EMPIRE GLASS CASE STUDY

ORGANIZATION
Empire Glass Company is a manufacturing company with a number of plants located throughout Canada. Empire Glass Company was a
diversified company organized into several major product divisions, one of which was the Glass Products Division. Each division was
headed by a vice president who reported directly to the company's executive vice president, Landon McGregor. All of the corporate and
divisional management groups were located in British City, Canada.
McGregor's corporate staff included three people in the financial areathe controller, the chief accountant, and the treasurer. The
controller's department consisted of only two peopleWalker and the assistant controller, Alien Newell. The market research and labor
relations departments also reported in a staff capacity to McGregor.
All of the product divisions were organized along similar lines. Reporting to each product division vice president were several staff
members in the customer service and product research areas. Reporting in a line capacity to each divisional vice president were also a general
manager of manufacturing (responsible for all of the division's manufacturing activities) and a general manager of marketing (responsible for
all of the division's marketing activities). Both of these executives were assisted by a small staff of specialists.

VOLATILE GLASS INDUSTRY

The Empire Glass Company operates exclusively as a manufacturer of glass food-and-beverage bottle. Organized along functional
lines, it has number of plants in Canada and operates as an independently run profit center with its operations tied to its parent through
its strategic plan and budget.
Highly dependent on the overall economy's health, the glass industry is characterized by cyclical demand and uncertainties that
make planning difficult, even in the short term. Glass buyers often postpone purchases until their own business operations are profit-
able, and demand is normally seasonal.
Dominated by the customers were large and bought in huge quantities, many were relatively small, the Glass industry is faced
with an increasing level of industry competition. As these customers continue to consolidate and grow, they put tremendous price
pressure on their suppliers. Manufacturers that do win contracts often expand capacity to meet increased volume. As time passes, the
large customers pressure suppliers to maintain or even lower prices, thereby disallowing cost increases incurred by suppliers to be
passed on.
Suppliers often find they are victims of their own successtheir revenues increase, but profits are squeezed by rising costs. Yet
they become captive suppliers to the large customers whose volume is needed to absorb the cost of expanded capacity. Given these
highly uncertain industry conditions, considerable planning and coordination is needed to ensure that production capacity is used fully
and unit costs are maintained or reduced.

THE COMPANYS VS. COMPETITORS PRODUCT PRICE AND QUALITY

Over the years, the sales of the Glass Products Division had grown at a slightly faster rate than had the total market for glass
containers. Until the late 1950s, the division had charged a premium for most of its products, primarily because they were of better
quality than competitive products.
In later years, however, the quality of the competitive products had improved to the point at which they matched the division's
quality level. In the meantime, the division's competitors had retained their former price structure.
Consequently, the Glass Products Division had been forced to lower its prices to meet its competitors' lower market prices.
According to one division executive: "Currently, price competition is not severe, particularly among the two or three larger companies
that dominate the glass bottle industry. Most of our competition is with respect to product quality and customer service. In fact, our
biggest competitive threat is from containers other than glass."

PROPOSED CHANGES TO DEVELOP PRICE POLICY

The rates charged by its competitor were comparable to the rates charged by Empire Glass, the company may need to consider a study
for "Price elasticity' which is the ratio of the percentage change in quantity demanded to the percentage changes in price, assuming that
all other factors influencing demand remain unchanged. In order to determine if the service it provides is Elastic or Inelastic, if the
product is Elastic, reducing the prices will increase the quantity demanded, therefore increasing the revenue. While if the service is
Inelastic it may consider increasing dropping the price to increase the revenue.

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Empire Glass marketing department needs to study its Pricing freedom which refers to the company's degree of power and
freedom to set prices and therefore establish product profitability. Pricing will be set to maximize profits and will depend on
market elasticity. Where monopoly conditions apply and demand is inelastic, high prices will be set. Where there are pure
competition, many competitors, and good substitute products available, however, prices will be determined entirely by market
forces. Empire Glass should answer the following questions as they evaluate this factor:
Are all product prices regulated? If so, are the prices based on costs and subject to appeal and revision?
How competitive is the market?
Does the profitability of the industry appear unusually high or low?
Are the competitive aspects based on some factor other than price?
Are there high barriers to entry?
Do the company's products occupy a unique position within the market?
Can premium prices be justified due to service?
Where are the products within their life cycle?

PRODUCTS AND TECHNOLOGY

The Glass Products Division operated number of plants in Canada, producing glass food-and-beverage bottle. Of these products, food
jars constituted the largest group. Milk bottles, as well as beer and soft drinks bottles were also produced in large quantities. A great
variety of shapes and sizes of containers for wines, liquors, drugs, cosmetics and chemicals were produce in smaller quantities Most of
thousands of different products, varying in size, shape, color, and decoration were produced to order.

PRODUCTION PROCESS
The principal raw materials for container glass were sand, soda ash, and lime. The first step in manufacturing process was to melt
materials in furnaces or tanks. The molten mass was then passed into automatic or semiautomatic machines that filled molds with
the molten glass and blew the glass into the desired shape. The "ware" then through an automatic annealing oven or Lahr, where it
was cooled slowly under carefully controlled conditions. If the glass was to be coated on the exterior to increase its resistance to
abrasion and scratches, this coatingoften a silicone filmwas applied in the Lahr. Any decorating (such as a trademark or other
design) was then added, the product was inspected again, and the finished goods were packed in corrugated containers (or wooden
cases for some bottles).

QUALITY INSPECTION
Quality inspection was critical in the manufacturing process. If the melt in the furnace was not completely free from bubbles and
stones (unmelted ingredients or pieces of refractory material), or if the fabricating machinery was slightly out of adjustment, or
molds were worn, the rejection rate was very high. Although a number of machines, including electric eyes, were used in the
inspection process, much of the inspection was still done visually.

ADVANTAGE OF TECHNOLOGY IMPROVEMENTS

Glass making was one of the oldest arts, and bottles and jars had been machine-molded at relatively high speeds for over
half a century, but the Glass Products Division had spent substantial sums each year modernizing its equipment.
These improvements had greatly increased the speed of operations and had reduced substantially the visual inspec-
tion and manual handling of glassware.
No hand blowing was done in the division's plants; in contrast to the methods used in the early days of the industry, most
of the jobs were relatively unskilled, highly repetitive, and gave the worker little control over work methods or pace.
The mold makers, who made and repaired the molds, the machine repairers, and those who made the equipment setup
changes between different products were considered the highest skilled classes of workers.

DISADVANTAGE OF WORKING ENVIRONMENT

Wages were relatively high in the glass industry.
The rumble of the machinery and the hiss of compressed air in the molding operation, however, plus the roar of fuel in the
furnaces, made the plants extremely noisy.
The great amount of heat given off by the furnaces and molten glass also made working conditions unpleasant.
Production employees belonged to two national unions, and for many years, bargaining had been conducted on a
national basis. Output standards were established for all jobs, but no bonus was paid to hourly plant workers for exceeding
standard.
According to British City Executives, the typical lead time between the customers order and shipment from the plant was
between two and three weeks during 1963

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PROPOSED CHANGES TO MARKETING ACTIVITIES
Each of the division's various plants to some extent shipped its products throughout Canada, although transportation costs limited
each plant's market primarily to its immediate vicinity. Although some of the customers were large and bought in huge quantities,
many were relatively small. The Company may need to consider a Strategic planning which is the process of developing a
strategic fit between the organizations goals and capabilities and its changing marketing opportunities. It involves defining a
clear company mission, setting supporting objectives, designing a sound business portfolio, and coordinating functional
strategic.
Strategic planning sets the stage for the rest of the company is planning. Marketing contributes to strategic planning, and the
overall plan defines marketing's role in the company. Market planning help to learn about the market, stay in touch with the
market, better understanding of the market, and identify the factors that embedded in the market. Also, to answer the following
questions; what consumers are buying? What value adding is the product offering? What is our business? Who are our
customers? Why customers buy from the firm? How consumers view our products?
Planning encourage management to think systematically about what has happen in the past, present and the future. It forces the
company to sharpen its objectives and policies, lead to better coordination of the company efforts, and provide clearer
performance standards for control. Sound planning helps the company to anticipate and respond quickly to changes, and to
prepare better for sudden development.
Corporate strategic planning Process.
Strategic planning involves developing a strategy for long-run survival and growth. It consists of:
Defining the corporate mission,
Design business portfolios and develop growth strategies.
Functional planning strategies and marketing's role in strategic planning,
Defining a clear company mission begins with drafting a formal mission statement, which should be market achievable,
measurable, oriented, realistic, motivating, and consistent with the market environment. The mission is then transformed into
detailed supporting goals and objectives to guide the entire company. Based on those goals and objectives, headquarters designs a
business portfolio, deciding which businesses and products should receive more or fewer resources. In turn, each business and
product unit must develop detailed marketing plans in line with the company wide plan. Comprehensive and sound marketing
plans support company strategic planning by detailing specific opportunities.
Design business portfolios and develop growth strategies.
Guided by the company's mission statement and objectives, management plans its business portfolio, or the collection of
businesses and products that make up the company. To produce a business portfolio that best fits the company's strengths and
weaknesses to opportunities in the environment, the company must analyze and adjust its current business portfolio and develop
growth strategies for adding new products or businesses to the portfolio.
Functional planning strategies and marketing's role in strategic planning. Once strategic objectives have been
defined, management within each business must prepare a set of functional plans that coordinates the activities of the
marketing, finance, operations, and other departments. A company's success depends on how well each department
performs its customer, value-adding activities and on how well the departments work together to serve the customer. Each
department has a different idea about which objectives and activities are most important.

