Clarkson Company is a large multi-division firm with several plants in each division. A comprehensive budgeting system is used for planning operations and measuring performance. The annual budgeting process commences in August five months prior to the beginning of the fiscal year. At this time the division managers submit proposed budgets for sales, production and inventory levels, and expenses. Capital expenditure requests also are formalized at this time. The expense budgets include direct labor and all overhead items which are separated into fixed and variable components. Direct materials are budgeted separately in developing the production and inventory schedules. The expense budgets for each division are developed from its plants' results, as measured by the percent variation from an adjusted budget in the first six months of the current year, and a target expense reduction percentage established by the corporation. To determine plant percentages the plant budget for the just completed half-year period is revised to recognize changes in operating procedures and costs outside the control of plant management (e.g., labor wage rate changes, product style changes, etc.). The difference between this revised budget and the actual expenses is the controllable variance, and is expressed as a percentage of the actual expenses. This percentage is added (if unfavorable) to the corporate target expense reduction percentage. A favorable plant variance percentage is subtracted from the corporate target. If a plant had a \(2 \%\) unfavorable controllable variance and the corporate target reduction was \(4 \%\), the plant's budget for next year should reflect costs approximately \(6 \%\) below this year's actual costs.

Next year's final budgets for the corporation, the divisions, and the plants are adopted after corporate analysis of the proposed budgets and a careful review with each division manager of the changes made by corporate management. Division profit budgets include allocated corporate costs, and plant profit budgets include allocated division and corporate costs.

Return on assets is used to measure the performance of divisions and plants. The asset base for a division consists of all assets assigned to the division, including its working capital, and an allocated share of corporate assets. For plants the asset base includes the assets assigned to the plant plus an allocated portion of the division and corporate assets. Recommendations for promotions and salary increases for the executives of the divisions and plants are influenced by how well the actual return on assets compares with the budgeted return on assets.

The plant managers exercise control only over the cost portion of the plant profit budget because the divisions are responsible for sales. Only limited control over the plant assets is exercised at the plant level.

The manager of the Dexter Plant, a major plant in the Huron division, carefully controls his costs during the first six months so that any improvement appears after the target reduction of expenses is established. He accomplishes this by careful planning and timing of his discretionary expenditures. During 20X1 the property adjacent to the Dexter Plant was purchased by Clarkson Company. This expenditure was not included in the \(20 \mathrm{X} 1\) capital expenditure budget. Corporate management decided to divert funds from a project at another plant since the property appeared to be a better longterm investment.

Also during 20X1 Clarkson Company experienced depressed sales. In an attempt to achieve budgeted profit, corporate management announced in August that all plants were to cut their annual expenses by \(6 \%\). In order to accomplish this expense reduction, the Dexter Plant manager reduced preventive maintenance and postponed needed major repairs. Employees who quit were not replaced unless absolutely necessary. Employee training was postponed whenever possible. The raw materials, supplies and finished goods inventories were reduced below normal levels.

{Required:}

(a) Evaluate the budget procedure of Clarkson Company with respect to its effectiveness for planning and controlling operations.

(b) Is the Clarkson Company's use of return on assets to evaluate the performance of the Dexter Plant appropriate? Explain your answer.

(c) Analyze and explain the Dexter Plant Manager's behavior during 20XI.