MANAGEMENT CONTROL SYSTEM

Vershire Company
Performance Measurement and Organizational Control

Prepared by:
Andika Adikrishna Gunarjo
Muhammad Zakky Alif
Pramita Riskia Dhaliarti Putri
Yeris Permata Octarina

Lecturer: Supriyadi, M.Sc., C.M.A., Ph.D.

Magister of Management, UGM. International Class 31 Executive B

Case Summary
Vershire Company is a large business in the packaging industry with several major
divisions. The focus of this report is on the aluminum can division and its control systems
including the budgeting process and performance measurement. This division is one of
the largest manufacturers of aluminum beverages cans in the United States. However, if
customers expectations for cost, quality, and service are not met, they can easily
purchase from another manufacturer. Therefore, it is important for Vershire to keep tight
control over their plants, budgets, and performance in terms of efficiency and
effectiveness. The major concern currently facing Vershire Company is that each plant
within the division is being treated as a profit centre, rather than an engineered expense
centre. As a manufacturing plant, in which outputs produced are quantifiable in terms of
units produced, there is a need to focus on expenses rather than profit. This error in
classification is the root of many other control, communication, and performance
measurement problems.

Main Issue
When developing a budget or forecasting future performance, it is important to have a
planning and control system.
1. Organization policy
The division had plants scattered throughout the United States. Each plant served
customers in its own geographic region. Most of these customers had between two
and four suppliers and spread purchases among them.
2. Budget control system
Divisions of Vershire Company were structured to encompass broad product
categories. Divisional general managers were given full control of their businesses
with two exceptions: the raising of capital and labor relations, which were both
centralized at head office. The budget was used as the primary tool to direct each
divisions efforts towards common corporate objectives.
3. Sales Budget
In May, each divisional general manager submitted a preliminary report to
corporate management summarizing the outlook for sales, income and capital
requirements for the next budget year, and evaluating the trends anticipated in
each category over the subsequent two years. A sales forecast was then prepared
for each division; and these forecasts were combined to create a forecast for the
entire company.
4. Manufacturing Budget
At the plant level, the sales budget was then categorized according to price,
volume, and use. Once the sales numbers were estimated, each plant budgeted
gross profit, fixed expenses and pretax income. Profit was calculated as the sales
budget less budgeted variable costs (including direct material, direct labour, and
variable manufacturing overhead-each valued at a standard rate) and the fixed
overhead budget. The plant manager was held responsible for this budgeted profit
number even if actual sales fell below the projected level.
5. Performance Evaluation & Measurement
On the second business day after the close of each month, every plant faxed
certain critical operating variances which were combined into a variance analysis
sheet. A compilation of all variance sheets was distributed the following morning

to interested management. Plant managers were not supposed to wait until these
monthly statements were prepared to identify unfavorable variances; rather they
were expected to be aware of them (and to take corrective action) on a daily basis.
Four business days after the close of every month, each plant submitted a report
showing budgeted and actual results. Once these reports were received, corporate
management reviewed the variances for those items where figures exceeded
budgetary amounts, thus requiring plant managers to explain only the areas in
which budgeted targets had not been met. The focus was on net sales, including
price and mix changes, gross margin, and standard manufacturing costs.
6. Management Incentives
The sales department had sole responsibility for the price, sales, mix, and delivery
schedules. The plant manager had responsibility for plant operations and plant
profits.
Plant managers were motivated to meet their profit goals because only capable
managers were promoted, with profit performance being a main factor in
determining capability and plant managers compensation packages were tied to
achieving profit budgets.

Problem Statement
1.
2.
3.
4.
5.

