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Abrams Company | Profit (Accounting) | Inventory

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Chapter 5 Case 5-4. Abrams Company Case Overview Abrams has a division for each product group parts. Each division led by vice president and general manager who is expected to reach a certain target ROI. Each products division has a sales department OEM. The rest of the product produced by the division of the product sold to the AM division. AM division operates several warehouses parts distribution have company in the U.S. and overseas markets. Each manufacturing plant in the third division of
  Chapter 5Case 5-4. Abrams CompanyCase Overview Abrams has a division for each product group parts. Each division led by vice presidentand general manager who is expected to reach a certain target ROI. Each products division hasa sales department OEM. The rest of the product produced by the division of the product soldto the AM division. AM division operates several warehouses parts distribution have companyin the U.S. and overseas markets.Each manufacturing plant in the third division of the products have annual targets to beachieved. Each sale of OEM products division traced to the factory that makes parts. The targetROI based budget income divided by net assets beginning of the year (calculated by total assetsminus current liabilities).For the plant manager, the award is given on earnings variance factory. In this case anyadjustment variance gross margin generated from sales volume to the AM division. Themanager was not given a bonus of the profits from sales to the division AM and was not given apenalty if the actual purchase AM division is less than the amount approved by the AMdivision when the budget is approved by the annual earnings of the factory upper management.There are three things to be thinking of upper management, namely: There is alwaysstrife on the transfer price of the parts were sold by product division to the AM division,Management feels that the product divisions often treated AM division as a consumer which isnot free, and Upper level management felt the excess inventory throughout the year in eachdivision. Analysis and Discussion The three things that concern the company's senior management Abrams are: The firstproblem is the transfer pricing dispute between the three product divisions with AM divisions,especially on parts that are sold exclusively to the AM division. This is one of the weaknessesin the regulation of the business unit as a profit center. Disputes will increase because of thedebate over the appropriate transfer price. Although sometimes these disputes can be resolvedby the vice president of finance, this can affect the performance and efficiency of the company.Moreover, internal sales has its share of 20% of total sales of $ 100 million from $ 500 millionand future sales AM division is also targeted at 50% of total sales. Those products are also soldto OEM that transfer price is the price of the OEM market. Tansfer price for this product is not  a problem as both sides feel the price is fair. The problem is the parts were sold exclusively tothe AM division.The second problem is the attitude that prioritize OEM products division than thedivision AM in sales. It is also due to setting business unit as a profit center which decisionmaking authority shifted from top management to the lower level so that the division can notsell to the AM division. Divisions from Abrams losing the same goals that overall companygoals. Division products can optimize the profit its divisions at the expense of the company'soverall profit. In addition, the company's compensation programs do not encourage internalsales. The plant manager was only given a bonus for sales outside of the company and nobonuses and penalties for the underpayment for internal sales. This leads to a tendency OEMproducts division precedes the AM division.Third problem is excess inventory in each division. Excess inventory can be caused byproduction or marketing decisions wrong, poor quality of goods and so on. In addition, theassessment of performance using only as a measure of ROI is also inaccurate. Moreover,investments or assets are measured only at the beginning of the year so that excess inventoryduring the year was not questioned or considered by the plant manager because at the end of theyear, inventory is also reduced as are the Christmas holidays.Management control system in the Abrams Company still need to change towards thebetter. The advantages of the company's control systems are: (1) Profit center portion burdenedoverhead costs companies and divisions. In the Abrams company, costs are allocated based onthe budget so that the division manager will not complain of injustice or lack of control over theallocation of those costs. In addition, each division had sales of each department so it was easyto trace costs to each plant, (2) The existence of a compensation plan based on earnings pershare. Employees will be motivated to improve the performance of the company to increaseearnings per share will also increase incentives or bonuses. So the realization of goalcongruence, (3) Compensation for the plant manager of the difference of income that willencourage plant managers to maximize profits, (3) Abrams divisions have products such asparts and the different sales departments respectively. Lack of interaction between divisionsfacilitate the imposition of responsibility and performance measurement except AM divisions.The weaknesses of the company's control systems are: Plant manager compensationbased only on profit and ROI evaluation will encourage managers to prioritize short-term gainsat the expense of long-term profitability. Example to increase profits and meet the target, themanager could have removed the cost of R & D, training costs, lower product quality, and soon. Organizing the business unit as a profit center make decisions to decentralized and simple  disputes and unfair competition. Upper level management will lose some control. Moreover,there are divisions Abrams product which is a result of the acquisition. Conclusion Upper level management Abrams Company concerned on transfer pricing disputes,products division behaviors that prioritize OEM than the AM division and excess inventory ineach division. Management control system in the company Abrams also needs to be improvedfurther to overcome the difficulty of organizing the business unit as a central responsibility forprofit. Recommendation The need to change the existing compensation plan in which plant managers also get abonus for internal sales to encourage managers to sell to the division AM. The need to changethe existing compensation plan in which plant managers also get a bonus for internal sales toencourage managers to sell to the AM divisionManagement of the Abrams company needs to limit things that require strategicconsiderations, the uniformity (eg accounting method) and so on. Each division has carta eachcontaining production and marketing activities and should not be allowed to seize businessother business units. Upper level management must be involved in maintaining the goalscongruance and integrity of the organization..  
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