PhD Doctorate

CASE 8–30 Evaluating a Company’s Budget Procedures [LO8–1]

Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company’s 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 Robert Ferguson, Jr., the president’s son, had become 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 good or bad performance. I’m beginning to expect the worst. If the accountants say I saved the company a dollar, I’m called ‘Sir,’ but if I spend even a little too much—boy, do I get in trouble. I don’t know if I can hold on until I retire.”

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

When Robert Ferguson, Jr., became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and to 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 manager’s 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.

Tom Emory’s conversation with Jim Morris continued as follows:

Emory: 

I really don’t understand. We’ve worked so hard to meet the budget, and the minute we do so they tighten it on us. We can’t work any faster and still maintain quality. I think my men are ready to quit trying. Besides, those reports don’t 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.

Page 390

Morris: 

I’m sorry about that, Tom, but you know my department has had trouble making budget, too. We were running well behind at the time of that problem, and if we’d 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.

Emory: 

Well, Jim, at least you have some options. I’m locked into what the scheduling department assigns to me and you know they’re being harassed by sales for those special orders. Incidentally, why didn’t your report show all the supplies you guys wasted last month when you were working in Bill’s department?

Morris: 

We’re not out of the woods on that deal yet. We charged the maximum we could to other work and haven’t even reported some of it yet.

Emory: 

Well, I’m glad you have a way of getting out of the pressure. The accountants seem to know everything that’s 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. It’s all a big pain. I’m trying to put out quality work; they’re trying to save pennies.

Required:

1. Identify the problems that appear to exist in Ferguson & Son Manufacturing Company’s budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.

2. Explain how Ferguson & Son Manufacturing Company’s budgetary control system could be revised to improve its effectiveness.

 

 

 

 

 

 

 

 

CASE 11–23 Balanced Scorecard [LO11–4]

 

Haglund Department Store is located in the downtown area of a small city. While the store had been profitable for many years, it is facing increasing competition from large national chains that have set up stores on the outskirts of the city. Recently the downtown area has been undergoing revitalization, and the owners of Haglund Department Store are somewhat optimistic that profitability can be restored.

In an attempt to accelerate the return to profitability, management of Haglund Department Store is in the process of designing a balanced scorecard for the company. Management believes the company should focus on two key problems. First, customers are taking longer and longer to pay the bills they incur using the department store’s charge card, and the company has far more bad debts than are normal for the industry. If this problem were solved, the company would have more cash to make much needed renovations. Investigation has revealed that much of the problem with late payments and unpaid bills results from customers disputing incorrect charges on their bills. These incorrect charges usually occur because salesclerks incorrectly enter data on the charge account slip. Second, the company has been incurring large losses on unsold seasonal apparel. Such items are ordinarily resold at a loss to discount stores that specialize in such distress items.

The meeting in which the balanced scorecard approach was discussed was disorganized and ineffectively led—possibly because no one other than one of the vice presidents had read anything about how to build a balanced scorecard. Nevertheless, a number of potential performance measures were suggested by various managers. These potential performance measures are:

a. Percentage of charge account bills containing errors.

b. Percentage of salesclerks trained to correctly enter data on charge account slips.

c. Average age of accounts receivables.

d. Profit per employee.

e. Customer satisfaction with accuracy of charge account bills from monthly customer survey.

f. Total sales revenue.

g. Sales per employee.

h. Travel expenses for buyers for trips to fashion shows.

i. Unsold inventory at the end of the season as a percentage of total cost of sales.

j. Courtesy shown by junior staff members to senior staff members based on surveys of senior staff.

k. Percentage of suppliers making just-in-time deliveries.

l. Sales per square foot of floor space.

m. Written-off accounts receivable (bad debts) as a percentage of sales.

n. Quality of food in the staff cafeteria based on staff surveys.

o. Percentage of employees who have attended the city’s cultural diversity workshop.

p. Total profit.

Required:

1. As someone with more knowledge of the balanced scorecard than almost anyone else in the company, you have been asked to build an integrated balanced scorecard. In your scorecard, use only performance measures listed previously. You do not have to use all of the performance measures suggested by the managers, but you should build a balanced scorecard that reveals a strategy for dealing with the problems with accounts receivable and with unsold merchandise. Construct the balanced scorecard following the format used in Exhibit 11-5. Do not be concerned with whether a specific performance measure falls within the learning and growth, internal business process, customer, or financial perspective. However, use arrows to show the causal links between performance measures within your balanced scorecard and explain whether the performance measures should show increases or decreases.

