Harry Klein, inventor, formed Peerless Load Levellers Company in 1955 to produce a simple three-piece device for automatically levelling loads on industrial conveyor belts. As the business grew and prospered, Klein expanded the factory and added employees, but he continued to control every aspect of the enterprise himself. Klein hired only individuals who would follow his orders unquestioningly. Over the years, the product mix was expanded to include several products, all variants of the original design.
Klein had no need to develop a human resources function, accounting systems, or computerized business systems. He also felt that he did not need a budget process. "I know exactly how well we are doing," he would repeatedly assert. "Why do I need some new budgeting idea to tell me what I already know?"
In 1995, Peerless reached a level of 180 production employees, 3 managers (who reported directly to Klein), and 20 clerical people. The three managers are John Richards, shaping and forming department; Karl Willis, assembly department; and Susan Lyle, finishing department. Each manager was responsible for all aspects of his or her department's product manufacturing, including purchasing, production, inspection, and customer complaints.
In 2011, Klein passed away unexpectedly. The situation at Peerless turned to chaos because only Klein had the complete view of the company. Eileen Klein-Robb, Klein's daughter and current president, had never been involved in the business and needed help quickly. She engaged Robert Snider, consultant, to determine what Peerless needed to do to bring sense and structure to the operation.
Snider, after studying the operation, suggested that Peerless needed a method of evaluating, monitoring, and controlling performance, especially at the production level. Snider's recommendation does not change the reporting relationship of Richards, Willis, and Lyle. However, the functions of the three managers would change in the following ways:
• Richards would be the purchasing manager and handle all vendor relationships and raw materials inventories.
• Willis would be the production manager and oversee three newly promoted supervisors of the shaping and forming department, the assembly department, and the finishing department.
• Lyle would be the quality manager and oversee product quality, inspection, customer relations, and engineering changes.
Snider also suggested installing a responsibility accounting and budgeting system to control performance at the various levels of production and management. Klein-Robb, although interested in this system, was uncertain and wanted more information about responsibility accounting.
REQUIRED
A. List four characteristics and requirements for a responsibility accounting system.
B. Describe the following centers, and define the mission of each one when used with a responsibility accounting system:
1. Cost centers
2. Profit centers
3. Investment centers
C. 1. Identify at least three advantages that may be gained from a responsibility accounting system.
2. Identify at least one major risk of using a responsibility accounting system.
D. If Eileen Klein-Robb were to incorporate Robert Snider's functional recommendations at Peerless Load Levellers, identify and explain at least two specific operational performance measures that Klein-Robb should implement for these roles:
• John Richards, purchasing manager
• Karl Willis, production manager