M Corporation, a small privately owned company, manufactures a particular spare part (part X) for lathe machines. The company has been very successful in the past, mainly due to the quality of its product.Spare part X is machine-made, and the quality of the product is largely dependent on the craftsmanship of the machinists. M Corporation was started and is majority owned by Mr. Goodman, who recently resigned from his position as the CEO. At the beginning of this year, Mr. Goodman was replaced by Mike Boss, a complete outsider. Mike has a degree in mechanical engineering and an MBA, and most of his prior experiences were in manufacturing. Mr. Goodman has an accounting/finance background, and as a result, during his tenure, he was in charge of those functions in addition to being the CEO. Mike has been handling the budgeting process of the company since he joined. He prepares all subcomponents of the master budget, except for the sales budget. He does this with little or no input from the relevant departmental managers.Human resources and payroll functions of the company have been outsourced.

The key employees of M Corporation and selected information pertaining to each is as follows:

Tom Selling is the sales manager. He is responsible for setting the selling price and preparing the sales budget. His performance bonus is tied to meeting the annual sales budget targets.

Bob Maker is the production manager. He is responsible for production operations and costs. Bob's performance bonus is tied to meeting the budgeted production cost.

Jim Buyer is the purchasing manager and is responsible for all purchasing-related activities. Jim's performance-based bonus is tied to the direct materials purchases budget.

Matt Shipping is in charge of the outbound logistics and customer service. His performance bonus is also based on his annual performance review conducted by Mike.

As the owner, Mr. Goodman is concerned about the direction the company is heading, and he hired you as an out-side consultant to review the company's overall operations and make recommendations.

Yesterday (assume it was Wednesday, March 21, 2018), you attended the monthly performance review meeting, which was conducted to review February operations. Mike Boss, whose primary goal is cost reduction, started conducting monthly performance review meetings as soon as he joined the company. These meetings are held on the third Wednesday of each month, (to review the performance of the previous month). The primary purpose of these meetings is to compare the actual costs with the budgeted costs for every department. Whenever a department attained its budget in a given month, Mike Boss "tightened" the monthly budget numbers for the future months.

Yesterday's performance meeting was chaotic. Bob Maker was under fire for not being able to meet the budgeted production cost (See below for the performance report that Mike Boss used to evaluate the production department).

Production Department

February Performance Report

Budget

Actual

Variance

Production Volume (units)

6,400

7,100

Labor cost ($)¹

51,970

68,227

16,257 U

Material Cost ($)

200,000

248,000

48,000 U

Other Supplies Cost ($)²

22,250

24,100

1,850 U

Overhead cost ($)³

62,030

82,340

20,310 U

Total Cost

336,250

422,667

86,417U

¹Labor cost (both budgeted and actual) include a fixed salary of $2,050. All other labor costs are variable.

²Other supplies cost varies with the number of units produced

³The budgeted overhead cost includes $20,000 fixed cost related to rent, depreciation, and machine leasing costs. The remainder of the overhead cost is variable.

Maker was also under fire for not being able to produce sufficient Part Xs to meet the actual demand. Defending the production department, Maker accused Selling of not providing him with a realistic sales budget to plan production activity. According to Maker, the actual demand for the product was much higher than the budgeted sales volume in the sales budget, and Selling had enough information to predict the demand. In order to accommodate the unplanned demand, Buyer had to rush-order some materials and expedite delivery.Maker also had to pay overtime for his hourly employees in order to meet the excess production needs. In addition, Maker and Selling ignored company's ending inventory policy and sold every unit they had in February. Mike Boss approved all decisions related to meeting the unplanned demand. Company's inventory policy (for both materials and finished goods) is to maintain inventories equal to 30% of its budgeted sales volume for the following month.

Adding to Maker's frustration, during the meeting, Mike also announced the termination of Peter Skill, an experienced machinist. The reason was that "Skill's productivity is below expectation". Peter Skill had been with the company for a long time and has won many internal awards for the quality of his craftsmanship.

After yesterday's meeting. Mr. Goodman himself has prepared the following revised sales budget for the next three months.

March

April

May

Sales (units)

7,000

5,000

8,000

Sales ($)

420,000

300,000

860,000

As the consultant, you have been asked to provide answers to the following questions:

1. Was it reasonable for the production manager (Bob Maker) to receive all the blame for not meeting the targets for the monthly production cost?List two (2) reasons to justify your answer. Your reasons should be exclusively based on the information provided above.

6 points

1. Help with a revised performance report that is suitable for performance measurement of the production department for February.

10 points

1. Using the revised performance report you prepared, briefly comment on the performance of the production department in February.

2 points

1. List three (3) budgeting and performance measurement related problems that you can identify in this company (strictly based on the information provided). For each problem you identified, provide one suggestion to overcome the problem. (suggestion should match the problem)

9 points

1. Based on the revised sales budget and the other information available, calculate the number of units that the company should produce in March and April. (Assume that they will adhere to the ending inventory policy in March and April)