13-66. The Role of Budgets and People in the Budgeting Process (CL0 131, 2) Fargo Industries manufactures and sells snowmobiles. The company has eight business units strategically located near the major markets each with a sales force and two to four manufacturing plants. These business units operate as autonomous profit centers responsible for purchasing operations, and sales, The corporate controller describes the business unit performance measurement system as follows. "We allow the business units to control the entire operation from the purchase of materials to the sale of the product. We at corporate headquarters are involved only in strategic decisions such as developing new product lines. Each business unit is responsible for meeting its market needs by providing the right products at low cost on a timely basis. Frankly, the business units need to focus on cost control, delivery, and services to customers. Being as close to the markets as they are, they are best qualified to determine how to do this." The corporate controller continued, "We give the business units considerable autonomy, but we watch their monthly income statements like a hawk! Each month's actual performance is compared to the budget in considerable detail. If actual sales or contribution margin is more than 4 or 5 percent below budget, we demand an immediate report from the business unit managers. I might add that we don't have much trouble getting their attention. All of the management people at the plant and the business unit level can add appreciably to their annual salaries with bonuses if they exceed their budgets." The budgeting process begins in April when the business unit sales managers consult their sales personnel to estimate sales for the next fiscal year (the fiscal year runs between July 1 and June 30). These estimates are sent to the plant managers, who use them to prepare the production estimates. At the plants, production statistics including direct materials, labor hours, production schedules, and output quantities are developed by plant personnel. Using the statistics prepared by the plant personnel, the plant accounting staff estimates costs and the plant's budgeted variable cost of goods sold and other plant expenses for each month of the coming fiscal year. In the first week of June, cach business unit counting staff.combines the plant badres with sales estimates The budgeting process begins in April when the business unit sales managers consult their sales personnel to estimate sales for the next fiscal year (the fiscal year runs between July 1 and June 30). These estimates are sent to the plant managers, who use them to prepare the production estimates. At the plants, production statistics including direct materials, labor hours, production schedules, and output quantities are developed by plant personnel. Using the statistics prepared by the plant personnel, the plant accounting staff estimates costs and the plant's budgeted variable cost of goods sold and other plant expenses for each month of the coming fiscal year. In the first week of June. each business unit accounting staff combines the plant budgets with sales estimates. The corporate controller continued. "It's really hard to predict the demand for snowmobiles. We think both the plant managers and the sales personnel are too conservative. They both prefer to underestimate the sales of snowmobiles. If they are wrong and the sale of snowmobiles are better than projected, they could charge a premium. But that doesn't agree with corporate wishes because that means prospective customers will go elsewhere to get their snowmobiles." Required a. Identify and explain biases of the corporate management of Fargo Industries that should be expected in the communication of budget estimates by business units staff and plant personnel b. What sources of information can Fargo Industries' top management use to monitor the budget estimates prepared by business units and plants? Page 579 What services could Fargo Industries' top management offer the business units to help them develop their budget without interfering with the business unit's decisions? d. Assume you are consulting with Fargo Industries. They ask your advice about getting more involved in the business units and plants budgeting activities. Identify and explain what management needs to consider in reaching its decision (CMA adapted) 13-66. The Role of Budgets and People in the Budgeting Process (CL0 131, 2) Fargo Industries manufactures and sells snowmobiles. The company has eight business units strategically located near the major markets each with a sales force and two to four manufacturing plants. These business units operate as autonomous profit centers responsible for purchasing operations, and sales, The corporate controller describes the business unit performance measurement system as follows. "We allow the business units to control the entire operation from the purchase of materials to the sale of the product. We at corporate headquarters are involved only in strategic decisions such as developing new product lines. Each business unit is responsible for meeting its market needs by providing the right products at low cost on a timely basis. Frankly, the business units need to focus on cost control, delivery, and services to customers. Being as close to the markets as they are, they are best qualified to determine how to do this." The corporate controller continued, "We give the business units considerable autonomy, but we watch their monthly income statements like a hawk! Each month's actual performance is compared to the budget in considerable detail. If actual sales or contribution margin is more than 4 or 5 percent below budget, we demand an immediate report from the business unit managers. I might add that we don't have much trouble getting their attention. All of the management people at the plant and the business unit level can add appreciably to their annual salaries with bonuses if they exceed their budgets." The budgeting process begins in April when the business unit sales managers consult their sales personnel to estimate sales for the next fiscal year (the fiscal year runs between July 1 and June 30). These estimates are sent to the plant managers, who use them to prepare the production estimates. At the plants, production statistics including direct materials, labor hours, production schedules, and output quantities are developed by plant personnel. Using the statistics prepared by the plant personnel, the plant accounting staff estimates costs and the plant's budgeted variable cost of goods sold and other plant expenses for each month of the coming fiscal year. In the first week of June, cach business unit counting staff.combines the plant badres with sales estimates The budgeting process begins in April when the business unit sales managers consult their sales personnel to estimate sales for the next fiscal year (the fiscal year runs between July 1 and June 30). These estimates are sent to the plant managers, who use them to prepare the production estimates. At the plants, production statistics including direct materials, labor hours, production schedules, and output quantities are developed by plant personnel. Using the statistics prepared by the plant personnel, the plant accounting staff estimates costs and the plant's budgeted variable cost of goods sold and other plant expenses for each month of the coming fiscal year. In the first week of June. each business unit accounting staff combines the plant budgets with sales estimates. The corporate controller continued. "It's really hard to predict the demand for snowmobiles. We think both the plant managers and the sales personnel are too conservative. They both prefer to underestimate the sales of snowmobiles. If they are wrong and the sale of snowmobiles are better than projected, they could charge a premium. But that doesn't agree with corporate wishes because that means prospective customers will go elsewhere to get their snowmobiles." Required a. Identify and explain biases of the corporate management of Fargo Industries that should be expected in the communication of budget estimates by business units staff and plant personnel b. What sources of information can Fargo Industries' top management use to monitor the budget estimates prepared by business units and plants? Page 579 What services could Fargo Industries' top management offer the business units to help them develop their budget without interfering with the business unit's decisions? d. Assume you are consulting with Fargo Industries. They ask your advice about getting more involved in the business units and plants budgeting activities. Identify and explain what management needs to consider in reaching its decision (CMA adapted)