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Western Pants Western Pants Exhibit 1 Organization Chart: Western Pants Inc. President Executive Vice-Pres. VP VP VP VP Marketing Corporate Finance and Production Planning Accounting Operations Copyigh Basic Jeans Men's Men's Dress Women's Jeans Casuals and Fashion Jeans Distribution Traffic Dept. Dept. Dept Dept. Plants Jeans Dept. Dept. Dept. able to develop learning curves that tell us how long after a product switchover it will take production to reach the budgeted time per unit for the new style. We know the rate at which total production time per unit reaches the budgeted time for every basic style of pants that Western makes! We use this information for budgeting a plant's costs( The marketing staff figure out how many pants of each style it wants produced each year and passes that information on to us. We divvy up the total production among plants pretty much by eyeballing the total amounts for each style of pants. We like to put one plant to work for a whole year on one style of pants, if that's possible. It saves time losses from startups and changeovers. We can sell all we make, you know, so we like to keep plants working at peak efficiency. Unfortunately, marketing always manages to come up with a lot of midyear changes, so this objective winds up like a lot of other good intentions in life. You know what they say about the road to Hell! Anyhow, it's still a game plan we like to stick to, and two or three plants making the basic blue jeans accomplish it every year. The budgeting operation begins with me and my staff determining what a plant's quota for each month should be for one year ahead of time. We do this mostly by looking at what past performance at a plant has been. Of course, we add a little to this. We expect people to improve around here. These yearly budgets are updated at the end of each month in the light of the previ- ous month's production. Budget figures incidentally, are in units of production. If a plant manager beats this budget figure, we feel he's done well. If he can't meet the quota, his people haven't been working at what the engineers feel is a very reasonable level of speed and efficiency. Or possibly absenteeism, a big problem in all our plants, has been excessively high. Or turnover, another big problem, has been unacceptable high. At any rate when the quota hasn't been made, we want to know why, and we want to get the problem corrected as quickly as possible. Given the number of pants that a plant actually produces in a month, we can determine, by using the budgeted numbers I was boasting about earlier, the number of labor hours each operation should have accumulated during the month. We measure this figure against the hours we actually paid for to determine how a plant performed as a cost center. As you might guess, we don't like unfavorable variances here anymore than shortfalls in a plant manager's performance against quota. We watch the plant performance figures monthly. If a plant manager meets his quota and his cost variances are OK, we let him know that we are pleased. I almost always call them myself and relay my satisfaction, or, if they haven't done well, my concern. I think this kind of prompt feedback is important. We also look for other things in evaluating a plant manager. Has he or she maintained good community relations? Are his or her people happy? The family that owns almost all of Western's stock is very concerned about this." aki Riza Balci(bkblci@gmail.com) on 4/10/2020 authorized to use until 4/12/2020.Use beyond the authorized date represents copyright violation.Master Budget and Responsibility Accounting Case Western Pants Western Pants, Inc. is one of America's oldest clothing firms. Founded in the mid-nineteenth century, the firm successfully weathered lean years and the Great Depression largely as the result of the market durability of its dominant, and at times only, product-blue denim jeans. Until 1950, the firm had never seriously marketed other products or even additional types of trousers. A significant change in marketing strategy in the 1950s altered that course, which Western's management had revered for 100 years. Aggressive new managers decided at that time that Western's well-established name could and should be used to market other lines of pants. Consumers welcomed initial offerings in a men's casual trouser. The company produced different patterns of this basic style and stylish, tailored variations of the same casual motif almost yearly. Alert managerial planning in the early 1960s enabled Western to become the first pants manu- facturer to establish itself in the revolutionary "wash and wear" field. Further refinement of this pro- cess broadened the weave and fabric types that could be tailored into fashionable trousers and still survive enough machine wash and dry cycles to satisfy Western's rigid quality-control standards. With the advent of "mod" clothing and the generally casual yet stylish garb that became acceptable attire at semiformal affairs, pants became fashion attire, rather than the mere clothing staples they had been in years past. Western quickly gained a foothold in the bell-bottom and flare market, and from there grew with the "leg look" to its present position as the free world's largest clothing manufacturer. Today Western, in addition to its still remarkably popular blue denim jeans, offers a complete line of casual trousers, an extensive array of "dress and fashion jeans" for both men and boys, and a complete line of pants for women. Last year the firm sold approximately 70 million pairs of pants. Production on For the last twenty years, Western Pants has been in a somewhat unusual and enviable market position. In each of those years, it has sold virtually all its production and often had to begin ration- ing its clothing to established customers or refusing orders from new customers as early as six months prior to the close of the production