Denny Daniels is production manager of the Alumalloy Division of WRT, Inc. Alumalloy has limited contact with outside customers and no sales staff. Most of its customers are han¬

dled by other corporate divisions. Therefore, Alumalloy is treated as a cost center rather than a profit center.

Denny perceives the Accounting Department as the unit that generates historical num¬

bers but provides little useful information. The Accounting Department creates the bud¬

gets at the beginning of the year and then gathers the actual costs incurred by production.

Denny wonders whether the accountants even understand the nature of the production process itself. It seems all they are concerned with are numbers—whether they mean any¬

thing or not. In his opinion, the whole accounting process is a negative motivational de¬

vice that does not reflect how hard or efficiently he has worked as a production manager.

Denny tried to discuss these perceptions and concerns with John Scott, the controller for Alumalloy.

DENNY: "I know Tve had better production over a number of operating periods, but the cost report still says I have excessive costs. Look, Tm not an accountant, Tm a production manager. I know how to get a good quality product out. Over a number of years, Tve even cut the raw materials used to do it. But the cost report doesn't show any of this. It's always negative no matter what I do. There is no way you can win with accounting or those peo¬

ple at corporate who use those reports."

John gave Denny little consolation. John stated that the accounting system and the cost reports generated by headquarters are just part of the corporate game and almost impossi¬

ble for an individual to change.

JOHN: "Although these reports are the basis for evaluating the efficiency of your division and the means for corporate to determine whether you have done the job it wants, you shouldn t worry too much. You haven't been fired yet! Besides, these cost reports hav'e been used by WRT for the last 25 years."

From talking to the production manager of the Zinc Division, Denny perceived that most of what John said was true. However, some minor cost reporting changes for zinc had been agreed to by corporate headquarters. He also knew from the trade grapevine that the turnover of production managers was considered high at WRT, even though relatively few managers were fired. Most seemed to end up quitting, usually in disgust, out of the belief that they were not being evaluated fairly.

A recent copy of the cost report prepared by corporate headquarters for Alumalloy is shown below. Because of an unexpected increase in demand for the final product, Alumal¬

loy produced 10,000 units more than the 40,000 originally budgeted. Denny does not like this report because he believes that it fails to reflect the division's operations properly, thereby resulting in an unfair evaluation of performance.

Required:
1. Comment on Denny's perception of

a. John Scott, the controller

b. Corporate headquarters

c. The cost report

d. Himself as a production manager

e. Discuss how Denny's perception of these items affects his performance as a pro¬
duction manager of WRT.
2. List the deficiencies of WRT's budgetary system. Prepare a list of recommendations to improve the system so that the process and the reports produced are more useful and less threatening to the production managers. (CMA adapted)

Transcribed Image Text:

Alumalloy Division Cost Report For the Month of April (in thousands) Master Budget Actual Cost Variance Aluminum Labor $ 400 $ 477 $ 77 U 560 675 115 U Overhead 100 110 10 U Total $1,060 $1,262 $202 U