Case Study on "HK"

Quoted Instructions for "HK" Assignment:

Case Study: HK Corporation

HK Corporation produces a variety of plastic products. Some of these products are

standard items that are listed in the company*****s catalogue, while others are made to

customer specifications. The company operates on a calendar-year basis. It begins

the annual budgeting process in late August, when the managing director

establishes targets for the total pound sales and net income before taxes for the next

year.

The sales target is given to the Marketing Department, where the marketing

manager formulates a sales budget by product line in both units and pounds. From

this budget, sales quotas by product line in units and pounds are established for

each of the corporation*****s sales districts.

The marketing manager also estimates the cost of the marketing activities required

to support the target sales volume and prepares a tentative marketing expense

budget.

The operations manager uses the sales and profit targets, the sales budget by

product line, and the tentative marketing expense budget to determine the pound

amounts that can be devoted to manufacturing then forwards to the Production

Department the product-line sales budget in units and the total pound amount that

can be devoted to manufacturing.

The production manager meets with the factory managers to develop a

manufacturing plan that will produce the required units when needed within the

cost constraints set by the operations manager. The budgeting process usually comes

to a halt at this point because the Production Department does not consider the

financial resources allocated to be adequate.

When this standstill occurs, the director of finance, the operations manager, the

marketing manager and the production manager meet to determine the final

budgets for each of the areas. This normally results in a modest increase in the total

amount available for manufacturing costs, while the marketing expense and

corporate office expense budgets are cut. The total sales and profit figures proposed

by the managing director are seldom changed. Although the participants are seldom

pleased with the compromise, these budgets are final. Each executive then develops

a new detailed budget for the operation in his or her area.

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None of the areas has achieved its budget in recent years. Sales often run below the

target. When budgeted sales are not achieved, each area is expected to cut costs so

that the managing director*****s profit target can still be met. However, the profit target

is seldom met because costs are not cut enough. In fact, costs often run above the

original budget in all functional areas. The managing director is disturbed that HK

has not been able to meet the sales and profit targets. He hired a consultant with

considerable experience with companies in HK*****s industry. The consultant reviewed

the budgets for the past four years. He concluded that the product-line sales budgets

were reasonable and the cost and expense budgets were adequate for the budgeted

sales and production levels.

As part of his review, the consultant sat with, Ali, the manufacturing supervisor of

HK Corporation, and Adam, HK*****s purchasing manager. Each month, Ali receives a

performance report showing the budget for the month, the actual activity, and the

variance between budget and actual. Part of Ali*****s annual performance evaluation is

based on his department*****s performance against budget. Adam also receives monthly

performance reports and he, too, is evaluated in part on the basis of these reports.

The monthly reports for September, 2009 had just been distributed when the

consultant met Ali and Adam in the hallway outside their offices. The consultant

listened to Ali and Adam*****s chat which went like this:

Scowling, Ali began the conversation, *****I see we have another set of monthly

performance reports hand delivered by that not very nice junior employee in the

budget office. He seemed pleased to tell me that I*****m in trouble with my performance

again.*****

Adam: I got the same treatment. All I ever hear about are the things I haven*****t done

right. Now I*****ll have to spend a lot of time reviewing the report and preparing

explanations. The worst part is that it*****s now the 21st of October so the information is

almost a month old, and we have to spend all this time on history.

Ali: My biggest gripe is that our production activity varies a lot from month to

month, but we*****re given an annual budget that*****s written in stone. Last month we

were shut down for three days when a strike delayed delivery of the basic ingredient

used in our plastic formulation, and we had already exhausted our stocks. You

know about that problem, though, because we asked you to call all over the country

to find an alternative course of supply. When we got what we needed on a rush

basis, we had to pay more than we normally do.

Adam: I expect problems like that to pop up from time to time *****“ that*****s part of my job

*****“ but now we*****ll both have to take a careful look at our reports to see where the

changes are reflected for that rush order. Every month I spend more time making

sure I should be charged for each time reported than I do making plans for my

department*****s daily work. It*****s really frustrating to see charges for things I have no

control over.