BUDGETARY CONTROL SYSTEM

One good advantage is the Mr. James Walker, who had been the Empire Glass Company's controller for some 15 years understand
the role of the budgetary control systems. Fundamentally, the company management philosophy is organized as a divisional
organization based on broad product categories. These divisional activities are coordinated by the company's executive vice presi-
dent, with the head office group providing a policy and review function for the company's executive vice president.
Within the broad policy limits, the company operates on a decentralized basis, with each of the decentralized divisions
performing the full management job that normally would be inherent in any independent company. The only exception to this
philosophy is that the head office group is solely responsible for the sources of funds and the labor relations with those bargaining
units that cross division lines. Given this form of organization, the budget is the principal management tool used by the head office to
coordinate the efforts of the various segments of the company toward a common goal. Certainly, in our case, the budget is much
more than a narrow statistical accounting device.

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COMPARISON BETWEEN CENTRALIZED AND DECENTRALIZED
CENTRALIZED DECENTRALIZED

Appropriate for stable conditions Appropriate for changing conditions

Tasks are highly specialized and differentiated Tasks are shared jointly and on a cooperative basis

Tasks and obligations are precisely defined Tasks evolve and are defined by the nature of the problem
faced

Control, authority, and the flow of information are hierarchical A network structure of control, authority, and information is
used

The many operating rules and procedures are rigidly enforced The few rules that exist are commonly ignored

The hierarchical structure of the organization is reinforced by Knowledge and control are located where the decision is made
locating knowledge and the control of tasks exclusively at the in the network
top of the hierarchy

Communications are downward and vertical and consist Communications are lateral and consist primary of sharing
mainly of rules, instructions, and decisions to implement information and advice

DECENTRALIZATION
Decentralization is a philosophy of organizing and managing. Careful selection of decisions to push down the hierarchy and
which to hold at the top is required. There will be a greater degree of decentralization if
1) The greater numbers of decisions are made lower down the management hierarchy.
2) The more important decisions are made lower down the management hierarchy,
3) Most functions are affected by decisions made at lower levels.
4) Review or prior approval is required before implementation of a decision.
5) Decentralized structures typically use return on investment (ROI) or profit center accounting methods.
a) ROI gives an objective measure of the performance of individual managers of decentralized units.
b) ROI allows monitoring of performance through management by exception
c) ROI permits comparison of performance of decentralized divisions.
d) ROI facilitates allocation of resources and rewards to the decentralized divisions.
e) ROI measures for decentralized divisions have some limitations. As do other profit-center approaches.
i) ROI measures encourage short-run performance to the detriment of long-run survival.
ii) They encourage division managers to maximize subunit goals to the possible detriment of the total organization.
iii) Transfer prices between units may be unjust.
iv) Top management may adversely influence divisional performance by indirect cost allocation decisions.
v) Some parts of an organization do not lend themselves to 1-year evaluations (e.g. new product divisions).
vi) Annual profit objectives in a cyclical industry or economy may be difficult to determine.
vii) It is frequently impossible to assign responsibilities for deviations from profit objectives beyond the manager's
control.
6) Decentralization is most easily implemented in organizations with product departrmentation based on clearly divisible units.
a) Eliminates extensive transfer-price problems
b) Allows for easier allocation and isolation of overhead.

ADVANTAGES OF DECENTRALIZATION
1) Allows greater speed in making operational decisions
2) Encourages better communication
3) Necessitates understanding of goals throughout the organization (goal congruence)
4) Enables identification and training of good decision makers at lower levels
5) Builds a large pool of experienced management talent
6) Provides many behavioral advantages
a) Gains advantages of participation in management
b) Gives responsibility and authority to lower-level managers
c) Job autonomy is desired by many employees.

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 d) Specific feedback is important for goal-directed people.
e) Provides objective feedback
7) Frees top management from operating problems, thus allowing them to concentrate on long-term strategy
8) Provides a mechanism for allocating resources to profit centers based on ROI applications
9) Permits determination of a single comprehensive figure, e.g., ROI or net income, that measures the financial status of the
decentralized unit
DISADVANTAGES OF DECENTRALIZATION
1) Strong tendency to focus on short-run results to the detriment of long-run health b. Increased risk of loss of control by top
management
2) More difficulty in coordinating highly interdependent units
a) EXAMPLE: A conglomerate that is highly decentralized, i.e., operates its divisions as very separate companies, will
find it difficult to establish a transfer price for goods manufactured in one division and consumed in another. The
consuming division will not believe market prices are equitable, and the producing division will not want to sell for
less.
3) Greater danger of satisfying decisions (those that satisfy or suffice but are not optimal) made by a manager who is unable or
unwilling to see overall organizational goals and is rewarded for maximizing the performance of the decentralized unit
4) Less cooperation and communication between competing unit managers

BOTTOM- UP PLANNING APPROACH

The first efforts at planning and budgeting by a company often fall into the "bottom-up" category. In this generally
unsophisticated process, top management establishes the expected profit level and directs the manager to set a budget to achieve
this target result. The mechanics of the bottom-up approach are such that operating managers and personnel have little input into
the budget content or the projected results.
Revenues are often an extension of historic trend and the bottom line net profit is a function of the top management's
expectation.
The profit results are not based on operating characteristics, but rather on job security issues or bonus and reward
motivation.
Bottom-up planning does not provide any real assurance that the target result will be achieved. Perhaps more important,
the failure to achieve the budget often brings an "It wasn't my budget" response to criticism.
In the context of operational management, mandated profits limit amounts available for individual expense items. The
line item budgets will reflect top management priorities rather than explicit justification.
The distribution of resources will probably be consistent with or proportional to prior year amounts unless some
particular category or group needs or justifies a disproportionate allocation. In such a case all other categories or groups will
be budgeted or projected at lower amounts, without any particular justification involved
With the availability of computer systems that permit a company to model the budget after the normal reporting
structure, the bottom-up, profit-based planning is very easy to prepare.
TOP-DOWN PLANNING
A variation on bottom-up planning is "top-down" planning.
In this instance, top management establishes revenue targets.
Utilizing the revenue target as the beginning point, the remainder of the plans and budgets are established on a
proportionate basis.
No effort to recognize profitability gains arising out of the existence of fixed costs occurs.
The long- or short-term plans that result again do not have line management commitment. They may seem more
scientific because the top line is often established as an extrapolation of historic performance.
Computers permit increased complexity and sophistication in the planning- process.
Top management often measures performance based on sales progress and other results in terms of sales, evaluation of
plans and budgets is often done in terms of the top-down relationships.
The Top-Down Planning method also provides a means of predicting approximate results very early in the process,
facilitating other aspects of planning.

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SALES BUDGET
This was the first step in the budget preparation procedure. As early as May 15 of the year preceding the budget year, the
top management of the company asks the various product division vice presidents to submit preliminary reports stating what
they think their division's capital requirements and outlook in terms of sales and income will be during the next budget year. In
addition, corporate top management also wants an expression of the division vice president's general feelings toward the trends
in the particular items over the two years following the upcoming budget year. At this stage, the head office is not interested in
too much detail.
Top management want an interpretive statement about sales and income based on the operating executives' practical feel
for the market.
All divisions plan their capital requirements five years in advance and have made predictions of the forthcoming budget
year's market when the budget estimates were prepared last year, so these rough estimates of next year's conditions and re-
quirements are far from wild guesses.
After the opinions of the divisional vice presidents are in, the market research staff goes to work. They develop a formal
statement for the marketing climate in detail for the forthcoming budget year and in general terms for the subsequent two
years.
This is an important first step because practically all of the forecasts or estimates used in planning either start with or
depend in some way on a sales forecast.

SALES FORECAST
The sales forecast developed by the sales force and reviewed by sales management must be detailed enough to
provide the basis for other sections in the budget. It should include forecasts by products and by customer if that type of information
can be reasonably Obtains.
The timing of the sales will also be important. It is essential that forecast information by product be developed in
order that other functions in the company will be able to prepare appropriate staffing and expenses projections, and if needed,
capital investment requisitions.
New Products and new customers should be forecast very conservatively, included only if the projections have a
more than strong likelihood of validity.
THE MARKET RESEARCH GROUP INVOLVEMENT IN THE BUDGET PROCESS
The market research group begins by projecting such factors as:
General economic condition, growth of our various markets, weather conditions related to the end uses of our products,
competitive effort, and labor disturbances.
Once these general factors have been assessed, a sales forecast for the company and each division is developed.
Consideration is given to the relationship of the general economic climate to customers' needs and Empire's share of each
market. In addition, basic assumptions as to price, weather conditions, and so forth, are developed and stated explicitly.
In sales forecasting, consideration is given also to the introduction of new products, gains or losses in particular accounts,
forward buying, new manufacturing plants, and any changes in gross sales.
The probable impact of information such as the following is also taken in consideration:
Industry growth trends,
packaging trend,
inventory carry-overs,
In addition, the development of alternative packages to or from glass.
This review of all the relevant factors is followed for each of our products lines, regardless of its size and importance.
The completed forecasts of market research group are then forwarded to the appropriate divisions for review, criticism and
adjustment
PROPOSED CHANGES OF MARKETING DEPARTMENT INVOLVEMENT IN THE BUDGET PROCESS
The marketing department stresses the consumer's point of view, whereas the operations department may be more
concerned with reducing production costs. In order to best accomplish the firm's overall strategic objec tives, marketing
managers must understand other functional managers' points of view. Marketing plays an important role throughout the
strategic planning process. It provides inputs to strategic planning concerning attractive market possibilities, and
marketing's customer focus serves as a guiding philosophy for planning. Marketers design strategies to help meet strategic
objectives and prepare programs to carry them out profitably. Marketing also plays an integrative role to help ensure that
departments work together toward the goal of delivering superior customer value and satisfaction.
The marketing process and the forces that influence it. The marketing process matches consumer needs with the
company's capabilities and objectives. Consumers are at the center of the marketing process. The company divides the total
market into smaller segments, selecting the segments it can best serve. It then designs a marketing mix to differentiate its
marketing offer and position this offer in selected target segments. The marketing mix consists of product, price, place,
and promotion decisions.