Strength and Weakness of Vershire Companys Planning and Control System

Profit Budgeting Process in Vershire
Should Plant manager responsible for profits?
How to assess performance evaluation system?
Redesign Management control structure in Vershire

Analysis of Solution Alternatives

1. Strengths and Weaknesses of Vershires Planning and Control System
Vershire uses a planning and control system that has strengths and weaknesses, which
will be further analyzed below:
Planning System
Strengths:
When formulating the sales budget, divisional managers are required to predict market
conditions and capital expenditures five years out and prepare a forecast for the
subsequent two years. This is a good way for the divisions and the company as a
whole to anticipate sales, income, and capital requirements that are necessary to
make future decisions and remain competitive. This forward looking approach allows
the company to design its long-term goals and objectives.
In addition, the forecasting is done at the corporate level and is then sent to the
divisional managers for fine-tuning. This allows divisional managers to have input in
the budget, which enhances the quality of the budget since divisional managers have
a more realistic outlook on what sales will be for the coming year. As well, since their
performance is tied to these budgets, it is important for them to feel involved in its
preparation.
Thirdly, corporate controllers visit each plant for half a day prior to the final submission
of the budget. During this visit, plant managers have the opportunity to explain their

situation and discuss in detail specifics that affect their plants. This will allow for a
more accurate and complete budget to be produced.
Weaknesses:
The initial sales forecast uses assumptions such as inventory carryovers, forward
buying, packing trends, etc., which are entirely derived from corporate headquarters
analyses. As divisional managers are in charge of managing the operations of each
division, they should be given the responsibility of making their own detailed sales
forecast and getting approval from corporate head office on the final numbers. This
will increase the overall accuracy of the initial forecast, making it less subject to
change during subsequent reviews of the budget and creating a more efficient
process.
Secondly, the forecasting method is the same for all product lines. This is not an
effective way of forecasting as each division or product line has different factors that
affect its sales such as demand of customer base, industry trends, product
characteristics, etc.
Finally, plant managers do not come up with the sales budgets the district sales
managers do. After this is done, the budgeted sales are handed down to the plants
after which each plant budgets gross profit and pretax income. However, plant
managers are held responsible for the budgeted profit numbers as their performance
is tied to the profit that their plant generates. This is a weakness as the plant
managers are held accountable for profits when they do not have control over all the
profit components, mainly the sales side of the equation.
Control Systems
Strengths :
Divisional managers are given full control over their divisions except in the areas of
raising capital and labor relations. This process is efficient as it allows the different
divisional managers to take full responsibility for the divisions and make decisions that
can best achieve the divisions goals, objectives, and performance forecast. Also,
leaving labor relations and capital to the corporate head office allows the company to
enjoy the benefits of operating as a large organization and economies of scale, such as
the ability to obtain preferred interest rates from financial institutions. The divisions
are then also able to focus on activities more central to the profit objectives
emphasized by the company.
Secondly, there is timely communication between the various hierarchies of the
company as there are not that many tiers - plant managers report to the divisional
managers who then report to the corporate office. Finally, there is constant oversight
on meeting the budget, as plant managers are required to perform a variance analysis
explaining differences each month and are expected to anticipate large variances on a
daily basis.
Weaknesses:
Profit is the main measure for assessing plant managers performance and
determining bonuses. This is not an effective incentive measurement since there are
other factors that determine the capabilities of a plant manager. Even if sales fall
below the budgeted levels, it is still the plant managers responsibility to achieve the
budgeted profit levels. In addition, determining the efficiency of plant managers by

comparing different divisions does not give accurate measures since plants have
different product lines. This weakness in performance evaluation is discussed in more
detail later in the report.

2. Profit Budgeting Process in Vershire

3.
The table below shows the profit budgeting process, with a rationale for each activity as well as who is
responsible for that step. In addition, please refer to the Appendix for an overview diagram of this process at
Vershire.

4.
5.
Date
9.
May

6.
Re
sponsibl
10.
Di
visional
General
Manager

21.
C
entral
Market
Resear
ch
Staff

37.
Di
visional
General
Manager
44.
Distri
ct

7. Action
11. 1) Summarize outlook for sales, income, and
capital requirements for the next budget year
14.
2) Evaluate trends anticipated in each category
over the subsequent two years

18. 3) Submit the preliminary report to Corporate

Management
22. 1)
Examine next budget year in detail
25. 2) Examine following two years in general terms
3) Prepare a sales forecast for each division:
Consider economic conditions and their
impact on customers, and market share
for different products by geographic
area.
Make assumptions for price, new
products, changes in particular
accounts, new plants, inventory
carryovers, forward buying, packaging
trends, industry growth trends, weather
31. 4) Aggregate divisional forecast into a company
forecast
34. 5) Submit forecasts to respective Divisional
General Managers
38. 1) Compile new sales forecasts
41. 2) Request input from District Sales Managers
1) Estimate sales forecasts for the upcoming year
Request help from Head Office or divisional

8.
Rationale
The Divisional General Manager has
the broadest knowledge about
his/her region; therefore, he/she is
utilized to make the preliminary
forecasts
By evaluating the outlook,
areas for improvement or

19.

