Stewart Box Company – Case Study Essay
Stewart Box Company – Case Study
I. Executive Summary
The group provided recommendations on how to improve the control systems and planning processes of Stewart Box. Stewart Box is a profitable medium-sized manufacturing company that has several areas for improvement in its accounting, planning, budgeting and pricing methods. The group highlighted these weaknesses and gave proposals as to how the company can significantly improve its operations.
II. Case Context
Stewart Box is a packaging company that manufactures paperboard and cartons. Its paperboard division sells to external customers and supplies raw materials to the carton division. Outlined in the case are the planning and control systems that Stewart Box has in place.
III. Problem Definition
There is a need to review the control systems of Stewart Box to determine if these are configured to properly evaluate the performance the company and its departments. Its management procedures also need to be assessed to establish if the correct people are being involved.
IV. Framework for Analysis and Areas of Consideration
The group examined each system and evaluated them to see if they are aligned with Stewart Box’s organizational structure and nature of business and if the correct people are involved. The group also scrutinized the control system to see if this effectively measures each department’s performance and if it can pinpoint the sources of any variance.
Below are the various systems that the company has in place, with the corresponding analyses.
The company utilizes a job-cost accounting system using standard costs. These standard costs are based on the annual estimates of labor and factory overhead costs. If these estimates were inaccurate then the standard costs would be incorrect as well. The system must be more dynamic and must examine on a more regular basis (e.g. monthly or quarterly) the allocation of the overhead costs and make the necessary adjustments.
Additionally, job-costing requires the fixed costs to be allocated to each job. If the allocation is incorrect, then the costing will be incorrect. These inaccuracies will be passed on to the customer or to the carton division. As with the computation of the standard costs, these allocations must be scrutinized thoroughly and frequently to minimize any errors. Otherwise, these errors will be reflected in management reports such as Exhibits 4 and 5.
Exhibit 4 lists the costs and revenues associated with the paperboard and carton divisions. The advantage of this is that the company can easily see which of its divisions are making money. This will allow it to make strategic decisions such as whether to outsource the manufacturing of paperboards.
The disadvantage is that the control system is based on the business units, not on the organizational structure. The organizational structure is based on the operational functions of the company, i.e. sales, production and marketing. However in the control system, the figures for these functional groups are divided between the board mill and the carton factory. This makes it difficult to pinpoint the source of the variances since the expenses are grouped together. Thus if a negative variance appears, it will not be immediately apparent what the source of the variance is.
There is a vague distinction between task control and management control. Superintendents attend the strategic planning meetings, even though they should only be concerned with the implementation of the strategic decisions.
In the initial budget preparation, the Vice President for Production nor any representative from the manufacturing side is included. What the President and Marketing VP agree on is communicated to the responsibility centers. These may make the budget biased in favor of marketing.
It is very puzzling why the current pricing system of Stewart Box varies from the corporate standards. The company should review its pricing scheme to see where the discrepancies originate.
The organizational structure and the control system must be better aligned. The control system must be further improved to effectively locate the sources of the variances. The company must also do a better job in separating the strategic tasks from the tactical tasks for better accountability and implementation.
VII. Basic Justifications
As mentioned in the analysis, aligning the organizational structure with the control system will enable the company to locate the variances faster. It will also give accountability to the appropriate personnel.
VIII. Implementation Recommendations
For large companies, the group would recommend that the organizational structure be altered to separate the two manufacturing departments. Then these departments could have their own sales, marketing, production and finance personnel. This structure will allow the company to better plan and budget its operations, as well as locate the sources of variances.
Since Stewart Box is a medium-sized company, making such organizational restructuring will only lead to inefficiencies since additional personnel may need to be hired. Thus a better alternative is to add more detail to the control systems. For example, exhibit 4 should be further broken down to see any variances associated with marketing.
The company should make improvements with regards to separating strategic from tactical decisions and deciding which people are involved. Strategic planning sessions should involve only the management team. After the plan has been developed, each vice president can communicate these decisions to their subordinates.
Production should be involved at the start of the budget review so that inputs from the manufacturing side such as plant capacity or personnel will be included.
Since overcapacity should inevitably lead to price-cutting, the company should investigate how it is able to quote prices above their estimates. It’s highly probable that hidden costs exist.