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The marketing management functions, including the elements of marketing plan. To find the best mix and put it into
action, the company engages in marketing analysis, planning, implementation, and control. The main components of a
marketing plan are the executive summary, current marketing situation, threats and opportunities, objectives and issues,
marketing strategies,
Marketing Implementation is the process that turns marketing strategic and plans into marketing actions in order to accomplish
strategic marketing objectives.
Implementation involves day-today, month-to-month activities that effectively put the marketing plan to work. In an
increasingly connect world, people at all level of the marketing system must work together to implement marketing plans
and strategies.
At all levels, the company must be staffed by people who have the needed skills, motivation, and personal
characteristics. Marketing Plan and Business plan needs to be developed internally, because in the process of preparing the
plan the management gets to acquire unique knowledge about the market. How sensitive is the market to their
product/services. They get to know which numbers are solid, able to develop different scenarios and be able to predict the
market responds in short/long term. In addition, it is the best way to train management staff and to buy into the plan when
implemented.
All of the companys management needs to work together; marketing mangers make decision about target segment,
branding, packing, pricing, promoting, and distributing. They interact with engineers about product design, with
manufacturing about production and inventory level, and with finance about funding and cash flows.
It is important sales forecast take in consideration the critical bases related to inflation, wage adjustment, exchange
rates, national or industry economics, and all other external influences be established and included in the budget.

THE ROLE OF THE HEAD OFFICE GROUP IN DEVELOPING SALES FORECAST

Empire Glass head office groups primary goal is to assure uniformity between the divisions with respect to the basic
assumptions on business conditions, pricing, and treatment of possible emergencies. Also, possible provide a yardstick so as t
assure the companys overall sales will be reasonable and obtainable.
The product division top management goes back to its district sales managers, each district sales mangers is asked to tell his
top management what he expects to do in the way of the sales during the budget year.
The head office and the divisional staff will give the district sales managers as much guidance as they request, but it is
the sole responsibility each district sales manager to come up with his particular forecast.
After the divisional top management receives the district sales managers forecasts, the forecasts are consolidated and
reviewed by the division's general manager of marketing. At this time, the general manager of marketing may go back to the
district sales managers and suggest they revise their budgets.
From the headquarters' point of view, they can ascertain the size of the whole market and the customer's probable relative
market share. That is where the market research group's studies come in handy. However, even in this case nothing is changed in
the district sales manager's budget, unless the district manager agrees.
Once the budget is approved, nobody is relieved of his responsibility without top management approval. In addition, no
arbitrary changes are made in the approved budgets without the concurrence of all the people responsible for the budget.

THE ROLE OF TOP MANAGEMENT

Top management sets the rules. Top management defines the overall strategy and establishes the overall objectives for the
company. Top management also sets the tone by which all the operating managers run the company.
Top management also approves the plans and budgets prepared and presented by the operating- managers. Here, too, the
separation of responsibilities is imperative. In some companies, a member of top management, in the role of operating manager,
competes for limited corporate resources with other operating managers. If the distinction between manager seeking resources
and decision-maker distributing them is not remembered, the conflict of interest may result in poor decision-making- and
improper allocation of resources. Ultimately, this misallocation may create severe organizational and operational difficulties for
the company. Additional Sales involvement may include:
The sales estimate provided by top management will, if it is reasonable and compares favorably with historical trends,
establish a guideline for the budget manager to use while working with the operating managers. Ultimately, the final
budget will reconcile with this top management estimate, helping to assure that top management will approve it. It also
helps to assure that top management feels in control of the business plans.
The top management revenue estimate enables the budget manager, by assuming a linear income statement relationship
with prior years, to estimate the profits and any financing requirements that the budget year activity will necessitate.
This information is very useful, providing guidance for the actual budgeting process as well as facilitating the
estimation of additional cash requirements for the organization. We will deal with this material explicitly later in the
program.
After review by sales and top management, a sales forecast is now established. This does not mean that the sales budget
is firmly set. The forecast need not be finalized at this point. In fact, the forecast may be altered significantly because of
the first pass at the other steps in the budgeting process. It is, however, a strong starting point.

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 The budget manager, in conjunction with top management, also needs to prepare shortcut estimates and cash
requirements projections.

PLANT MANAGERS INVOLVEMENT IN THE PREPARATION OF THE SALES BUDGET

The plant managers know what is going on not in a formal way. For example, when a plant manager prepares his capital
equipment investment program he is sure to talk to the district sales manager closest to his plant about the district's sales plans.
Next, we go through the same process at the division and headquarters levels. We keep on repeating the process until everybody
agrees that the sales budgets are sound. Then, each level of management takes responsibility for its particular portion of the
budget. These sales budgets then become fixed objectives.
OTHER OBJECTIVES THE DIVISIONS HAVE IN MIND WHEN THEY REVIEW THE SALES FORECASTS
The divisions have four general objectives in mind:
1. A review of the division's competitive position, including plans for improving that position.
2. An evaluation of its efforts to either gain a larger share of the market or offset competitors' activities.
3. A consideration of the need to expand facilities to improve the division's products or introduce new products.
4. A review and development of plans to improve product quality, delivery methods, and service.

PROPOSED CHANGES IMPLEMENT LINEAR ESTIMATION - TIME SERIES MODELS

In its simplest case, history-based planning is the extrapolation of prior performance to project the future results. While this
process is valuable and appropriate for financial needs approximation, it does not provide for the commitment of the line
management and organization to its delivery and it does not take into account any economic, market, or competitive information
that may be available. This linear estimation, all elements and lines of the plans retaining the same relationship to revenues as has
been true historically, in effect, assumes that all expenses are variable. Analysts evaluating performance will frequently compare
the gross margin percentage or the relationship of operating expenses to sales from period to period and conclude, if the
percentages are unchanged, that the company is managing well.
Companies that plan using a time-trend extrapolation will project future results by determining the percentage relationship of
each business element to other elements, ultimately relating the key factors to revenue. This practice means that as soon as
revenues, for next year or for the next several years, have been estimated, the computer will extend all line items and define the
budgets and plans.

MANUFACTURING BUDGETS
Empire Glass classify each plant had a profit responsibility. We have to study the profit center or Slandered Cost Center to see whether
the profit Center criteria fit in the manufacturing division.

REVENUE CENTERS
Revenue centers exist in order to organize marketing activities. Typically, a revenue center acquires finished goods from a
manufacturing division and is responsible for selling and distributing those goods. If the revenue center has discretion for setting
the selling price, then it can be made responsible for the gross revenues it generates. If pricing policy is determined outside the
revenue center (at the corporate level), then the manager of the revenue center is held responsible for the physical volume and
mix of sales.
When a performance measure is chosen for a revenue center, some notion of the cost of each product should be included so that
the center is motivated to maximize operating margins rather than just sales revenue. If evaluated solely on sales revenue,
managers may be motivated to cut prices to increase total sales, spend excessive amounts on advertising and promotion, or
promote low-profit products. Each of these actions could increase total sales revenue but decrease overall corporate profitability.
PROFIT CENTERS
A significant increase in managerial discretion occurs when managers of local unit are given responsibility for both production and
sales. In this situation, they can make decisions about which products to manufacture, how to produce them, the quality level, the
price, and the selling, and distribution system. The managers must make product-mix decisions and determine how production
resources are to be allocated among the various products. They are then in a position to optimize the performance of their centers by
making tradeoffs among price, volume, quality, and costs.
STANDARD COST CENTERS
Standard cost centers can be established whenever we can define and measure output well and can specify the amount of inputs
required to produce each unit of output. Standard cost centers as arising in manufacturing operations in which, for each type of
output product, a standard amount and standard price of input materials, labor, energy, and support services can be specified.
Standard cost centers, however, can be used for any repetitive operation for which we can measure the physical amount of output
and specify a production function relating inputs to outputs.