Use the Divisional General

Managers forecasts to develop a
more formal market assessment
Ensure that basic assumptions
are uniform throughout the entire
company
Determine areas for additional
capital expenditure
Assess competitive position and
areas for improvement
Determine areas where market
share can be increased
Determine
opportunities
Ensure thatany
overall
corporate for
sales forecasts were
reasonable and achievable

35.
Determine need for
additional investments

42.
The District Sales Manager has the
most knowledge about the sales so

45.

46.

47.
56.
Divisional
General

61.
66.
Vice
President of
Marketing

80.

Corporate

48.
staff (optional)
52. 53.
Submit sales forecasts to Divisional
2) 58.
General
Manager sales forecasts
57.
Consolidate
1)
62. 63.
Submit to Vice President of Marketing
2)
67. 68.
Review consolidated sales forecasts
1) 72.
71.
Make amendments with approval of
2) district manager (if necessary)
76. 77.
Submit to corporate level
3)
81. 82.
Review consolidated sales forecasts
1) 86.
85.
Make amendments with approval of
2) district manager (if necessary)
90. 91.
Approve budget as a fixed objective
3)
95. 96.
Translate consolidated budget into a sales
4) budget for each plant from which the finished
goods would be shipped

103. Plant
Manager

117. Industrial
Engineering
Department

126. Plant
Manager
131. Head
Office
Controller

49. estimates can be made

54.
59.
64.
Ensure that the consolidated sales
forecasts are consistent with the
knowledge of the Vice President of
Marketing, who has a broader view
of the sales

78.

Ensure that the forecasts are

aligned to the corporate strategy
and identify any areas for
improvement

92.

Sales budget is divided amongst

the plants from which finished
goods would be shipped, as these
are where the revenue is
generated. Performance is

99. 100. Submit plant sales budget to Plant

101.
5) Manager
104.
105. Categorize budget according to price, volume, Separate product lines so that
1) and end use
costs can be budgeted according
108.
109. Budget gross profit, fixed expenses, and pre110.
2) 114.
tax income
113.
Request cost budget from the plants
115.
3) Industrial Engineering Department
118.
119. Develop cost standards and cost
The Industrial Engineering
1) reduction targets including budgeted cost
Department sets these costs for all
reductions, allowances for unfavourable
plants; therefore, the thresholds
variances from standards, and fixed costs such
should be consistent across all
as maintenance labour.
plants and makes them more
122.
123. Submit to Plant Manager
124.
2)
127.
128. Compile input from Industrial Engineering
129.
1) Department into budget
132.
133. Visit plant and walkthrough
Allow Controllers to familiarize
1)
themselves with the plant
processes

134.

135.

136.

146. Sept 147. Plant

ember
Manager
151.
Divisi
on Head
Office
159. Divisional
General
Manager
166. Plant
Manager

173. Divisional
General
Manager
181. Chief
Executive
Officer
187. Dece
mber
192. Board of
Directors

137.
2) Review budget with plant manager and Provide Plant Managers to
any supervisors
explain the basis of their budgets

Ensure that Plant Managers are in

140.
line with the corporate goals
144.
Reinforce plant connection
and communication with
148. 1) Submit plant budgets to Division Head Office
149.
152.
1) Consolidate plant budgets to a division
153.
156.budget 2) Submit to Divisional General Manager
157.
160.
1) Review division budget
161.
164. 2) Return budget to Plant Manager for revisions
Determine areas where cost
(if necessary)
efficiency can be improved so that
there is a larger gross margin
167.
1) Revise budget for any additional
Since the plant manager has the
savings
most knowledge of the operations,
they should determine any areas
for additional savings
170.
2) Submit to Divisional General Manager
171.
174.
1) Approve budget
175.
178.
2) Submit budget to the Chief Executive
179.
182.Officer 1) Request modifications to the budget (if Ensure that the budget is consistent
necessary)
with the overall corporate strategy
185.
2) Approve budget
186.
189.
3) Submit final budget to Board of
190.
193.Directors
1) Approve final budget
194.