Page 512

2. Assume that the company adopts your balanced scorecard. After operating for a year, some performance measures show improvements, but not others. What should management do next?

3.

a. Suppose that customers express greater satisfaction with the accuracy of their charge account bills but the performance measures for the average age of accounts receivable and for bad debts do not improve. Explain why this might happen.

b. Suppose that the performance measures for the average age of accounts receivable, bad debts, and unsold inventory improve, but total profits do not. Explain why this might happen. Assume in your answer that the explanation lies within the company.

 

 

 

CASE 12–30 Ethics and the Manager; Shut Down or Continue Operations [LO12–2]

  

Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to BSC, which records the data on each check in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made between banks. The Rocky Mountain Region has three check processing centers, which are located in Billings, Montana; Great Falls, Montana; and Clayton, Idaho. Prior to her promotion to vice president, Ms. Romeros had been the manager of a check processing center in New Jersey.

Immediately after assuming her new position, Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region’s controller, John Littlebear. Ms. Romeros specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report follows:

 d 

Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation.

Romeros: 

What’s the story on Clayton? It didn’t have a loss the previous year did it?

Littlebear: 

No, the Clayton facility has had a nice profit every year since it was opened six years ago, but Clayton lost a big contract this year.

Romeros: 

Why?

Littlebear: 

One of our national competitors entered the local market and bid very aggressively on the contract. We couldn’t afford to meet the bid. Clayton’s costs—particularly their facility expenses—are just too high. When Clayton lost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Clayton facility.

Romeros: 

Why is Clayton’s facility expense so high? It’s a smaller facility than either Billings or Great Falls and yet its facility expense is higher.

Littlebear: 

The problem is that we are able to rent suitable facilities very cheaply at Billings and Great Falls. No such facilities were available at Clayton; we had them built. Unfortunately, there were big cost overruns. The contractor we hired was inexperienced at this kind of work and in fact went bankrupt before the project was completed. After hiring another contractor to finish the work, we were way over budget. The large depreciation charges on the facility didn’t matter at first because we didn’t have much competition at the time and could charge premium prices.

Romeros: 

Well we can’t do that anymore. The Clayton facility will obviously have to be shut down. Its business can be shifted to the other two check processing centers in the region.

Littlebear: 

I would advise against that. The $1,200,000 in depreciation at the Clayton facility is misleading. That facility should last indefinitely with proper maintenance. And it has no resale value; there is no other commercial activity around Clayton.

Romeros: 

What about the other costs at Clayton?

Page 579

Littlebear: 

If we shifted Clayton’s business over to the other two processing centers in the region, we wouldn’t save anything on direct labor or variable overhead costs. We might save $90,000 or so in local administrative expense, but we would not save any regional administrative expense and corporate headquarters would still charge us 9.5% of our sales as corporate administrative expense.

 

In addition, we would have to rent more space in Billings and Great Falls in order to handle the work transferred from Clayton; that would probably cost us at least $600,000 a year. And don’t forget that it will cost us something to move the equipment from Clayton to Billings and Great Falls. And the move will disrupt service to customers.

Romeros: 

I understand all of that, but a money-losing processing center on my performance report is completely unacceptable.

Littlebear: 

And if you shut down Clayton, you are going to throw some loyal employees out of work.

Romeros: 

That’s unfortunate, but we have to face hard business realities.

Littlebear: 

And you would have to write off the investment in the facilities at Clayton.

Romeros: 

I can explain a write-off to corporate headquarters; hiring an inexperienced contractor to build the Clayton facility was my predecessor’s mistake. But they’ll have my head at headquarters if I show operating losses every year at one of my processing centers. Clayton has to go. At the next corporate board meeting, I am going to recommend that the Clayton facility be closed.

Required:

1. From the standpoint of the company as a whole, should the Clayton processing center be shut down and its work redistributed to other processing centers in the region? Explain.