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In general, managers of standard cost centers are not held responsible for variations in activity levels in their centers. They are
held responsible for the efficiency with which they meet externally determined demands as long as the demands are within the
capacity of the cost center.
Efficiency is measured by the amount of inputs consumed in producing the demanded level of outputs. The implication is that if
a full-cost scheme is being used, the managers are not responsible for under absorbed overhead due to volume variances. They
are, however, responsible for controlling the overhead costs expected to vary with activity volumes and the level of discretionary
fixed costs in the center.
Managers of standard cost centers do not determine the price of their outputs, so they are not responsible for revenue or profit.
Nevertheless, if the output does not meet the specific quality standards or is not produced according to schedule, the actions of
the cost center will adversely affect the performance of other units in the organization. Therefore, quality and timeliness
standards must be specified for any standard cost center, and its manager must produce output according to those standards.
For a standard cost center, then, efficiency is evaluated by the measured relation be tween inputs and outputs, and effectiveness is
evaluated by whether the center achieved the desired production schedule at specified levels of quality and timeliness.
DISCRETIONARY EXPENSE CENTERS
Discretionary expense centers are appropriate for units that produce outputs that are not a measurable in financial terms or for
units where no strong relation exists between resources expended (inputs) and results achieved (outputs). Examples of
discretional expense centers are general and administrative (G&A) departments (controller, industrial relations, human resources,
accounting, and legal), research and development (R&D) departments, and some marketing activities such as advertising,
promotion, and warehousing.
The output of G&A departments is difficult to measure. For departments such as R&D and marketing, often no strong relation
exists between inputs and outputs. For the R&D and marketing functions, we can determine whether the responsible departments
are being effective. That is, we can see whether they are meeting the company's goals in terms of new products and improved
technologies (for R&D) and sales volume or market penetration (for marketing).
Because of the weak relationship between inputs and outputs in these departments, however, we are unable to determine whether they
are operating efficientlythat is, producing the actual amount of output with the minimally required inputs.
For the SG&A departments, it is even more difficult to measure output, so neither effectiveness nor efficiency can be determined.
Instead, companies usually control such departments by monitoring the amount of resources provided to themspending, people,
and equipmentrather than by the outcomes, they achieve. They use controls on the inputs used by the discretionary expense centers
rather than using results control.
Given the difficulty of measuring the efficiency of discretionary expense centers, a natural tendency may arise for their managers to
desire a very high quality department even though a somewhat lower quality department would provide almost the same service at
significantly lower costs. Thus, it becomes difficult for central management to determine appropriate budget, quality, and service
levels for the firm's discretionary expense centers. One solution is to look at industry practice to see whether the company's
expenditures on a given function are in line with those of other companies.
Determining the budget for a discretionary expense center requires the judgment of informed professionals. The central
management needs to trust and work closely with the managers of discretionary expense centers to determine the appropriate
budget level.
The managers of such centers are in the best position to predict the consequences of changing the budget by +10% or +20%. After
finding out which activities would be augmented or reduced by changes, central management could then decide on the budget and
hence on the quality or intensity of effort for the next period. Discretionary expense centers are an excellent example of cases in
which great information asymmetry is most likely to exist between a local unit manager and central management.
Once the budget for a discretionary expense center has been determined, no great benefit can result from pressuring the local manager to
bring actual costs in under budget. Having actual spending below budgeted levels is not necessarily favorable or a sign of efficiency,
as would be the situation in a standard cost center. In a standard cost center, we have good measures of output quantity and quality, so
producing a given amount of output for less-than-budgeted costs is a favorable indication.
For a discretionary expense center, however, a favorable cost variance may only mean that the center has operated at a lower level of
quality, service, or effectiveness than was intended when the budget was established. Typically, the control process for such expenses
will involve ensuring that the quality and level of service of the center have been maintained. Similarly, cost overruns in a discre-
tionary expense center may be caused by favorable circumstances, such as a new-product breakthrough that justifies higher
development expenditures or an improved marketing climate in which increased advertising and distribution expenditures may yield great
returns.
The existence of budgeted and actual expenses for discretionary expense center; may give an illusion of precision about their
operations. However, without good measures of the output from such centers, such data may yield little insight into whether the
centers are operating effectively or efficiently. For some of these centers, the control of discretionary expense centers requires the
informed judgment of knowledgeable professionals on the level and quality of service the centers are producing.

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MANAGERS CURRENT RESPONSIBILITY
The district sales managers have a responsibility for sales volume, price, and sales mix.
The plant manager is responsible for manufacturing costs and extends to profits.
The budgeted plant profit is the difference between the fixed sales dollar budget and the budgeted variable costs at
standard and the fixed overhead budget.
It is the plant manager's responsibility to meet this budgeted profit figure. Even if actual dollar sales drop below the
budgeted level

COMPARISON BETWEEN COST CENTER, REVENUE CENTER, AND DISCRETIONARY CENTER

Standard cost centers, revenue centers, and discretionary expense centers have limited decentralization of decisions. Managers of
standard cost centers may acquire and manage inputs at their discretion, but the outputs from these centers are determined and
distributed by other units. Revenue centers distribute and sell products but have no control over their manufacture. Discretionary
expense centers must produce a service or staff function demanded by the rest of the organization
EMPIRE GLASS NEEDS TO REVISIT THE RESPONSIBILITY OF PLANE MANAGERS AND CONSIDERED MANUFACTURING
DIVISION BE VIEWED AS STANDARD COST CENTER NOT AS PROFIT CENTER

PLANT BUDGETS
Once the vice presidents, executive vice president, and company president have given final approval to the sales budgets,
the sales budget for each plant is prepared by breaking the division sales budget down according to the plants from which the
finished goods will be shipped.
These plant sales budgets are then further broken down on a monthly basis by price, volume, and end use.
With this information available, the plants then budget their gross profit, fixed expenses, and income before taxes.
THE PRINCIPAL CONSTRAINT WITHIN WHICH THE PLANTS WORK THE SALES BUDGET
This is one of the advantages that given plant sales budget, it is up to the plant manager to determine the fixed overhead and
variable costsat standardthat he will need to incur to meet the demands of the sales budget.
In some companies, the head office gives each plant manager sales and income figures that the plant has to meet.
Empire Glass believes that type of directive misses the benefit of all the field experience of those at the district sales and plant
levels. If we gave a profit figure to our plant managers to meet, how could we say it was their responsibility to meet it?

QUESTIONS TO THE PLANT MANAGERS

Assuming that they have to produce this much sales volume?
How much do they expect to spend producing this volume?
In addition, what do they expect to spend for there programs allied to obtaining these current and future sales?

THE PLANT MANAGERS MAKE THEIR OWN PLANS

Requiring the plant managers to make their own plans is one of the most valuable things associated with the budget system. Each
plant manager divides the preparation of the overall plant budget among his plant's various departments.
First, the departments spell out the programs in terms of the physical requirements such as tons of raw materialand then the
plans are priced at standard cost.

ITEMS THAT DEPARTMENTAL BUDGETS MAY INCLUDE

The phase of the budget preparation in which the industrial engineering people are responsible for.
The plant industrial engineering department is assigned the responsibility for developing engineered cost standards
and reduced costs consequently,
The phase of budget preparation covered by the industrial engineers includes budget standards of performance for each
operation, cost center, and department within the plant.
This phase of the budget also includes budget cost reductions, budgeted unfavorable variances from standards, and
certain budgeted programmed fixed costs in the manufacturing area such as service labor.
The industrial engineer prepares this phase of the budget in conjunction with departmental line supervision.

CAPACITY ASSESSMENT
The forecast information, particularly the volume by product, is presented to the operating management responsible for
assuring that product is available when sales needs it.
These managers must review the sales forecast against the capacity to deliver and determine whether sufficient capacity
is available to deliver the volume projected.

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 This assessment will yield capital investment requirements for both replacements of obsolete or worn-out equipment
and expansion due to increases in projected demand.
DEVELOPMENT OF ASSUMPTIONS
Working with top management, the plant manager may develop and disseminates the assumptions to be incorporated into the
plans. Examples of assumptions include inflation rates and how they are to be applied,
currency exchange rates,
average wage and salary adjustments (prepared in conjunction with Human Resources),
employee benefit percentages (prepared in conjunction with Human Resources),
In addition, raw material costs (prepared in conjunction with Purchasing).

REVIEW OF THE PLANT BUDGETS WHEN COMPLETED BEFORE THEY SENT DIRECTLY TO THE
DIVISIONAL TOP MANAGEMENT
Before each plant sends its budget into British City, a group from head office goes out and visits each plant. For example, in the case
of the Glass Products Division, Alien [Newell, assistant controller] and Controller, along with representatives of the Glass Products
division manufacturing staffs visit each of the division's plants.

THE PURPOSES OF THE VISITS ARE:

First, to get familiar and acquaint with the thinking behind the figures that each plant manager will send in to British
City. This is helpful because when reviewing these budgets with the top management. The controller will be able familiar with
the process will know the answer to there questions.
Second, the review is a way of giving guidance to the plant managers as to whether or not they are in line with what the
company needs to make in the way of profits. When all the plants are put together in a consolidated budget, the plant
managers may have to make some changes because the projected profit is not high enough. When this happens, we have to tell
the plant managers that it is not their programs that are unsound. The problem is that the company cannot afford the programs.
It is very important that each plant manager have a chance to tell his story. In addition, it gives them the feeling that
headquarters are not living in an ivory tower.
The plant visits are spread over a three-week period, and the controller and his assistant spend an average of half a day
at each plant.
The role of the head office and divisional staff is to recommend, not decide. That is the plant manager's right.