195. Should the Plant Managers be Held Responsible for Profits

196.
Profit is made up of two components, revenue and expense. Plant
managers should be responsible only for the measures that they can directly control,
which are the expenses. This includes direct materials, direct labor, variable
manufacturing and fixed overhead budget. The plant itself should be considered an
engineering expense centre as there are no direct revenues generated from the
plant rather the revenue is generated in the sales department. This is an important
factor when monitoring management compensation for improved plant
performance.

197.
198.
The plant manager was held responsible for the budgeted profit number
even if actual sales fell below the projected level. However, sales department has
sole responsibility for the price, sales mix and delivery schedules and each of these
components can have a direct impact on profitability, more specifically revenue. As
well, any difference of opinions between sales and production is always favoured
with the sales department as Vershire wants to satisfy the customer since they can
easily switch to a competitor. This reduces the plant managers ability to maintain
control over profitability in the plant since production can be disrupted by the sales
manager and hurt efficiency of outputs; resulting in higher costs.

199.
200.
Prior to budget submission, head office controller staff visits the plants and
the plant manager has the opportunity to explain his/her situation. The plant
managers can vocalize any concerns or unanticipated/unaccounted issues not
captured in the current budget. The ability to express concerns helps to slightly
mitigate the lack of control that plant managers have over the sales side of the
budgeted profit.

201.

202.
The incentive program for plant managers is as follows:
Only capable managers were promoted with profit performance being the main
factor
Compensation package was tied to achieving profit budgets
Plant efficiency reports were highly publicized even though different shops had
different set up times

203.

204.
These profit-oriented incentives motivate plant managers to act in the best
interest of the corporation. For example, if the managers incentives focused only
around output and cost, they might be inclined to refuse to accommodate the sales
department when they had special orders that altered production schedules and
output. The incentives are well aligned with the corporate goal of maximizing profit.

205.

206.
However, as plant managers have little influence over revenue decisions,
holding them entirely accountable for profitability is not appropriate.
207. How to assess performance evaluation system?

208.
Four business days after the close of every month, each plant submitted a
report showing budgeted and actual results. Once these reports were received,
corporate management reviewed the variances for those items where figures
exceeded budgetary amounts, thus requiring plant managers to explain only the
areas in which budgeted targets had not been met. The focus was on net sales,
including price and mix changes, gross margin, and standard manufacturing costs.
209.
Table 1 : Performance Evaluation Report for a Plant for the Month
of November.
211.

Items

215.
216.
Total Sales
218.
Variances due
to
220.
Sales price
222.
Sales mix
224.
Sales
volume
226.
Total
Variable
Cost of Sales
228.
Variances
due to
230.
Material
232.
Labour
234.
Variable
overhead
236.
Total
Fixed
Manufacturing Cost
238.
Variances in
fixed cost
240.
Net Profit
242.
Capital
Employed
244.
Return
on
Capital Employed
246.

210.
212.
Actu
a
l
$

Month
213.
Varian
ce
$

214.

Year to Date
Variance $

217.
219.
221.
223.
225.
227.
229.
231.
233.
235.
237.
239.
241.
243.
245.

247.
The Table 1 shows main focus is net profit, which is influenced by both sales
and expenses. The exhibit includes variances regarding sales price, sales mix, and
sales volume. These are items that the sales department has responsibility over,
rather than the plant manager. Therefore, they are evaluating plant managers based
on metrics over which the plant managers have no direct control. Vershire fails to
properly evaluate not only efficiency, but also effectiveness. In a manufacturing
environment, both elements use output as a means of evaluation. By looking at

output in terms of profit rather than the quantity produced, the evaluations become
irrelevant. While the cost variances present in Table 1 would be a more accurate
performance measure, they are viewed in terms of sales rather than production. As
plant managers cannot control sales, these variances then become irrelevant.
Overall, the performance evaluators contained within Table 1 do not accurately
measure the effectiveness or efficiency of the aluminum can manufacturing plants.
248.

