16.49 LO16.2 Traditional approaches to control; activity-based management; performance measures: manufacturer Refer to the data for Schmidtke's Meat Pty Ltd in Case 16.48. Schmidtke's Meat uses the following approach to planning and control. The company is divided into three departments: manufacturing, marketing and administration. Each month, Hans Schmidtke checks a report that compares actual costs for the departments with budgeted costs. The budgeted costs are based on the costs for the previous year, adjusted for any major changes planned for the coming year. He also looks at actual versus budgeted revenue for the marketing department. When his father was running the business, he was able to 'keep his nger on the pulse' without any formal performance reports. Even in those days, the business had a reputation for ne quality and reliable delivery performance. However, the company has grown since then, and the existing approach to planning and control simply evolved. In her rst year at university, Hans' daughter, Heidi, learned about standard costing. She extolled the virtues of the standard costing variances and the principles of management by exception, and advised Hans to update his planning and control system. If he did not, she warned, he would never have effective control of his costs and Schmidtke's Meat would eventually fall to its competitors. Hans discussed Heidi's ideas with his long-time accountant, Otto Werner, but they decided it would involve a lot of effort setting standards for each of the company's products. The business seemed to be reasonably protable and costs appeared to be under control. In her second year at university, Heidi learned about activity-based costing and activitybased management. At about this time, the company experienced problems with sales of its mettwurst, described in the preceding case, and Heidi spent her summer vacation implementing an activity-based costing system. Initially, she used the system to cost products, but she also used the activity management dimension to identify and reduce the non-valueadded activities associated with the production of mettwurst. But she was still not completely happy with the company's information for planning and control. She had identied non-valueadded activities but she wanted to be sure that these were being eliminated as planned. Also, she wanted information to manage other critical aspects of performance for each activity, on an ongoing basis. Hans was not convinced. Only a year ago Heidi was insisting that he throw out the existing system and implement standard costing. Now she was brutal in her condemnation of standard costing and was insisting on masses of activity-based information. lth!' he said to himsei 'The impetuosity of youth knows no bounds, but nor does it understand that conservatism is the essence of good business: Required: 1. Identify the major weaknesses of the existing approach to planning and control at Schmidtke's Meat Pty Ltd. 2. If Hans had implemented a standard costing system, would it have given him a sound basis for planning and control? Explain your answer. {You may nd it useful to revisit Chapters 10 and 1 1 to help answer this question.) 3. What aspects of performance do you think Heidi would like to monitor at Schmidtke's Meat? Explain. 4. How could these requirements be met through activity-based management? 5. Identify a root cause cost driver for the activity 'dispose of substandard meat' and use the process {supplieri customer) perspective to suggest a suitable performance measure for the preceding activity 'inspect meat\". 6. When Hans hears that Heidi wants to measure several aspects of performance for each activity, he is horried. 'We will spend all our time measuring rather than making mettwurst!' How could Heidi's approach be simplied? 7. {Oniy attempt this question if you have compieted Chapter 14.) How does Heidi's proposal differ from the balanced scorecard approach to performance measurement described in Chapter 14