The plant manager is free to bring in any of his supervisors at or above the supervisory level.

WORK PERFORMED DURING THE PLANT VISITS

Discuss the budget primarily at each plant during the half-day visit.
Wander through the plant and go over in detail the property replacement and maintenance budget with the plant
engineer.

BUDGET PLAN FINAL APPROVAL PROCESS

After completing the plant tours, the plant budgets go to the respective division top management
About September 1, the plant budgets come into British City, and the accounting department consolidates them.
Then the product division vice presidents review their respective divisional budgets to see if the division budget is
reasonable in terms of what the vice president thinks the corporate top management wants.
If he is not satisfied with the consolidated plant budgets, he will ask the various plants within the division to trim their
budget figures. When the division vice presidents and the executive vice president are happy, they will send their budgets to the
company president. He may accept the division budgets at this point. If he does not, he will specify the areas to be re-examined
by division and, if necessary, plant management.
The final budget is approved at December board of directors' meeting.

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TYPES OF PROFIT PLANNING AND CONTROL REPORT (PPCR)
INDIVIDUAL PLANT REPORTS
1. Profit Planning And Control Report: Analysis of the net sales, gross margin, and the plant's ability to meet its standard manu-
facturing cost. Details of actual figures compared with budget and previous years' figures for year-to-date and current month.
2. Manufacturing Expense: Plant materials, labor, and variable overhead consumed. Details of actual figures compared with
budget and previous years' figures for year-to-date and current month.
3. Plant Expense: Plant expenses incurred. Details of actual figures compared with budget and previous years' figures for year-
to-date and current month.
4. Analysis of Sales and Income: Plant operating gains and losses due to changes in sales revenue profit margins, and other
sources of income. Details of actual figures compared with budget and previous years' figures for year-to-date and current
month.
5. Plant Control Statement: Analysis of plant raw material gains and losses, spoilage costs, and cost reductions programs.
Actual figures compared with budget figures for current month and year-to-date.
6. Comparison of Sales by Principal and Product Groups: Plant sales dollars, profit margin and P/V ratios broken down by
end-product use (e.g., soft drinks, beer). Compares actual figures with budgeted figures for year-to-date and current month.
DIVISION SUMMARY REPORTS

7. Comparative Plant Performance, Sales, and Income: Gross sales and income figures by plants. Actual figures compared
with budget figures for year-to-date and current month.

8. Comparative Plant Performance, Total Plant Expenses: Profit margin, total fixed costs, manufacturing efficiency, other
plant expenses, and P/V ratios by plants. Actual figures compared with budgeted and previous years' figures for current
month and year-to-date.
9. Manufacturing Efficiency: Analysis of gains and losses by plant in areas of materials, spoilage, supplies, and labor. Current
month and year-to-date actual reported in total dollars and as a percentage of budgets.
10. Inventory: Comparison of actual and budget inventory figures by major inventory accounts and plants
11. Status of Capital Expenditures: Analysis of the status of Capital expenditures by plants, months, and relative budget.
COMPARISON OF ACTUAL AND STANDARD PERFORMANCE
The head office goes over the actual results based on exception: that is, we only look at those figures that are in excess of the budgeted
amounts. This has a good effect on morale. The plant managers do not have to explain everything they do. They only have to
explain where they go off base.
GROSS PROFIT AND INCOME
Gross profit is the difference between gross sales, less discounts, and variable manufacturing costs such as direct labor, direct
material, and variable manufacturing overheads. Income is the difference between the gross profit and the fixed costs.

REVIEW OF COST AND REVENUE ITEMS

The head office pays close attention to the net sales, gross margin, and the plant's ability to meet its standard manufacturing cost.
When analyzing the gross sales, they look closely at the price and mix changes.
All this information is summarized on a form known as the Profit Planning and Control Report. This document is backed up by a
number of supporting documents.

REVIEW OF FIXED COSTS

The head office wants to know whether the plants carried out the programs that they said they would carry out. If they have not,
they want to know why they have not. They are looking for sound reasons. In addition, they want to know if the plant
managers have carried out their projected programs at the cost they said they would.

REVIEW OF PROFIT PLANNING AND CONTROL REPORT DURING THE MONTH

The head office does not wait until the end of the month to review profit planning. At the end of the sixth business
day after the close of the month, each plant wires to the head office certain operating variances, which they put together
on Variance Analysis.
Within a half-hour after the last plant, report comes through, variance analysis sheets for the divisions and plants are
compiled. On the morning of the seventh business day after the end of the month, these reports are usually on the desks of
the interested top management.
The variance analysis sheet highlights the variances in what we consider critical areas. Receiving this report as soon as
we do helps us at head office to take timely action. Let me emphasize, however, we do not accept the excuse that the plant
manager has to go to the end of the month to know what happened during the month. He has to be on top of these particular
items daily.

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EARLY DETECT OF AN ADVERSE TREND IN OPERATIONS BEFORE RECEIVE THE MONTHLY VARIANCE
ANALYSIS SHEET
At the beginning of each month, the plant managers prepare current estimates for the upcoming month and quarter on
forms similar to the variance analysis sheets.
Because budget is based on known programs, the value of the current estimate is that it gets the plant people to look at
their programs. I hope that they will realize that they cannot run their plants just on a day-today basis.
If a sore spot coming up, or if the plant manager draws attention to a potential trouble area, the head office may ask for daily
reports concerning this item to be sent to the particular division top management involved.
In addition, the division top management may send a division staff specialist to the plant concerned.
The division staff members can make recommendations, but it is up to the plant manager to accept or reject these
recommendations. Of course, it is well known throughout the company that we expect the plant managers to accept gracefully
the help of the head office and division staffs.

THE MONTHLY PROFIT PLANNING AND CONTROL REPORT RECEIVED AT BRITISH CITY HEAD OFFICE
The plant PPCR #1 and the month-end trial balance showing both actual and budget figures are received in British City at
the close of the eighth business day after the end of the month.
These two very important reports, along with the supporting reports PPCR #2 through PPCR #11are then consolidated by
the accounting department on PPCR-type forms to show the results of operations by division and company.
The consolidated reports are distributed the next day.
CHANGES IN THE PLANT BUDGET
This is one of the biggest risks Empire Glass run with budget system.
1. If the sales decline occurs during the early part of the year, and if the plant managers can convince the Head Office (HO)
that the change is permanent. The head office may revise the plant budgets to reflect these new circumstances.
2. However, if toward the end of the year the actual sales volume suddenly drops below the predicted sales volume, the
head office does not have much time to change the budget plans.
3. What the head office does is ask the plant managers to go back over their budget with their staffs and see where
reduction of expense programs will do the least harm. Specifically, to consider what they may be able to eliminate this year
or delay until next year.
4. Having plans makes it a lot easier to figure out what to do when sales fall off from the budgeted level. The understanding
of operations that comes from preparing the budget removes a lot of the potential chaos and con fusion that might arise.
5. If the head office were under pressure to meet, a stated profit goal and sales decline quickly and unexpectedly at year-end.
Under these circumstances, the head office asks the Plant mangers to tell them where they can reasonably expect to cut costs
below the budgeted level.
AFFECTS OF A PLANT COSTS BY THE SALES GROUP'S

1. When a plant manager's costs are adversely affected by the sales group's insisting that a production schedule be changed
to get out an unexpected rush order, the companys main concerned are the customer's. Whenever a problem arises at a plant
between sales and production, the local people are supposed to solve the problem themselves.

2. if the change in the sales program involves a major expense at the plant that is out of line with the budget, then the matter
is passed up to division for decision.

3. The sales department has the sole responsibility for the product price, sales mix, and delivery schedules. They do not
have direct responsibility for plant operations or profit. That is the plant management's responsibility.

4. The sales group will cooperate with the plant people wherever possible. Cooperation is very important to the success of
budget system.

5. Empire Glass management believes the budgetary control system works best if management can get cooperation. But,
within the framework of cooperation the sales and production groups have very clear responsibilities

MOTIVATE THE PLANT MANAGERS TO MEET THEIR PROFIT GOALS

Empire Glass only promote capable people also, a monetary incentive program has been established that stimulates their
efforts to achieve their profit goal.

