Case scenario: Pacific Manufacturers Company (PMC) Ltd

The Company is manufacturer of consumer electrical goods (fridges, freezers, washing machines, and similar white - goods products). The company produces all the parts for its products in five separate divisions. Those parts are then transferred to three assembly divisions and the finished goods are finally transferred to the sales division.

Each division is controlled by a manager. Budgets for the division are set annually based on a percentage increased on the previous year; this budget setting process appears to be appropriate because managers always spend between 95% and 102% of their budget each year, with increased spending towards the year end.

Budgets are normally imposed by senior management. Surprisingly, there is little dissent from lower level managers. However, senior management are aware that divisional managers share data on a regular basis.

Transfer prices between the divisions are also set by senior management again without consultation with the divisional managers. This does result in some problems, normally when manufacturing divisions have to stop production and the assembly divisions purchase supplies from third parties.

Adapted from: BPPs Learning Media Ltd 20i4.