2. Do you think Haley Romeros’s decision to shut down the Clayton facility is ethical? Explain.

3. What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services?

CASE 8–30 Evaluating a Company’s Budget Procedures [LO8–1]

Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company’s 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 Robert Ferguson, Jr., the president’s son, had become 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 good or bad performance. I’m beginning to expect the worst. If the accountants say I saved the company a dollar, I’m called ‘Sir,’ but if I spend even a little too much—boy, do I get in trouble. I don’t know if I can hold on until I retire.”

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

When Robert Ferguson, Jr., became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and to 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 manager’s 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.

Tom Emory’s conversation with Jim Morris continued as follows:

Emory: 

I really don’t understand. We’ve worked so hard to meet the budget, and the minute we do so they tighten it on us. We can’t work any faster and still maintain quality. I think my men are ready to quit trying. Besides, those reports don’t 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.

Page 390

Morris: 

I’m sorry about that, Tom, but you know my department has had trouble making budget, too. We were running well behind at the time of that problem, and if we’d 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.

Emory: 

Well, Jim, at least you have some options. I’m locked into what the scheduling department assigns to me and you know they’re being harassed by sales for those special orders. Incidentally, why didn’t your report show all the supplies you guys wasted last month when you were working in Bill’s department?

Morris: 

We’re not out of the woods on that deal yet. We charged the maximum we could to other work and haven’t even reported some of it yet.

Emory: 

Well, I’m glad you have a way of getting out of the pressure. The accountants seem to know everything that’s 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. It’s all a big pain. I’m trying to put out quality work; they’re trying to save pennies.

Required:

1. Identify the problems that appear to exist in Ferguson & Son Manufacturing Company’s budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.

2. Explain how Ferguson & Son Manufacturing Company’s budgetary control system could be revised to improve its effectiveness.

 

 

 

 

 

 

 

 

CASE 11–23 Balanced Scorecard [LO11–4]

 

Haglund Department Store is located in the downtown area of a small city. While the store had been profitable for many years, it is facing increasing competition from large national chains that have set up stores on the outskirts of the city. Recently the downtown area has been undergoing revitalization, and the owners of Haglund Department Store are somewhat optimistic that profitability can be restored.

In an attempt to accelerate the return to profitability, management of Haglund Department Store is in the process of designing a balanced scorecard for the company. Management believes the company should focus on two key problems. First, customers are taking longer and longer to pay the bills they incur using the department store’s charge card, and the company has far more bad debts than are normal for the industry. If this problem were solved, the company would have more cash to make much needed renovations. Investigation has revealed that much of the problem with late payments and unpaid bills results from customers disputing incorrect charges on their bills. These incorrect charges usually occur because salesclerks incorrectly enter data on the charge account slip. Second, the company has been incurring large losses on unsold seasonal apparel. Such items are ordinarily resold at a loss to discount stores that specialize in such distress items.

The meeting in which the balanced scorecard approach was discussed was disorganized and ineffectively led—possibly because no one other than one of the vice presidents had read anything about how to build a balanced scorecard. Nevertheless, a number of potential performance measures were suggested by various managers. These potential performance measures are:

a. Percentage of charge account bills containing errors.

b. Percentage of salesclerks trained to correctly enter data on charge account slips.

c. Average age of accounts receivables.

d. Profit per employee.

e. Customer satisfaction with accuracy of charge account bills from monthly customer survey.

f. Total sales revenue.

g. Sales per employee.

h. Travel expenses for buyers for trips to fashion shows.

i. Unsold inventory at the end of the season as a percentage of total cost of sales.

j. Courtesy shown by junior staff members to senior staff members based on surveys of senior staff.

k. Percentage of suppliers making just-in-time deliveries.

l. Sales per square foot of floor space.

m. Written-off accounts receivable (bad debts) as a percentage of sales.

n. Quality of food in the staff cafeteria based on staff surveys.

o. Percentage of employees who have attended the city’s cultural diversity workshop.

p. Total profit.

Required:

1. As someone with more knowledge of the balanced scorecard than almost anyone else in the company, you have been asked to build an integrated balanced scorecard. In your scorecard, use only performance measures listed previously. You do not have to use all of the performance measures suggested by the managers, but you should build a balanced scorecard that reveals a strategy for dealing with the problems with accounts receivable and with unsold merchandise. Construct the balanced scorecard following the format used in Exhibit 11-5. Do not be concerned with whether a specific performance measure falls within the learning and growth, internal business process, customer, or financial perspective. However, use arrows to show the causal links between performance measures within your balanced scorecard and explain whether the performance measures should show increases or decreases.

