Two engineers, an accountant, and an attorney organized the Hammond Company. The principal business activity is the manufacture and assembly of factory machinery. In addition, the company performs contract work for governmental units. Not only does the company have a healthy domestic market, but sales to European countries have also continued to grow.

In the early stages of organization, Hammond’s external auditor performed most of the accounting work, organized the books and set up bookkeeping procedures. Hammond still uses very informal budgets employing approximations of factory overhead, marketing, and administrative expenses. Since cash is a critical issue, the main responsibility of the vice president of finance is preparing detailed cash flow projections. A secretary keeps the cost records. Hammond uses accounting information only to a limited extent; however, the firm keeps fairly adequate cost records on the government contract work since government auditors require it.
The president assists the vice president of finance in closely checking the cash position and receivables. Quarterly income statements are prepared by the external auditors, these statements are examined closely since the company is strongly profit motivated. Project engineers also play an important role in cost control because each development program is budgeted or funded for a specific amount of money. Each project engineer has the responsibility for developing the product within the specified budget. If the engineers meet their budgets, they are rewarded with bonuses; otherwise, they are penalized even to the extent of termination.
The project engineer’s tasks is difficult because of not only many complex design problems but also time and budget constraints. Many of the company’s engineers have erred in designing technically perfect products so expensive to produce that sales prices were prohibitive.
It is not surprising, then, that the average project engineer believes cost accounting data are a nuisance that impedes efforts to arrive at a superior design.
When the number of employees and sales increase, management believes it will become .
necessary to substantially refine accounting and cost-control procedures. A controller will be hired to establish a simple budgeting system and introduce a rudimentary standard cost system for production work. Management plans to employ an outside engineering firm to establish material, labor, and overhead standards that will be scientific goals or yardsticks to measure the efficiency of factory employees.
Required:

a. Problems among the accounting, production, marketing, and engineering staffs are anticipated as the company grows; mention five potential problems.

b. Give several factors in support of management’s philosophy of using small organizational units.