Universal Power Machinery (MUP) designs and manufactures specialized equipment for a wide range of industries. For a number of years the company's maintenance division, which has been organized as a cost centre, has provided services free of charge to the company's user departments (production, distribution, research, marketing, and so forth). During the last three years, requests for maintenance have increased considerably and as a result of that, quality and timeliness of services provided are becoming a significant issue. In response to that issue, the top management established a task force to review the maintenance division operations. The task force recommended the maintenance division to be converted from a cost center to a profit center and the use of a charge-back system for the maintenance services (i.e. users to be billed for services performed). Required: How should the manager of the maintenance division be evaluated (i.e. as a cost centre)? If the company switches the maintenance department from a cost centre to a profit centre: What will likely happen to the number of user service requests? Why? How should MUP evaluate the manager of the maintenance division? Question three Since budgets affect many people in an organization, they can have significant behavioural implications. Allowing people to participate in setting their own budget targets may improve commitment those targets but create the incentive to build budgetary slack into budget estimates. Required: Explain three disadvantages of budgetary slack from the point of view of The business unit managers who must achieve the budget Corporate management
Universal Power Machinery (MUP) designs and manufactures specialized equipment for a wide range of industries. For a number of years the company's maintenance division, which has been organized as a cost centre, has provided services free of charge to the company's user departments (production, distribution, research, marketing, and so forth).
During the last three years, requests for maintenance have increased considerably and as a result of that, quality and timeliness of services provided are becoming a significant issue. In response to that issue, the top management established a task force to review the maintenance division operations. The task force recommended the maintenance division to be converted from a cost center to a profit center and the use of a charge-back system for the maintenance services (i.e. users to be billed for services performed).
Required:
- How should the manager of the maintenance division be evaluated (i.e. as a cost centre)?
- If the company switches the maintenance department from a cost centre to a profit centre:
- What will likely happen to the number of user service requests? Why?
- How should MUP evaluate the manager of the maintenance division?
Question three
Since budgets affect many people in an organization, they can have significant behavioural implications. Allowing people to participate in setting their own budget targets may improve commitment those targets but create the incentive to build budgetary slack into budget estimates.
Required:
Explain three disadvantages of budgetary slack from the point of view of
- The business unit managers who must achieve the budget
- Corporate management
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