TCG033 Barrington Products, Inc. 2 of 4 The divisions had considerable autonomy. Each was headed by a division general manager (DGM), who was also a vice president of the company. Each division also maintained its own ac- counting records, and submitted a balance sheet and income statement to corporate headquarters once a month. The corporate staff was responsible only for helping the divisions when needed and for coordi- nating various activities. The corporate accounting department prescribed the company's account- ing systems, maintained the central office accounting records, consolidated all of the accounts, and published a companywide balance sheet and income statement each month. THE MANAGEMENT CONTROL SYSTEM In early December, based on individual division forecasts, the corporate staff prepared an esti- mate of annual sales. Each DGM reviewed this estimate, and occasionally made modifications. The corporate staff consolidated the approved estimates, and sent the summary to Mr. Baum for ap- proval. Although he could send the estimates back for reworking, he had never done so, and usually approved them without question. In mid-December, based on the approved sales volume figures, each division prepared a profit budget for the upcoming year. This budget was based on standard costs for material and direct la- bor, and standard overhead rates based on machine hours. Once the DGMs had completed these budgets, they met with Mr. Baum and several corporate staff to present them. During the meeting, each DGM needed to explain any differences from the current year's actual performance. Following this meeting, Mr. Baum either approved the budget, adjusted it slightly, or sent it back to be reworked. Following final approval by Mr. Baum, the corporate controller's office com- bined all the budgets into a companywide profit budget, which was presented to the company's board of directors in late December for final approval. Although the board could call for a change in previously approved budgets if the total company profits were not satisfactory, it had never done So. Following final approval by the board, the budget became the basis for evaluating the division's performance. Historically, DGMS had not been paid bonuses based on meeting or exceeding budg- eted profits, but Mr. Baum was contemplating doing so. Monthly Reports By the 12th working day of each month, each division prepared a financial performance report showing actual profits for the prior month, compared to budget. Exhibit 2 is an example of this re- port for the Cotton Textiles Division. The corporate budget department reviewed this report, made any needed corrections, and dis- tributed copies to the president and the board. The department also prepared a brief analysis of each report, indicating points that should be brought to the board's and senior management's attention. In addition, the department prepared a "Company Profit Budget Report"(a consolidation of the five operating divisions) which it sent to Mr. Baum and the board. Mr. Baum's Views During his meeting with Mr. Carroll, Mr. Baum expressed considerable dissatisfaction with the management control system: Your monthly reports are just about worthless to me, Lew. For one thing, we can't budget sales reve- nues very accurately, so all the reports show large revenue variances. But what do I do about them? Ei- ther volume has been higher or lower than budget or prices have gone up or down. Also, once a division starts having problems with sales or prices, it might need several months to fix the problem. The divi- sion might have to change its product line, wait until competitors get tired of losing money and raise prices, or wait until the economy improves. In other words, I look at the report and say "so what? Another thing-I really get no surprises from the reports because I know when something has hap- pened long before I get the report. I get weekly sales reports from each division and I can easily see which divisions are having trouble with volume or prices. Costs don't usually vary much from month to month. The few times that our costs have gone up temporarily, I've known it almost immediately. What I need is a report that will tell me what's going to happen, not one that tells me what I've known for several weeks. TCG033 Barrington Products, Inc. 3 of 4 There's a third thing that bothers me. I know for a fact that John Bennett (the DGM of Artificial Leather) has been doing a poor job with that division this year, even though his financial performance is the best of the five divisions. Because of quality problems, he lost our best customers in the furniture business. Yet, because automobiles are selling far better than we anticipated, he shows a large favorable sales volume variance. On the other hand, my most capable manager shows the poorest financial per- formance. There you are, Lew-three complaints. I can't do anything with the reports: they contain no impor- tant information that I didn't already know; and they don't reflect the true performance of the mangers. I had hoped to use the results of this system as a basis for paying bonuses to the managers, but, as you can see, I can't do this now. So, you'll have to do something about these complaints or discontinue the whole system. As it is now, it may have been all right for IP but it's no good for us. Assignment 1. You are an investor looking for a company with an after-tax return of at least 15 percent. Is Barrington Prod- ucts, Inc. such a company? How do you know? 2. What kind of responsibility center is a division at BPI? How do you know? Is the responsibility center design a good one? Why or why not? 3. Exhibit 2 shows negative variances for Sales volume, raw material usage, and advertising and sales promotion during the month of April. What is a plausible explanation for each negative variance? 