Page 512

2. Assume that the company adopts your balanced scorecard. After operating for a year, some performance measures show improvements, but not others. What should management do next?

3.

a. Suppose that customers express greater satisfaction with the accuracy of their charge account bills but the performance measures for the average age of accounts receivable and for bad debts do not improve. Explain why this might happen.

b. Suppose that the performance measures for the average age of accounts receivable, bad debts, and unsold inventory improve, but total profits do not. Explain why this might happen. Assume in your answer that the explanation lies within the company.

 

 

 

CASE 12–30 Ethics and the Manager; Shut Down or Continue Operations [LO12–2]

  

Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to BSC, which records the data on each check in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made between banks. The Rocky Mountain Region has three check processing centers, which are located in Billings, Montana; Great Falls, Montana; and Clayton, Idaho. Prior to her promotion to vice president, Ms. Romeros had been the manager of a check processing center in New Jersey.

Immediately after assuming her new position, Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region’s controller, John Littlebear. Ms. Romeros specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report follows:

 d 

Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation.

Romeros: 

What’s the story on Clayton? It didn’t have a loss the previous year did it?

Littlebear: 

No, the Clayton facility has had a nice profit every year since it was opened six years ago, but Clayton lost a big contract this year.

Romeros: 

Why?

Littlebear: 

One of our national competitors entered the local market and bid very aggressively on the contract. We couldn’t afford to meet the bid. Clayton’s costs—particularly their facility expenses—are just too high. When Clayton lost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Clayton facility.

Romeros: 

Why is Clayton’s facility expense so high? It’s a smaller facility than either Billings or Great Falls and yet its facility expense is higher.

Littlebear: 

The problem is that we are able to rent suitable facilities very cheaply at Billings and Great Falls. No such facilities were available at Clayton; we had them built. Unfortunately, there were big cost overruns. The contractor we hired was inexperienced at this kind of work and in fact went bankrupt before the project was completed. After hiring another contractor to finish the work, we were way over budget. The large depreciation charges on the facility didn’t matter at first because we didn’t have much competition at the time and could charge premium prices.

Romeros: 

Well we can’t do that anymore. The Clayton facility will obviously have to be shut down. Its business can be shifted to the other two check processing centers in the region.

Littlebear: 

I would advise against that. The $1,200,000 in depreciation at the Clayton facility is misleading. That facility should last indefinitely with proper maintenance. And it has no resale value; there is no other commercial activity around Clayton.

Romeros: 

What about the other costs at Clayton?

Page 579

Littlebear: 

If we shifted Clayton’s business over to the other two processing centers in the region, we wouldn’t save anything on direct labor or variable overhead costs. We might save $90,000 or so in local administrative expense, but we would not save any regional administrative expense and corporate headquarters would still charge us 9.5% of our sales as corporate administrative expense.

 

In addition, we would have to rent more space in Billings and Great Falls in order to handle the work transferred from Clayton; that would probably cost us at least $600,000 a year. And don’t forget that it will cost us something to move the equipment from Clayton to Billings and Great Falls. And the move will disrupt service to customers.

Romeros: 

I understand all of that, but a money-losing processing center on my performance report is completely unacceptable.

Littlebear: 

And if you shut down Clayton, you are going to throw some loyal employees out of work.

Romeros: 

That’s unfortunate, but we have to face hard business realities.

Littlebear: 

And you would have to write off the investment in the facilities at Clayton.

Romeros: 

I can explain a write-off to corporate headquarters; hiring an inexperienced contractor to build the Clayton facility was my predecessor’s mistake. But they’ll have my head at headquarters if I show operating losses every year at one of my processing centers. Clayton has to go. At the next corporate board meeting, I am going to recommend that the Clayton facility be closed.