Table 2 :

Supplemental Reports

249.
Individual Plant Level Reports
250.
Report
251.
Content
252.
Analysis of sales
253.
Detailed analysis of sales volume,
by customer groups
sales dollars, profit dollars, and profit
margin by end user customers (e.g., beer
companies, soft drink companies).
254.
Analysis of sales
255.
More detailed backup analysis to
Exhibit 2 regarding
256.
Variances due to sales price, sales
mix, and sales volume
257.
Analysis of costs
258.
More detailed backup analysis to
Exhibit 2 regarding
259.
Variances due to variable costs and
fixed costs of manufacturing.
260.
261.
Division Level Reports
262.
Report
263.
Content
264.
Comparative
266.
Comparison of sales and profits
analysis of profit
across plants
265.
performance
267.
Comparative
269.
Comparison of efficiencies in variable
analysis
of
and fixed costs across plants.
manufacturing
268.
Efficiency.
270.
271.
The individual plant level reports contained in Table 2 give a more detailed
analysis of the variances in Table 1. As stated above, these variances fail to properly
evaluate plant managers, and as such further detail is just irrelevant.
272.
The division level reports focus on net sales, including price and mix
changes, as well as gross margin. As stated above, net sales are controlled by both
sales and costs. Plant managers only have the ability to control costs, and as such
these reports also lack relevance in terms of evaluating their performance.
273.
The manufacturing division level report also is an inadequate performance
evaluation report; as it compares plants that produce different products and that
have varying setup times. This makes any analysis unreliable.
274.
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. Alternatively, the company is

also rewarding the plant managers when the sales department is able to negotiate
favorable contracts for the company. When looking at the metrics within the exhibits,
they would be excellent measures if they were used to evaluate the performance of
those individuals that have direct control over the metrics. Given that they are used
for the plant manager, they are nowhere near adequate.
275.
276. Redesign the Management Control Structure at Vershire Company
1. More communication and meetings between corporate HQ and among division
general managers
277.
Action:
- Holding a company-wide meeting of division general managers and corporate
HQ in order to discuss the upcoming year's sales budget
- Having division marketing managers assist corporate HQ in developing division
forecasts instead of HQ making general assumptions
- Create more channels of communication among division general managers
278.

Benefits:

- Reminds division general managers of the overall goals of the company

- Provides a holistic view of the company and the status quo
- Facilitates brainstorming of new products or ideas
- Discuss similar issues plaguing several divisions
- Facilitates knowledge and resource sharing among divisions and corporate HQ
- Facilitates the sales budgeting process by minimizing errors
2. Alter how plant managers are compensated and reassign responsibility over profits
279.
Action:
- Realign plant manager compensation packages so that it is tied largely to cost
or manufacturing efficiency and a lesser extent to profit
- Tie district sales managers' compensation packages to profit
- Add adjustments for extra costs associated with sales manager or high level
management decisions
- Add adjustments for costs associated due to "acts of nature" such as a fire
280.

Benefits:

Motivates plant managers to maximize profit using a variable they can control,
which is cost
- Protects the plant manager against adverse factors out of his/her control
- Enables the plant managers and sales managers to collaborate towards
maximizing the bottom line (profits)
- Achieves better goal congruence
3. Improve comparisons of manufacturing efficiency between divisions and plants
281.
Action:
- Compare manufacturing efficiency between plants and divisions using a more
comparable metric
- If such a metric does not exist then a new metric could be developed to solve
this issue
- Reward most efficient plant and division
282.

Benefits:

More efficient plants or divisions could be 'studied' and a knowledge base could
be created
Facilitates knowledge and resource sharing among plants and divisions
Increase in efficiency will contribute to the corporate bottom line
Achieves better goal congruence