.Thecustomerhadbeenforcedtopurchaseamoreexpensive,thoughtechnicallysuperior,componentfromanalternativemanufacturer.
Theinstitutionalshareholders’representative,recentlyappointedtotheboard,hasaskedyouasaperformancemanagementexpertforyouradvice.‘WeneedtoknowwhetherPerkin’sbudgetingprocessisappropriateforthebusiness,andhowthiscontributedtolastyear’spoorperformance’,shesaid,‘andmoreimportantly,howdoweneedtochangetheprocesstopreventthishappeninginthefuture,suchasamovetobeyondbudgeting.’
Required:
(a)EvaluatetheweaknessesinPerkin’scurrentbudgetingsystemandwhetheritissuitablefortheenvironmentinwhichPerkinoperates.(13marks)
(b)EvaluatetheimpactonPerkinofmovingtobeyondbudgeting.(12marks)


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