year. Whereas most business ventures face limited demand and, in the long run, excess production, Western, whose sales have doubled each five years during that twenty year period, has had to face excess and growing demand with limited although rapidly growing production capacity. The firm has established 33 plants in its 150 year history. These production units vary some- what in output capacity, but the average is roughly 20,000 pairs of trousers per week. With the exception of two or three plants that usually produce only blue denim jeans during the entire production year, Western's plants produce various styles of pants for all of Western's departments (see Western Pants Exhibit 1). The firm has for some years augmented its own productive capacity by contractual agree- ments with independent manufacturers of pants. At the present time, there are nearly 20 such contractors producing all lines of Western's pants (including blue jeans). Last year, contractors produced about one-third of the total volume in units sold by Western. The Budgeting and Responsibility Accounting System "We treat all our plants pretty much as cost centers (see Western Pants Exhibit 1)," Mr. Wicks, Western's vice president for production and operations, commented. "Of course, we exercise no control whatever over the contractors. We just pay them the agreed price per pair of pants. Our own operations at each plant have been examined thoroughly by industrial engineers. You know, time-motion studies and all. We've updated this information consistently for over ten years. I'm quite proud of the way we've been able to tie our budgeted hours down. Over the years, we've even been Source: Horngren/Datar, CASES IN COST ACCOUNTING, (c) 1994. Printed and electronically repro- duced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey. Ici@gmail.com) on 4/10/2020 authorized to use until 4/12/2020. Use beyond the authorized userMaster Budget and Responsibility Accounting A Christmas bonus constitutes the meat of Western's reward system. Mr. Wicks and his two chief assistants subjectively rate a plant manager's performance for the year on a one to five scale. Western's top management at the close of each year determines a bonus base by evaluat ing the firms overall performance and profit for the year. That bonus base has recently been as high as $12,000. The performance rating for each member of Western's management team is multiplied by this bonus base to determine a given manager's bonus. Western's management group includes many finance and marketing specialists. The case writer noted that these personnel, who are located at the corporate headquarters, were con- sistently awarded higher ratings by their supervisors than were plant managers. This difference consistently approached a full point. Last year, the average rating in the corporate headquarters was 3.85; the average for plant managers was 2.92. Evaluation of the System Mia Packard, a recent accounting graduate, gave some informed opinions regarding Western's production operation and its budgeting procedures. "Mr. Wicks is one of the nicest men I've ever met, and a very intelligent businessman. But I really don't think that the system he uses to evaluate his plant managers is good for the firm as a whole. Not long ago, I made a plant visit as part of my company orientation program, and I accidentally discovered that the plant manager 'hoarded' some of the pants produced over quota in a good month to protect himself against future production deficiencies. That plant manager was really upset that I stumbled onto his storehouse. He insisted that all the other managers did the same thing and begged me not to tell Mr. Wicks. This seems like precisely the wrong kind of behavior in a firm that usually has to turn away orders! Yet I believe the quota system that is one of Western's tools for evaluating plant performance encourages this type of behavior. I don't think I could prove this, but I suspect that most plant managers aren't really pushing for maximum production. If they do increase out- put, their quotas are going to go up, and yet they won't receive any immediate monetary rewards to compensate for the increase in their responsibilities or requirements. If I were a plant manager, I wouldn't want my production exceeding quota until the end of the year. Also, Mr. Wicks came up to the vice presidency through the ranks. He was a plant man- ager himself once-a very good plant manager. But he has a tendency to feel that everyone should run a plant the way he did. For example, in Mr. Wick's plant there were eleven workers for every supervisor or member of the office and administrative staff. Since then, Mr. Wicks has elevated this supervision ratio to some sort of sacred index of leadership efficiency. All plant managers shoot for it, and as a result, usually understaff their offices. As a result, we can't get timely and accurate reports from plants. There simply aren't enough people in the offices out there to generate the information we desperately need when we need it. Another thing-some of the plants have been built in the last five years or so and have much newer equipment, yet there's no difference in the budgeted hours calculated for these plants and the older ones. This puts the managers of older plants at a terrific disadvantage. Their sewing machines break down more often, require maintenance, and probably aren't as easy to work with." Required 1. Describe the steps and the process of developing cost budgets for operations within a plant at Western Pants? 2. For what purposes do managers at Western Pants use budgets? 3. With respect to plant operations, what decisions are made by headquarters and what decisions are made by plant managers? Do you regard plant managers as cost centers or profit centers? 4. What problems at the plants result from the budgeting system and why? 5. What changes in Western's budgeting and responsibility accounting system would you recommend