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 Each month the Head office put together a bar chart that shows, by division and plant, the ranking of the various
manufacturing units with respect to manufacturing efficiency
The head office believe the plant managers arc one hundred percent responsible for variable manufacturing costs since all
manufacturing standards have to be approved by plant managers.
The efficiency bar chart and efficiency measure itself is perhaps a little unfair in some respects when comparing one plant
with another. Different kinds of products are run through different plants. These require different setups, etc., which have an
important impact on a position of the plant.
In general, the efficiency rating is a good indication of the quality of the plant manager and his supervisory staff.
A number of plants run competitions within the plants, which reward department heads, or supervisors, based on their
relative standing with respect to a certain cost item.
The plant managers, their staffs and employees have great pride in their plants

MOTIVATION FOR LOCAL MANAGERS

Good managers are ambitious and take pride in their work. If their role is restricted to carrying out
instructions determined at higher levels, they may lose interest in their assignments and cease applying their talents to their
assignment.
The firm may find it difficult to attract creative and energetic people to serve merely as decision
implementers.
Managers will become more motivated and interested in their assignments when they are permitted more
discretion in performing their tasks.
Allowing for decision making at a local level encourages managers to be more aggressive in their acquisition
of local information and more entrepreneurial and strategic in their actions.
The challenge of course, is to design incentive systems so that such aggressive, entrepreneurial, and strategic
activities at a local level are consistent with overall corporate goals and objectives
STRESS PROFITS AND PRODUCT QUALITY.
The number one item now stressed at the plant level is quality. The market situation is such that in order to make sales the
company has to meet the market price and exceed the market quality.
By quality, not only the physical characteristics of the product but also such things as delivery schedules. If the company is
to be profitable, it must produce high-quality items at a reasonable cost.
This is necessary so that the plants can meet their obligation to produce the maximum profits for the company under the
circumstances prevailing.
ANALYZE OF THE SALES REPORTS
1. The Controller does not review the sales report.
2. It is the sales group's responsibility to comment on the sales activity. They prepare their own reports. They also control
their selling costs against budgets prepared by the sales managers.
3. Initial sales statistics are developed from plant billings summarized by end use and are available on the third business
day after month-end.
4. Detailed sales statistics by end use and customer indicating actual and variance to both budget and prior year are prepared
by data processing at British City and available on the eighth business day after month-end.
5. Sales and price and mix variances by plant and end use can be obtained from PPCR #1, PPCR #4, and PPCR #6.

PROPOSED FUTURE CHANGES IN BUDGETARY CONTROL SYSTEM

1. An essential part of the budgetary control system is planning.
2. Empire Glass management has developed a philosophy that they must begin plans where the work is donein the line
organization and out in the field.
3. Perhaps, in the future, they can avoid or cut back some of the budget preparation steps and start putting sales budget
together later on in the year than May 15.
4. However, I doubt if they will change the basic philosophy. Frankly, I doubt if the line operators would want any major
change in the systemthey are very jealous of the management prerogatives the system gives to them.
5. It is very important that they manage the budget.
6. Sometimes, the plants lose sight of this fact. They have to be made conscious daily of the necessity of having the sales
volume to make a profit. In addition, when sales fall off and their plant programs are reduced they do not always appear to see
the justification for budget cuts.
7. Although, I do suspect that they see more of the justification for these cuts than they will admit. It is this human side of
the budget to which we will have to pay more attention in the future.

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FINAL CONCLUSION
Survival in today's competitive environment means that businesses must be flexible and innovative, largely through development of
new products and services, while simultaneously improving productivity and customer service. However, building the effects of
innovation into the annual budget can be difficult because actions and outcomes often are evolutionary and only become known
as the year progresses. Under these conditions, it is understandable that the annual budget is not an effective control tool because
revenue and spending targets are based on operating conditions different from those actually encountered.
Manufacturing companies have the greatest complexity. The planning process must take into account all aspects of the business
from purchasing and production through to selling and distribution. Often, there are research and development activities as well.
Within the manufacturing function, there are engineering, maintenance, and other indirect functions that must be recognized and
included in the overall planning along with the various production steps and alternatives. Because of the sequence of activities in
a manufacturing company and the interdependence of its operations, planning will help assure that needed resources are properly
identified and will be available when they are required. The more complex the production process, the more interdependence
there is and the greater is the need for comprehensive planning.

PROPOSED CHANGES TO DEVELOP PRICE POLICY

Empire Glass marketing department needs to study its Pricing freedom which refers to the company's degree of power and
freedom to set prices and therefore establish product profitability. Pricing will be set to maximize profits and will depend on
market elasticity. Where monopoly conditions apply and demand is inelastic, high prices will be set. Where there are pure
competition, many competitors, and good substitute products available, however, prices will be determined entirely by market
forces. Empire Glass should answer the following questions as they evaluate this factor:
Are all product prices regulated? If so, are the prices based on costs and subject to appeal and revision?
How competitive is the market?
Does the profitability of the industry appear unusually high or low?
Are the competitive aspects based on some factor other than price?
Are there high barriers to entry?
Do the company's products occupy a unique position within the market?
Can premium prices be justified due to service?
Where are the products within their life cycle?

PROPOSED CHANGES TO MARKETING ACTIVITIES

Each of the division's various plants to some extent shipped its products throughout Canada, although transportation costs limited
each plant's market primarily to its immediate vicinity. Although some of the customers were large and bought in huge quantities,
many were relatively small. The Company may need to consider a Strategic planning which is the process of developing a
strategic fit between the organizations goals and capabilities and its changing marketing opportunities. It involves defining a
clear company mission, setting supporting objectives, designing a sound business portfolio, and coordinating functional
strategic.

MERGE STRATEGY AND BUDGET

Managers at The Empire Glass Company should communicate and coordinate operating plans through a decentralized
process.
All departments need work together to produce an updated budget at the beginning of each quarter.
In The Empire Glass Company's aggressive but realistic budget philosophy, senior management expects each
performance to be developed and met by local Management.
New products and services drive company growth, and research to define and meet emerging customer demand is ongoing.
Budget targets must be supported by action plans that coordinate operational improvements throughout the organization.
In manufacturing, production processes repeatedly are challenged and bottlenecks removed.

THE RESPONSIBILITY FOR BUDGETING AND PLANNING

Every organization appoints one person to be focal point for the preparation of the planning documents. This person,
often designated as Budget Manager, prepares the information to conform to the prescribed structure of the plan or budget.
This person, however, is not "responsible" for the plan. Rather, top management retains overall responsibility and the
managers of all the company departments or activities are responsible for their specific portions.
The Budget Manager is the coordinator who brings all of the parts of the plan or budget together.
The company can meet its budget as a whole only if it achieves each of the individual parts. If this distinction is not
recognized by the entire organization, the planning process is doomed to failure. It is imperative that each manager, and in
fact, each employee who can influence the results, accept responsibility for his or her portion.

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THE ROLE OF BUDGET MANAGER
The budget manager oversees the preparation of the plans and budgets of the company.
He or she does not do the planning.
Rather the budget manager helps the other managers to prepare their parts of the budget according to a schedule and set
of Guidelines established by top management.
The budget manager is really a "plan preparation facilitator, relating to and among all of the functional managers as
they prepare their respective sections of the different planning documents.

THE PLANNING TIMETABLE

The budget manager prepares the schedule for completing each stage of the planning process in time to satisfy the overall
corporate requirements. The budget manager also reminds the operating managers of deadlines and assists managers and their
subordinates in meeting these deadlines

FLEXIBLE BUDGETS
A flexible budget is budget adjusted for changes in volume, in the planning phase; a flexible budget is used to compare
the effects of various activity levels on costs and revenue.
In the controlling phase, the flexible budget is used to help analyze actual results by comparing actual results with a
flexible budget for the level of activities achieved in the period.
Standard costing naturally complements flexible budgeting. However, even without standard costing flexible budgeting
can be used based upon actual costs and quantities outputs.
IMPACT OF ABC
Based on recent developments in activity-based costing, sales units can be assigned both the costs of items they sell and the costs
serving their individual customers. Consequently, companies can use activity-based costing to transform revenue centers that
perform marketing and sales activities into profit center before the development of ABC, companies did not have accurate
measures either specific product costs purchased by customers or of the costs of serving individual customers.
Lacking such specific information, companies could not evaluate the profit contributions from marketing and sales organizations.
With the increased application of ABC concepts to distribution, marketing, and sales activities, the rationale for treating many
units only as revenue centers is sharply diminished.
As with revenue centers, however, companies have begun to apply activity-based costing to their staff departments. ABC enables
companies to treat their staff departments as standard cost centers, or even as profit centers if they are given the option of selling their
outputs to external users. ABC facilitates the measurement of the quantitative output from corporate staff departments. With such
measures, executives can hold the staff departments responsible for the costs incurred in delivering their service output to operating
unit: just as they do production departments that produce and deliver products to subsequent production stages. Thus, the ABC
innovation permits many organizational units, previously treated as discretionary expense centers, to become standard cost or profit
centers
PROPOSED CHANGES IN DEVELOPING SALES BUDGET.
1. Preparation of the sales budget begins with the territory sales managers when they submit quarterly sales budgets to the
sales department for consolidation.
2. Then the sales budget is summarized by geographic territory and by distribution channel.
3. At the same time the sales department is preparing territory budgets, the marketing department independently prepares a
sales budget based on general product types and distribution channels.
4. These two sales budget submissions typically differ, largely due to divergent perspectives and sources of information.
While the sales department bases its estimates on historical patterns of existing products, marketing has more detailed
information about new products and their introduction dates and about special promotion programs.
5. After the marketing and sales departments have made their separate sales forecasts, the two groups compare forecasts,
analyze differences, and reach agreement on the final sales targets.
6. If the two sales targets differ by a substantial amount, more detail about sales derivation and rational is, shared and
discussed. Negotiations over acceptable targets continue until the two parties reach a consensus.
7. Once sales and marketing reach agreement, their sales targets are compared to the strategic plan at a top-level meeting
attended by the president and senior staff.
8. The purpose of the meeting is to identify major product group sales levels that appear too low or too high.
9. Because of discussions on the issues causing these discrepancies, changes are made to reconcile budgeted sales and
market share with the strategic plan.

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10. Upon final approval, sales dollar targets are sent to production scheduling for conversion to production units and shipping
volume.