Required:

1. From the standpoint of the company as a whole, should the Clayton processing center be shut down and its work redistributed to other processing

CASE 8–30 Evaluating a Company’s Budget Procedures [LO8–1]

Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company’s 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 Robert Ferguson, Jr., the president’s son, had become 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 good or bad performance. I’m beginning to expect the worst. If the accountants say I saved the company a dollar, I’m called ‘Sir,’ but if I spend even a little too much—boy, do I get in trouble. I don’t know if I can hold on until I retire.”

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

When Robert Ferguson, Jr., became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and to 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 manager’s 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.

Tom Emory’s conversation with Jim Morris continued as follows:

Emory: 

I really don’t understand. We’ve worked so hard to meet the budget, and the minute we do so they tighten it on us. We can’t work any faster and still maintain quality. I think my men are ready to quit trying. Besides, those reports don’t 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.

Page 390

Morris: 

I’m sorry about that, Tom, but you know my department has had trouble making budget, too. We were running well behind at the time of that problem, and if we’d 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.

Emory: 

Well, Jim, at least you have some options. I’m locked into what the scheduling department assigns to me and you know they’re being harassed by sales for those special orders. Incidentally, why didn’t your report show all the supplies you guys wasted last month when you were working in Bill’s department?

Morris: 

We’re not out of the woods on that deal yet. We charged the maximum we could to other work and haven’t even reported some of it yet.

Emory: 

Well, I’m glad you have a way of getting out of the pressure. The accountants seem to know everything that’s 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. It’s all a big pain. I’m trying to put out quality work; they’re trying to save pennies.

Required:

1. Identify the problems that appear to exist in Ferguson & Son Manufacturing Company’s budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.

2. Explain how Ferguson & Son Manufacturing Company’s budgetary control system could be revised to improve its effectiveness.

 

 

 

 

 

 

 

 

CASE 11–23 Balanced Scorecard [LO11–4]

 

Haglund Department Store is located in the downtown area of a small city. While the store had been profitable for many years, it is facing increasing competition from large national chains that have set up stores on the outskirts of the city. Recently the downtown area has been undergoing revitalization, and the owners of Haglund Department Store are somewhat optimistic that profitability can be restored.

In an attempt to accelerate the return to profitability, management of Haglund Department Store is in the process of designing a balanced scorecard for the company. Management believes the company should focus on two key problems. First, customers are taking longer and longer to pay the bills they incur using the department store’s charge card, and the company has far more bad debts than are normal for the industry. If this problem were solved, the company would have more cash to make much needed renovations. Investigation has revealed that much of the problem with late payments and unpaid bills results from customers disputing incorrect charges on their bills. These incorrect charges usually occur because salesclerks incorrectly enter data on the charge account slip. Second, the company has been incurring large losses on unsold seasonal apparel. Such items are ordinarily resold at a loss to discount stores that specialize in such distress items.

The meeting in which the balanced scorecard approach was discussed was disorganized and ineffectively led—possibly because no one other than one of the vice presidents had read anything about how to build a balanced scorecard. Nevertheless, a number of potential performance measures were suggested by various managers. These potential performance measures are:

a. Percentage of charge account bills containing errors.

b. Percentage of salesclerks trained to correctly enter data on charge account slips.

c. Average age of accounts receivables.

d. Profit per employee.

e. Customer satisfaction with accuracy of charge account bills from monthly customer survey.

f. Total sales revenue.

g. Sales per employee.

h. Travel expenses for buyers for trips to fashion shows.

i. Unsold inventory at the end of the season as a percentage of total cost of sales.

j. Courtesy shown by junior staff members to senior staff members based on surveys of senior staff.

k. Percentage of suppliers making just-in-time deliveries.

l. Sales per square foot of floor space.

m. Written-off accounts receivable (bad debts) as a percentage of sales.

n. Quality of food in the staff cafeteria based on staff surveys.

o. Percentage of employees who have attended the city’s cultural diversity workshop.

p. Total profit.

Required:

1. As someone with more knowledge of the balanced scorecard than almost anyone else in the company, you have been asked to build an integrated balanced scorecard. In your scorecard, use only performance measures listed previously. You do not have to use all of the performance measures suggested by the managers, but you should build a balanced scorecard that reveals a strategy for dealing with the problems with accounts receivable and with unsold merchandise. Construct the balanced scorecard following the format used in Exhibit 11-5. Do not be concerned with whether a specific performance measure falls within the learning and growth, internal business process, customer, or financial perspective. However, use arrows to show the causal links between performance measures within your balanced scorecard and explain whether the performance measures should show increases or decreases.