4. Why might the most capable DGM show the poorest financial performance? Why might a DGM who is doing a poor job show good financial performance? Please be specific about this matter for the Cotton Textiles Divi- sion. What additional information would you like to have to assist you in your assessment of this division's performance? 5. What changes should be made to the management control system to make it more responsive to Mr. Baum's concerns and BPI's needs. TCG033 Barrington Products, Inc. BARRINGTON PRODUCTS, INC. Exhibit 1. Last Year's Sales and Profit ($000) Sales Profit Margin % Cotton textiles $42,581 $463 1.1 Knitted goods 27,862 4.068 14.6 Artificial fiber 13,733 716 5.2 Woolen goods 10,429 (28) n.a. Artificial leather 5.216 1,582 30.0 Total $99,821 $6,801 6.8 Income tax Net income 3,400 $3,401 3.4 4 of 4 Exhibit 2. Profit Budget Performance Report for the Cotton Textiles Division (1) For the Month of April ($000) April Year-to date Actual profit $(12) $(43) Budgeted profit 42 150 Actual over/(under) budget (54) (193) Analysis of variances (2) Revenue items: Sales volume $(65) $(240) Selling prices 15 (25) product mix 2 10 Expense items: Material prices 4 10 Material usage (3) 6 Direct labor 10 45 Variable overhead 5 30 Advertising and sales promotion (16) (35) Other selling (1) (9) Administration (5) 15 Total S(54) $(193) Notes: (1) This exhibit was backed up with schedules showing the details of the variance and explanations of the reasons for the va The explanations were provided by the various operating executives responsible for these variances. (2) Unfavorable is shown in parentheses (). HBSP Product Number TCG033 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Barrington Products, Inc. Let's face it, Lew. Our new management control system is in trouble. As far as I can tell, Frank [Baum, Barrington's president] doesn't use the reports in any meaningful way. In fact, he told me this afternoon that he finds the reports useless. He said that the variances from budget always seem to be large but there's always a good explanation. More importantly, Frank says that some divisions are showing favor- able variances when he knows they're doing a poor job! Hank Andersen, Controller of Barrington Products Inc. (BPI), was speaking to Lew Carroll, one of his deputies. Mr. Carroll had come to BPI three years before, from a large industrial com- pany where he had been a budget analyst in one of the divisions. He was responsible for develop- ing and installing the present management control system. The system had gone into effect 18 months ago, and for the first year, it was considered experimental. About four months ago, it had become fully operational, and now Mr. Baum was questioning its utility. Mr. Andersen evidently was agreeing, leaving Mr. Carroll confused: I don't understand, Hank. The system is like the one I used at IP [Industrial Products] and it worked really well there. If a manager deviated from the budget, he or she had to have a really good explanation, and, even then, there were consequences. Mr. Andersen responded: Well, it may have worked at IP, but it isn't working here. I'll arrange for you to talk with Frank about it. Then, I want you to figure out how to make the system work better. BACKGROUND Barrington Products, Inc. began during World War II as a family-owned manufacturer of cot- ton textiles for the military. The original plant was located in the town of Barrington in western Massachusetts. A few years after the war, the family sold the company. The new owners renovated the Barrington plant, built a knitting plant nearby, and purchased a woolen plant. By 1970 Barring- ton's annual profit after taxes was $3 million on a sales of about $28 million. During the next ten years, sales increased but profits declined. Some 20 years ago, the owners appointed Mr. Baum, who had a reputation as a no-nonsense manager skilled at turnarounds, as CEO. Under his leadership, sales in the three core divisions (cotton, knitted goods, and woolens) grew. Ten years later, the company added two new divisions: artificial fiber products and artificial leather. By this time, Barrington's sales were approaching $100 million a year. However, as Exhibit 1 shows, after tax profits still were only about $3 million. Products Each division manufactured its products in its own plant and had its own marketing and sales staff. Cotton Textiles produced printed and unprinted fabrics and sold them to clothing manufac- turers. Knitted Goods produced knitted fabrics and converted them into clothes, which it sold di- rectly to department stores. Over 50 percent of the production was in women's clothes, which were style items and seasonal. Woolen Goods produced woolen cloth of various types, dyed it, and sold it to clothing manufacturers. Artificial Fibers (dacron and nylon) manufactured clothing, which it sold directly to large department stores. Artificial Leather produced fabric for automobile and furni- ture upholstery, which it sold directly to manufacturers. This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illus- trate either effective or ineffective handling of an administrative situation. Copyright 2014 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and interna- tional copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org)