CONVERT THE SALES BUDGET TO A PLANT PRODUCTION

1. The scheduling group allocates production targets to the companys different plant to gain greatest production and
distribution efficiencies.
2. The Plant group converts the sales budgets derived in the Sales Budget into unit production targets for each plant.
3. Scheduling makes this conversion by analyzing the history of each product category and including such factors as
product destination, delivery distance, and plant capabilities.
4. It also takes into account current product inventories and adjusts or planned increases or decreases.
5. After unit production targets are assigned, production managers begin budgeting there quarterly costs.

RE-EVALUATION OF MANUFACTURING PROFIT CENTER TO COST CENTER

Empire glass needs to revisit the responsibility of plane managers and considered manufacturing division be viewed as standard cost
center not as profit center. Standard cost centers, revenue centers, and discretionary expense centers have limited decentralization of
decisions. Managers of standard cost centers may acquire and manage inputs at their discretion, but the outputs from these centers are
determined and distributed by other units. Revenue centers distribute and sell products but have no control over their manufacture.
Discretionary expense centers must produce a service or staff function demanded by the rest of the organization

CHALLENGES TO STANDARD COST ACCOUNTING SYSTEMS

Standard cost accounting systems are not helpful either when budgeting for continuous change because of built-in contradictions.
One shortcoming of standard costs for companies seeking continuous improvement, for example, is that they presuppose the goal is
to optimize efficiency within a given state of operating conditions rather than to strive for ongoing improvement. Consequently,
when production processes undergo continuous change, standards developed annually for static conditions no longer offer
meaningful targets for gauging their success.

PREPARE COST/EXPENSE BUDGETS.

1. All the Empire Glass Company's functional areas need to be organized as either cost or expense centers.
2. Separate budgets should be prepared for research and development, SG&A , customer service, production, and
distribution.
3. Plant managers submit expense budgets that determine spending and efficiency targets for the upcoming quarter and
year.
4. Each area is expected to provide for improvements designated in the strategic plan.
5. Preparation of a production plant's budget requires widespread participation of department managers and employees and
the full commitment of the plant accountant.
6. The budget process pushes responsibility down to the lowest departmental levels within each plant.
7. Department managers are expected to base their budgets on action plans that detail how improvements will be made.
8. The plant accountant must prepare the direct and indirect salary budgets, consolidate department budgets into an overall
plant budget, and prepare productivity performance measures.
9. The plant manager should help to guide improvement efforts between departments and makes sure that overall
outcomes agree with goals set forth in the strategic plan.
10. Company-wide productivity improvements begin with the production and distribution processes.
11. Every department in these two areas is expected to initiate changes that allow more units to be processed without
incurring added cost.
12. The strategic plan specifies an allowable sales percentage for R&D, for SG&A expenses broken down by functional area
(general administration, marketing, selling), and for customer service.
13. At the beginning of the budget process, area managers are given general expense guidelines based on past history.
14. Budget responsibilities are pushed down to department levels where guideline targets are refined to take into account
the effects of improvements and new programs.
15. SG&A managers then would prioritize needs to find where these funds might best be used while still meeting the
allowable spending targets for all of SG&A.

CONSOLIDATE BUDGETS AND COMPARE WITH STRATEGIC PLAN.

1. After individual budgets are completed by functional areas, they are forwarded to The Empire Glass headquarters.
2. The company accounting group has to review the budget for obvious errors and assemble the final budget package.

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3. The budget is analyzed to ensure that strategic plans are being accomplished and that the plants and the SG&A
departments are focused on the correct efforts.

PREPARE A BUDGET PACKAGE FOR PARENT COMPANY.

1. The controller department has to prepare a complete set of financial statements plus a host of comparative data: budgeted
return on assets employed, productivity measures, budgeted sales attributable to new product introductions, major tooling
expenditures, and an analysis of list prices to net sales.
2. These data first are analyzed to ensure that The Empire Glass Company's performance trends satisfy the targets set forth in
the strategic plan.
3. Normally, any shortfalls already would have been identified and corrected prior to this point in the process.
4. If additional deficiencies are identified, however, the company controller first must correct problem areas before
proceeding further.
5. Then the completed budget is sent to the Head Office for approval.
6. If the Head Office does not approve the budget, the controller must investigate needed changes, such as additional cost
cuts. In these cases,
7. The Empire Glass president normally has to assure the parent company that the budget is the best that is attainable, or, if
such arguments fail, the budget is trimmed further.
8. This type of approach has proven effective because The Company's philosophy is that a change in the budget is not
simply a change in numbers, but rather it means that the company's action plans also must be changed.

BUDGETING FOR COMMITMENT AND ACTION

1. Empire Glass Company's continuous budgeting system enables senior managers to inspire and motivate the achievement of
corporate strategies.
2. Employees at all levels and in all departments needs to be kept informed of new product and process developments, and they
in turn update their own performance targets accordingly.
3. By planning in three-month periods, managers and front-line employees can make a fair assessment of their work
improvements and thus can set realistic targets.
4. This interactive approach pushes decisions down to the production floor, and, as a result, helps to gain employee commitment
and faster adoption of productivity improvements.
5. It also ensures that standard costs and variance reports are meaningful, an important consideration for helping employees gain
the satisfaction of short-term victories in their work.
6. Information technology advances have shortened budget preparation time. A highly integrated computer budgeting system
supplies each department manager with histories and projections of budget line items needs to be implemented.
7. Driver codes for revenue and cost targets needs to be set by default, and, thus, managers need only change budgets for
line items on an exception basis.
8. The budget system speeds up information flows to higher levels, too, because proposed targets are rolled up to the next
level immediately where they can be reviewed and revised quickly by senior management.
9. Most important, The Empire Glass Company's process of continuous quarterly budgeting unites senior-level strategy with a
committed corporate culture.
10. Corporate management best understands where energies need to be focused to enhance the firm's competitive edge, but
attaining strategic goals depends on a workforce that can translate corporate strategies into a well-coordinated action plan.
11. Continuous budgeting is the vehicle for ensuring both understanding and ownership by front-line workers by
communicating a corporate vision, empowering employees to act on the vision, and targeting and tracking short-term wins.
12. The result is an attitude among employees that ongoing improvement is a way of life

DOWNSIDE OF TRADITIONAL BUDGETING

1. The problem with the traditional budgeting process is the mismatch between top-down and bottom-up results.
Corporate spending and revenue goals are set at the top, and then the departmental budgets are computed from the bottom,
often on spreadsheets, in a process that can take several weeks.

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2. If the departmental budgets do not meet top management goals after they have been merged, then arbitrary adjustments
sometimes have to be made.
3. Especially in the current economic environment, a budget can be obsolete almost as soon as it is completed. Many
companies have to deal with changes to partners, suppliers, customers, and competitors, creating a climate where corporate
direction has to change rapidly.
4. Traditional budget process provides no simple method for realigning the departmental budgets when the corporate
strategy changes abruptly.
5. If expenses have to be cut, for example, there is no simple way to adjust all the line items. There is also no way to
guarantee that the imposed cutbacks will be realized. Fine-tuning will have to wait until the next budget cycle begins,
perhaps months down the line.
6. The traditional budgeting process whether manual or performed via spreadsheets, the budgeting process has depended
on the notion that everyone involved in the planning phase comes equipped with a baseline knowledge of accounting.
7. Many non-finance participants in the budgeting process often do not know where to begin. They understand their jobs
thoroughlyand how those functions fit into overall operationsbut they have not been trained in any kind of budgeting
procedures.
8. Lack of guidance and knowledge of appropriate budgeting tools for non-finance participants can hinder them when
they try to develop a meaningful contribution to their companys master plan.
9. Another obstacle results when different departments use a variety of spreadsheet or software programs to pull together
their part of the budget information.
10. The finance department has to compile all the spreadsheetsthat usually are not interoperableand management
accountants must weed through the resultant paperwork that has been generated in these disparate systems.
11. It is an intensive, unnecessary extra step that begins to slow down the process.
12. The budgeting process also is prolonged because the finance department must account for any time lag in this input
from remote-user participants.
13. Management accountants and financial managers watch deadlines disappear while they wait for copies of spreadsheets
via e-mail and snail mail.
14. The biggest drawback of traditional budgeting systems is the inability of participating individuals to access and use
historical data during the budgeting and planning process.
15. Without access to historical budgeting information, creating a budget from the ground up or making alterations to the
existing budget may become tediousand sometimes futiletasks for non-finance users.

E-BUDGETING
The e in e-budgeting refers to both electronic and enterprise wide, and it represents a revolutionary new way for companies
to plan for the future. Companies can implement a budgeting system that scales to the entire enterprise, and they can harness the
power of the Internet from any location in the world to budget effectively.
Managers in the modern mid- to large-sized company want to work a different way, and a number of additional factors are
prompting a change in their philosophy regarding budgeting and planning. Many of these organizations are expanding rapidly,
prompting managers to demand precise resource allocation to support growth plans.
Operational managers are heavily involved in preparing the companys budget.
A tight management plan is contingent upon a comprehensive and accurate budget.
A companys officers want the budget completed on time and correct on the first round. In addition, people in various
departments want to know how their piece of the budget affects overall corporate operations so they can do some what if
scenarios and modeling.
Fortunately, new technology solutions are taking the toil, guesswork, and disparity out of the budgeting process. Enterprise wide
budgeting and planning over the Internet (e-budgeting) is a corporate service application that supports an organizations
operations and efficiency.
Some significant benefits e-budgeting offers an organization includes:
Reducing administrative costs and tasks.
Increasing service levels to employees.
Freeing the finance department to focus on strategy, not spreadsheets.
Financial managers and management accountants can help steer the company toward new Internet-based applications that can
deliver immediate benefits, especially the streamlining of a previously cumbersome process. By discovering ways new e-

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budgeting technology can deliver business solutions, they can transform the budgeting and planning process from a chore of
drudgery to a strategic luxury for there organization.

