Acct 505 Week 4 Paper

Tom Emory and Jim Morris strolled back to their plant from the administrative offices of the Ferguson & Son Mfg. Company. Tom is the manger of the machine shop in the company’s factory. Jim is the 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 Robert Ferguson, Jr., the president’s son, had become the plant manager a year earlier. As they were walking, Tom Emory spoke. “Boy, I hate those meetings! I never know whether my department’s accounting reports will show or bad performance. I am beginning to expect the worst. If the accountants said I saved the company a dollar, I’m called
The success of the company depends on how well the planning is done. In this process the budgeted figures are compared with the actual figure. It seems that the fixed budgeted figures are compared with the actual budget without flexing it. Therefore there is a problem with the company’s employee. It seems that the focus is on the dollar amount not on the volume of the goods is being produced. For example, the company has set target of 2000 units with fixed cost of $20000 and variable cost of $60000. It means that the total budgeted cost is $80000. It is compared with the actual figures without looking at the volume. Now suppose that the actual cost incurred is $90000 and the volume is 2500 units. If $90000 is compared with $80000, it looks that the spending is more by $10000, which is wrong. Because the actual cost should have been spent for 2500 units is $20000 fixed and $75000 for variable, therefore the flexible budget for actual volume should be $95000. Now compare it with $90000, which shows there is saving of $5000 not overspending of $10000. It means that overspending always is not a bad
Explain how Ferguson & Son Mfg. Company’s budgetary control system could be revised to improve its effectiveness

The company should compare the actual figures with the flexible budget not the static budget. Company should also take into consideration the work to be done in future. The company should also revise its estimate, if the estimate is for less work to be done the budget will be on the lower side, but if the work is according to the capacity of the company then the budget will be reasonable, which will not create problem for departmental head to work more when their budgets have been attained, if they would have been made on unrealistic estimate.

The company may also use standard cost technique for control purpose, they set standard for each activity and then multiply that standard rate with actual activity carried on to compare with actual cost in dollars incurred. For example, the standard cost to produce one unit is $20 per unit and the company produces 5000 units, the standard cost allowed for actual production is $100000, then it should be compared with the actual cost incurred, it the cost incurred is $90000, it means the company has saved $10000 and if it is $105000, it shows overspending of