VERSHIRE COMPANY

Group Case Report

Presented as a Requirement for Management Control System Course

Lecturer :
Ertambang Nahartyo, Ph.D., CA, CMA

Written by:

Group 6
Bimo Reisnanda P (397161)
Tri Widyastuti W (408244)
Anjar Respati Adityo (415850)
M Rasyid Ramadhan (415858)

INTERNATIONAL UNDERGRADUATE PROGRAM

FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITAS GADJAH MADA
YOGYAKARTA

I. Problem Identification
In Vershire Company, once the budget has been decided, it will be difficult to make revisions. If
there are problems in carrying out the activity, the company assumes that the problem will be
solved by the parties directly related. In terms of incentives, Vershire only considers the
performance of division managers who succeed in achieving budget targets. Thus, division
managers are competing to achieve the highest financial performance possible.

In any case, if clients' expectations for cost, quality, and service are not met, they can buy from
another manufacturer. Which indicates that it is important for Vershire to keep tight control over
their plants, budgets, and execution as far as productivity and viability. The major concern right
now faced by Vershire Company is that each plant inside the division is being treated as a profit
centre, as opposed to an engineered expense centre. As a manufacturing plant, in which outputs
produces are a quantifiable term of units manufactured, there is a need to concentrate on costs
instead of profit. This error in classification is the base of numerous other control, communication,
and performance measurements issues.

II. Questions and Answers

1. Outline the strengths and weaknesses of Vershire Company’s planning and control
system
When developing a budget or anticipating future performance, it is important to have an
organized procedure in place. At a high level, Vershire utilizes a planning and control
system that has strengths and weaknesses, which are:
Strength :
● There is an inspection from the company to the factories directly, which is
an action that reflects the attention of superiors to his subordinates. The
workers might be delighted if they get direct attention from their superiors.
● A rigid budget, in the sense that once the budget has been approved, it will
be difficult to revise the budget, it is considered as an advantage. That way
the company can run according to plan. However, because the budget is
difficult to change, the budget should be prepared as relevant as possible to
the conditions of the company and the environment during the year.
Weakness :
● Budgets (especially budgets for Manufacturing) are based on budgets
submitted by other parties. Thus the budget becomes irrelevant to the
condition of the division.
● Weak incentive system. Only measured by the success of the division in
meeting the profit targets stated in the budget. This incentive is also given
only to a few people so it does not motivate lower-level employees to work
better.
● The system of budget convolution is convoluted and too long (prepared
from May and only approved in December).

2. Trace the profit budgeting process at Vershire, starting in May and ending with the
Board of Directors’ meeting in December. Be prepared to describe the activities that
took place at each step of the process and present the rationale for each.
In May, preliminary report summarizing outlooks of sales, income, and capital
requirements for the next budget year were submitted by each divisional general managers
 to the corporate management, together with evaluation of anticipated trends over the next
two years in general terms. Divisional GMs have a better knowledge over its own region,
so they are in a better position to do so. After the report is submitted, the HQs’ central
market research staff develop a more formal market assessment and examine in detail the
next year’s budget and the following two years in general. Each division’s sales forecast
were then prepared and combined as a forecast for the entire company, accompanied by
fundamental assumptions and expectations about the economy and markets to anticipate
better the uncertainties. These forecasts were prepared centrally to ensure uniformity of
assumptions and that overall corporate sales forecasts are reasonable and achievable.
After the forecasts were completed, they were forwarded back to divisional GMs to be
reviewed, who then compiled its own sales forecasts bottom-up; they ask each district sales
managers for next budget year’s sales estimation, as they know better about it. These were
then consolidated at the division level to be reviewed by the VP of marketing, which has a
broader view of the sales. No changes would be made in the forecasts without the consent
of district manager. This process was also apparent at the corporate level to ensure
alignment with corporate strategy and objectives. When all responsible parties were
satisfied with the sales budget, it became fixed objectives..
After it is approved, the overall sales budget were broken down for each plant according
to the plants from which the finished goods would be shipped, as it would be the main
source of plant’s revenue. The plant manager then categorize the sales budget into price,
volume, and end use. After sales estimation, gross profits and pretax income would be
budgeted, which will eventually made up the budgeted profit. The plant manager was held
responsible for the budgeted profit number to prevent presumptuous budget. Plant’s
industrial engineering department developed cost standards and cost reduction targets to
assure efficiency and the cost to be consistent throughout the plant. Head office controller
staff visited each of the plants before the plant budgets were submitted to do walkthrough,
which allows them to be familiar with the situation in the plant and the reasoning behind
the numbers, before they present it to the corporate management. Besides that, the
controller staff also ensure that the budgeted profits align with corporate goals and
reinforce that the HQ supervise and communicate with the plant.
On September 1 or before, plant budgets were submitted to the division head office, which
then consolidated and presented to the divisional GM to be reviewed. If it is not aligned
with management’s expectations, revision, particularly on savings, will be demanded from
the plant manager, as they know best how to improve it. Once the divisional GM is
satisfied, the budget is sent to the CEO to be approved, or request certain modifications.
The final consolidated budget was submitted for approval in December at the Board of
Directors meeting.

3. Should the plant managers be held responsible for profits? Why? Why not?
As profit is the amount of revenue that exceeds expenses, therefore, plant managers should
be responsible only for the measures that they can directly control, which are the expenses
that include direct materials, direct labor, variable manufacturing, and fixed overhead
budget. Even though it is stated that the plant manager was held responsible for the
budgeted profit number even if actual sales fell below the projected level, but sales
department has exclusive responsibility for the price, sales mix, and delivery schedules and
each of these components can have a direct impact on profitability, specifically on revenue.
 Any difference in opinions between sales and production is always favored with the sales
department as Vershire wants to satisfy the customer since they can easily switch to a
competitor. This reduces the plant manager’s ability to maintain control over profitability
in the plant since production can be disrupted by the sales manager and hurt the efficiency
of outputs which results in higher costs.

4. How do you assess the performance evaluation system contained in Exhibits 2 and 3?
Exhibit 2 focuses on net profit which is the effect of sales and expenses. It also includes
variances of sales price, sales mix, and sales volume. Therefore, these items are the sales
department's responsibility, making the plant manager to not have direct control. Vershire
company fails to evaluate both efficiency and effectiveness because it uses profit in
evaluating these two components instead of using quantity produced. As plant managers
cannot control sales, these variances then become irrelevant. Overall, the performance
evaluators contained within Exhibit 2 do not accurately measure the effectiveness or
efficiency of the aluminum can manufacturing plants.
Exhibit 3 gives a more detailed analysis of the variances in Exhibit 2. The division level
reports focus on net sales, including price and mix changes, as well as gross margin. Even
though net sales are controlled by both sales and costs, plant managers only have the ability
to control costs, hence, these reports also lack relevance in terms of evaluating their
performance. By using these performance evaluators to assess the plant managers’
performance in each plant, they are penalizing them for the shortfalls of the sales
department and its inability to sell what is produced.

5. On balance, would you redesign the management control structure at Vershire

Company? If so, how and why?
Yes, More communication and meetings between HQ and divisional management. This
upgrade exchange of ideas and improvement between division general manager and
corporate HQ. Improve comparisons of manufacturing efficiency between division and
plants. This improvement to efficiency to the company's bottom line.

III. Conclusion
Vershire company is already in right turn on by using bottom-up management system because
lower management can observe the regional condition better rather than upper management,
although there are going to be some improvement on the systems such as which has been suggested
in previous question. Such systems which focus on financial performance which might lead to
generalization of information from department management and give miss taken information
towards upper management, which might lead to wrong decision making in director level.