Review the following case study:

Tim Emery and Jim Morrison strolled back to their plant from the administrative offices of JJ & Sons Manufacturing Company. Tim is manager of the machine shop in the companys factory; Jim is manager of the equipment maintenance department.

The men had just attended the monthly performance evaluation meeting for plant department heads. These meetings had been held on the third Tuesday of each month since James Jones Jr., the presidents son, had become plant manager a year earlier.

As they were walking, Tim Emery spoke: Boy, I hate those meetings! I never know whether my departments accounting reports will show good or bad performance. Im beginning to expect the worst. If the accountants say I saved the company a dollar, Im called Sir, but if I spend even a little too muchboy, do I get in trouble. I dont know if I can hold on until I retire.

Tim had just been given the worst evaluation he had ever received in his long career with JJ & Sons. He was the most respected of the experienced machinists in the company. He had been with JJ & Sons for many years and was promoted to supervisor of the machine shop when the company expanded and moved to its present location. The president (James Jones Sr.) often stated the companys success was due to the high-quality work of machinists like Tim. As supervisor, Tim stressed the importance of craftsmanship and told his workers he wanted no sloppy work coming from his department.

When James Jones Jr. became the plant manager, he required monthly performance comparisons between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and seek cost reduction opportunities. The company controller was instructed to have his staff tighten the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the plant managers desire to reduce costs. The young plant manager often stressed the importance of continued progress toward attaining the budget; he also made it known that he kept a file of these performance reports for future reference when he succeeded his father.

Tim Emerys conversation with Jim Morrison continued as follows:

Emery: I really dont understand. Weve worked so hard to meet the budget, and the minute we do so, they tighten it on us. We cant work any faster and still maintain quality. I think my men are ready to quit trying. Besides, those reports dont tell the whole story. We always seem to be interrupting the big jobs for all those small rush orders. All that setup and machine adjustment time is killing us. And quite frankly, Jim, you were no help. When our hydraulic press broke down last month, your people were nowhere to be found. We had to take it apart ourselves and got stuck with all that idle time.

Morrison: Im sorry about that, Tim, but you know my department has had trouble making budget, too. We were running well behind at the time of that problem, and if wed spent a day on that old machine, we would never have made it up. Instead, we made the scheduled inspections of the forklift trucks because we knew we could do those in less than the budgeted time.

Emery: Well, Jim, at least you have some options. Im locked into what the scheduling department assigns to me, and you know theyre being harassed by sales for those special orders. Incidentally, why didnt your report show all the supplies you guys wasted last month when you were working in Bills department?

Morrison: Were not out of the woods on that deal yet. We charged the maximum we could to other work and havent even reported some of it yet.

Emery: Well, Im glad you have a way of getting out of the pressure. The accountants seem to know everything happening in my department, sometimes even before I do. I thought all that budget and accounting stuff was supposed to help, but it just gets me into trouble. Its all a big pain. Im trying to put out quality work; theyre trying to save pennies.

Answer the following questions:

1. Identify the problems with JJ & Sons Manufacturing Companys budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.
2. Explain how JJ & Sons Manufacturing Companys budgetary control system could be revised to improve its effectiveness.