‘I’m really not sure our information systems are as well placed as they could be to help us drive our performance. The industry data and my own observations suggest we need to do better in this regard. I really want to be ready when the market and the economy recovers and make sure we are doing better than the industry with respect to revenue. Also, we need to improve our planning processes and I’m really not too sure how to best plan for our expenditures in areas like R&D.’

Noel McEwen (who has been CEO for three years) was reflecting on recently-released industry information and his own experiences as CEO of Southern District Dairy (SDD). SDD, a privatelyowned company, produces a variety of milk, cheese and yoghurt products. Dairy ingredients for production are sourced largely from dairy farms owned by SDD. The company has a strategy of producing high quality products targeted towards consumers prepared to pay a premium price. 

Seventy per cent of the company’s output is exported to parts of Asia. SDD is structured around three investment centres (business units) supported by four support cost centres (R&D; accounting and finance; HR; and marketing and logistics). 

For the support cost centres, budgeted versus actual cost is the key performance metric. The three investment centre units are set the same ROI target of 12 per cent, as Noel believes all should be contributing equally to the company’s performance. The budget targets for the support cost centres are usually set on the basis of negotiation with Noel, although the common starting point is always last year’s budget. For example, with the R&D cost centre, Noel has linked the annual budget estimate to sales targets. The manager of R&D is then held accountable for managing the department within the annual budget estimate.

Required

(a) What are the possible limitations of the current process for planning and budgeting in the support cost centres of SDD?

(b) Suggest ways in which the planning and budgeting process in the support cost centres of SDD might be improved.