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BENEFITS OF E-BUDGETING
1. Among the benefits of Web-based enterprise wide budgeting and planning are a dramatic reduction of administrative
resources devoted to tasks and transactions, an overall increase in employee participation, and a significantly strategic focus
for the finance department.
2. New e-budgeting solutions reduce the number of administrative tasks and the associated time and cost necessary to
carry out the budgeting and planning process.
3. By slashing the need for hundreds of spreadsheets and by eliminating the monotonous task of reconciliation, the e-
budgeting process uses a variety of creative techniques to cut down the paperwork trail and save time for the finance
department and other budget participants. Administrative costs and tasks are curtailed because fewer handoffs are required.
4. E-budgeting provides check-out/check-in management and top-down/bottom-up revisions, so budgeters can fill out,
print out, and exchange fewer reports.
5. Everything is online. E-budgeting also offers analysis and reporting capabilities with the ability to drill down to details.
This process provides automated consolidations and a clean audit trail.
6. E-budgeting also extends the budgeting process to a wider range of users.
7. Corporate managers and employees with budget responsibility gain easy access and an intuitive interface via the
Internet. For example, an employee can check out the budget on a laptop and work on it while traveling on a plane. When
finished with the changes, he or she can log back into the application via the Web and upload the changes to the application
database.
8. The new figures the employee inputs into the budget will immediately affect and be affected by other budget
components when the employee checks in (returns) the information via the Internet.
9. Web access with distributed/disconnected capabilities is a key enabler for this flexibility.
10. Now more than ever, companies are following strict budgets, and managers are being held accountable for their budget
plans. Many companies actually base compensation plans on budgeting.
11. Organizations often award merit pay increases or base promotions on a managers ability to develop, implement, and
meet budgets.
12. E-budgeting systems provide these managers with the right tools to budget accurately and effectively.
13. All budgeting participants benefit from a user-definable interface that is customized to an employees skill sets.
14. E-budgeting systems also provide the historical data necessary for current budgeters in any department to make crucial
decisions and allocations based on past forecasts and trends.
15. New e-budgeting solutions provide the tools for a variety of employees to help build different types of budgets,
whether they are expense, capital, or payroll/HR.
16. A corporate human resources executive planning a budget can take a close look at the people costs for each
individual in the company, not just from the perspective of salary, but also taking into account other line item information
such as forecasted bonuses and raises.

17. Most important, e-budgeting allows an organizations finance department to focus on more strategic activities instead
of managing spreadsheet consolidations.

18. They can shift their attention to business analysis and more proactive efforts to monitor critical issues in a companys
growth cycle.

HOW E-BUDGETING WORKS

1. A company can use e-budgeting programs as stand-alone applications; they are most effective when integrated with
financial systems, particularly with a general ledger application, so budgeters can close the loop.
2. Participants in the budgeting process can link back to past data, validate assumptions implicit in their budget area, and,
at some levels, see how their numbers will affect others.
3. An e-budgeting solution completely automates the development of an organizations budget and forecast.
4. From anywhere in the world, at all times, participants in the process can log on through the Internet to access their
budget and any pertinent related information so they can work on their plans.
5. Web-based enterprise budgeting systems offer a centrally administered system that provides easy-to-use, flexible tools
for the end users who are responsible for budgeting.
6. The Web functionality of these applications allows constant monitoring, updates, and modeling.

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7. Pushing the initial phase of the budget process from the back office to corporate managers and front-line employees
frees up the finance department to focus on more strategic issues such as what if modeling, sales, and fiscal objectives.
8. Corporate service applications such as e-budgeting bolster employee productivity by reducing administrative tasks and
supporting the day-to-day operation of an organization.
9. Web-based enterprise wide budgeting and planning solutions facilitate participation by a wide range of users, they rely
on the finance department to maintain ultimate control.
10. The management accountants and financial managers who will monitor the process continually from inception to the
final working budget.
11. E-budgeting provides the flexibility demanded by modern organizations. For example, the finance department can
request across-the-board reallocations of expenditures and model the result immediately.
12. No longer do financial managers and management accountants have to go back and forth with other managers, re-
inputting data and recalling results.
13. E-budgeting can eliminate the cumbersome accounting tasks of pulling numbers from disparate files, cutting and
pasting, entering and uploading, and constantly performing reconciliation.
14. Financial managers do not want to scroll through hundreds of spreadsheets; they simply want to see if the company is
making money, how much it is making, and if actual income and expenditures are on track with budget projections.
15. Web-based solutions bring everyone to the same page and free up the finance department for strategic decision
making rather than paper pushing.
16. Web-based budgeting application lets managers access data from the office, home, or even the airportwherever they
happen to be working. It broadens the systems availability to the user community.
17. With Web deployment and distributed capabilities, new systems are accessible to users regardless of the technology at
their workstations.
18. For maximum control, e-budgeting incorporates an automated check-out/check-in process that provides flexibility for
highly distributed users (those famous road warriors) while maintaining strict security to sensitive information.
19. All activity is logged and recorded to provide a complete audit trail, which allows the finance department to maintain
ultimate control.
20. Because many employees outside finance may have little finance and budgeting experience, e-budgeting applications
take into consideration the needs of various users and the types of budgets for which they are responsible. For example, a
customer service manager needs to be able to do workforce planning.
21. E-budgeting automatically calculates the related depreciation expense associated with each type of capital item. It is
just one more piece of the overall plan that is required to derive a realistic budget from which to manage.
22. In all cases, companies can use an e-budgeting system to help build these diverse types of budgetscapital, expense,
human resources, and revenuewith ease and flexibility.
23. E-budgeting solutions also facilitate flexible planning with their what-if? modeling capabilities. For example, a
controller could propose, What would happen if we increase revenue by 10% or cut R & D by 2%? The application would
model the result.
24. E-budgeting technologies also are capable of supporting mass updates and changes through top-down and bottom-up
revisions, so individuals can quickly forecast a wide array of budgetary possibilities before deriving an accurate final
projection.

A STRATEGIC SOLUTION FOR THE ENTERPRISE

1. Organizations put a huge amount of time and energy into budgeting, but the process often is so labor intensive that the
finance department is bogged down in data consolidation and verification rather than planning and analysis.
2. The major value of new e-budgeting solutions is that they turn budgeting into a management tool instead of an
accounting chore.
3. These powerful applications dramatically change how an organizations employees develop strategic budgets and plans.
4. E-budgeting solutions streamline and transform the strategic budgeting process for non-financial users.
5. The applications empower front-line employees and corporate managers to participate in areas in which they have
expertise and allow the finance department to perform its vital role of fusing information into strategic goals and objectives.
6. New e-budgeting solutions can eliminate literally hundreds of spreadsheets and staff-hours from the budget process.
7. Budgeting should never be a full-time job, but many companies are moving toward continuous budgeting and away
from an annual or quarterly plan.
8. That means someone will be accessing budget data almost every day in some shape, especially when the potential for
new business or products arises.
9. A Web-based solution for the entire enterprise will let executives produce a more accurate and strategically sound
budget than ever before.

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THE KEY STEPS TO SUCCESSFUL STRATEGIC (OUTCOMES) BUDGETING
1. Develop clear goals and objectives. This is the responsibility of the elected leadership, with the advice and assistance
of the staff. The major responsibility of the board is to create the future for the members and for the organization. Goals and
objectives are the expression of the outcomes they are looking for.
2. Prioritize the goals and objectives. In today's constrained economic climate. Decide on a few programs and services
that are of critical importance to the companys members and that you can do superbly within available resources. Clearly
establish desired outcomes and critical completion dates. Again, this is the responsibility of the board, with a reality check
provided by staff.
3. Devise detailed, multiyear strategies for achieving the critical outcomes expressed in the goals and objectives.
Strategies are how is the companys management are going to achieve them. Strategies should be jointly developed by
management and staff and adopted by the board.
4. Spell out tactics used to implement strategies. Begin with the first step. What will be done? Who will do it? When will
it be completed? Who will be responsible? Instead of planning for the coming year, spin this process out until each tactic is
completed. This will give a multiyear work plan and budget for that project, with specific reportable outcomes tied to each
strategy. Add these tactics up and a multiyear work plan. This process of tactics development is the responsibility of the
staff, aided where needed by manager task forces.
5. Prepare a multiyear outcomes-based budget. Add up all the costs of all the tactics and have a multiyear outcomes-
based budget. If there is a deficit in funding next year's work plan, the priorities adopted by the board need to be revisited
and fully fund the highest priority objectives and strategies. Defer the others until subsequent years. Persuade board to adopt
a multiyear budget authorization, and to appropriate funds annually. This will eliminate the need to "spend it or lose it" each
year.

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