Ali: The way we get information doesn*****t help, either. I don*****t get copies of the reports

you get, yet a lot of what I do is affected by your department, and by most of the

other departments we have. Why do the budget and accounting people assume that

I should only be told about my operations even though the president regularly gives

us pep talks about how we all need to work together as a team?

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Adam: I seem to get more reports than I need, and I am never asked to comment on

them until top management calls me on the carpet about my department*****s

shortcomings. Do you ever hear comments when your department shines?

Ali: I guess they don*****t have time to review the good news. One of my problems is

that all the reports are in pounds and pence. I work with people, machines and

materials. I need information to help me this month to solve this month*****s problems *****“

not another report of the pounds expended last month or the month before.

Required (MIND THE WEIGHT OF EACH REQUIREMENT:

1. Discuss how the budgeting process as employed by HK Corporation

contributes to the failure to achieve the managing director*****s sales

and profit targets (25 MARKS).

2. Suggest how HK Corporation*****s budgeting process could be revised to

correct the problem (15 MARKS).

3. Should the functional areas be expected to cut their costs when sales

volume falls below budget? (10 MARKS).

4. Based on the conversation between Ali and Adam, describe the likely

motivation and behaviour of these two employees resulting from HK

Corporation*****s standard cost and variance reporting system? (10

MARKS).

5. When properly implemented, both employees and companies should

benefit from a system involving standard costs and variances.

a) Describe the benefits that can be realized from a standard cost

system (20 MARKS).

b) Based on the situation presented above, recommend ways for HK to

improve its standard cost and variance reporting system so as to

increase employee motivation (20 MARKS).

GUIDE NOTES (MUST BE READ):

· You are strongly advised before you address the above case to refer to text

books which discuss the budgeting process and standard costing systems.

You should find several texts in the library. The core text by Horngren

(chapters 14-16), and the text by Seal (chapters 11-13) are both good

examples. Also the article by Hope and Fraser (February 2003; pp.108-115)

titled: *****Who needs Budgets?***** Published in Harvard Business Review is very

good. A copy of this useful article can be accessed on OasisPlus by referring

to the ACC2211 Module Home Page. However, you need to do your own

research as well to gain more insight.

· Your report should be handed in to the student office by Friday 11th of

December 2009 by 4 pm. You should retain the receipt given to you by the

student office. If your report is not handed in by this date then you will be

given zero marks.

· Your report should include a title page a table of contents and a

bibliography.

· Students with extenuating circumstances will be asked to provide

documentary support where an extension is requested.

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· You MUST include the front sheet attached at the end of this document,

which details your name and student number, and your SEMINAR tutor*****s

name.

· Concerning the coursework structure, you are to submit such a report to

your line manager, so assume that you are an employee working at HK

Corporation and your tutor acting as your line manager. Hence, provide a

title page stating the name of the company, and then say from: insert your

name, to: insert your tutor*****s name.

· What follows is a table of contents including all the headings you have in

your coursework together with the page number for each heading. Use

TIMES NEW ROMAN as the font, size 12, lines are to be 1.5 spaced NOT

SINGLE SPACED, also ADJUST THE LINES IN ALL THE PARAGRAPHS.

· A suggested structure is as follows:

o Introduction including the background of the company and what are

the points to be discussed in your report

o Discuss the 5 Questions points addressed above

o Provide a Conclusion.

All those sections above must be linked together (cohesive), that is, when you are

done with the introduction, make a line or two linking it to what follows, and so on.

Also do not be DO NOT BE descriptive, you have to always link what you discuss

and apply it to HK Corporation. Providing only a descriptive analysis will make you

lose lots of marks. What adds value is your own critical assessment of the issues

involved and linking those to HK. Thus, clarity, cohesiveness, and critical assessment

are three key points that you need to focus on. Using graphs, *****