Page 512

2. Assume that the company adopts your balanced scorecard. After operating for a year, some performance measures show improvements, but not others. What should management do next?

3.

a. Suppose that customers express greater satisfaction with the accuracy of their charge account bills but the performance measures for the average age of accounts receivable and for bad debts do not improve. Explain why this might happen.

b. Suppose that the performance measures for the average age of accounts receivable, bad debts, and unsold inventory improve, but total profits do not. Explain why this might happen. Assume in your answer that the explanation lies within the company.

 

 

 

CASE 12–30 Ethics and the Manager; Shut Down or Continue Operations [LO12–2]

  

Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to BSC, which records the data on each check in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made between banks. The Rocky Mountain Region has three check processing centers, which are located in Billings, Montana; Great Falls, Montana; and Clayton, Idaho. Prior to her promotion to vice president, Ms. Romeros had been the manager of a check processing center in New Jersey.

Immediately after assuming her new position, Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region’s controller, John Littlebear. Ms. Romeros specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report follows:

 d 

Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation.

Romeros: 

What’s the story on Clayton? It didn’t have a loss the previous year did it?

Littlebear: 

No, the Clayton facility has had a nice profit every year since it was opened six years ago, but Clayton lost a big contract this year.

Romeros: 

Why?

Littlebear: 

One of our national competitors entered the local market and bid very aggressively on the contract. We couldn’t afford to meet the bid. Clayton’s costs—particularly their facility expenses—are just too high. When Clayton lost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Clayton facility.

Romeros: 

Why is Clayton’s facility expense so high? It’s a smaller facility than either Billings or Great Falls and yet its facility expense is higher.

Littlebear: 

The problem is that we are able to rent suitable facilities very cheaply at Billings and Great Falls. No such facilities were available at Clayton; we had them built. Unfortunately, there were big cost overruns. The contractor we hired was inexperienced at this kind of work and in fact went bankrupt before the project was completed. After hiring another contractor to finish the work, we were way over budget. The large depreciation charges on the facility didn’t matter at first because we didn’t have much competition at the time and could charge premium prices.

Romeros: 

Well we can’t do that anymore. The Clayton facility will obviously have to be shut down. Its business can be shifted to the other two check processing centers in the region.

Littlebear: 

I would advise against that. The $1,200,000 in depreciation at the Clayton facility is misleading. That facility should last indefinitely with proper maintenance. And it has no resale value; there is no other commercial activity around Clayton.

Romeros: 

What about the other costs at Clayton?

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Littlebear: 

If we shifted Clayton’s business over to the other two processing centers in the region, we wouldn’t save anything on direct labor or variable overhead costs. We might save $90,000 or so in local administrative expense, but we would not save any regional administrative expense and corporate headquarters would still charge us 9.5% of our sales as corporate administrative expense.

 

In addition, we would have to rent more space in Billings and Great Falls in order to handle the work transferred from Clayton; that would probably cost us at least $600,000 a year. And don’t forget that it will cost us something to move the equipment from Clayton to Billings and Great Falls. And the move will disrupt service to customers.

Romeros: 

I understand all of that, but a money-losing processing center on my performance report is completely unacceptable.

Littlebear: 

And if you shut down Clayton, you are going to throw some loyal employees out of work.

Romeros: 

That’s unfortunate, but we have to face hard business realities.

Littlebear: 

And you would have to write off the investment in the facilities at Clayton.

Romeros: 

I can explain a write-off to corporate headquarters; hiring an inexperienced contractor to build the Clayton facility was my predecessor’s mistake. But they’ll have my head at headquarters if I show operating losses every year at one of my processing centers. Clayton has to go. At the next corporate board meeting, I am going to recommend that the Clayton facility be closed.

Required:

1. From the standpoint of the company as a whole, should the Clayton processing center be shut down and its work redistributed to other processing centers in the region? Explain.

2. Do you think Haley Romeros’s decision to shut down the Clayton facility is ethical? Explain.

3. What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services?

in the region? Explain.

2. Do you think Haley Romeros’s decision to shut down the Clayton facility is ethical? Explain.

3. What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services?

 

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