160 Part I The Management Control Enuironment

Casr 3-6
Gner.rD JrlN CouPatw

The Grand Jean Company was founded in the commented on the firm's use of outside contrac-
mid-19th century. The frrm survived lean years tors: "The majority of these contractors have
and the 1929 depression largely as the result of been with us for five years or more. Several of
the market durability of its dominant product- them have served Grand Jean efficiently and
blue denim jeans. Grand Jean had been a mar- reliably for over 30 years. In our eagerness to
ket leader with "wash-and-wear," bell-bottom get the pants made, we understandably link
and flare jeans, and modern casual pants. By with some independents who don't know what
1989 it was one of the world's largest clothing they are doing and are forced to go out ofbusi-
manufacturers. It offered a wide variety of ness after a year or so because their costs are
i
dress and fashion jeans for both men and boys too high. Usually we can tell from an indepen-
and a complete line of pants for women' It en- dent's experience and per unit contract price
joyed a reputation for reasonably priced, qual- whether or not he's going to survive.
ity pants. The company sold 40 million pairs of "Contract agreements are made by me and
pants last year. my staff. The ceiling or maximum price we are
i' willing to pay for each type of pants is very well
established by now. If a contractor impresses us
i ii,r
Production
;.J,- as being both reliable and capable of making
.:I In each of the last 30 years, Grand Jean sold quality pants, we will pay him that ceiling' If
virtually all its production and often had to we aren't sure, we might bid a little below that
begin to ration its pants to buyers as early as ceiling for the frrst year or two, until the con-
four months prior to the close of the production tractor proves himself."
fi year. The company owned 25 manufacturing Due to intense domestic and foreign compe-
plants. The plants'capacity varied, but the av- tition, the failure rate in the garment industry
erage output was about 20,000 pairs of pants was quite high. Hence, new entrepreneurs
per week. With thb exception of two or three often stepped in and assumed control of exist-
plants that usually produced only blue denim ing facilities.
jeans, the plants produced various types of
pants. The firm augmented its own production
The Control System
.l capacity by contracting with independent man-
ufacturers. Currently, there were 20 such con- Mr. Wicks continued: "We treat our 25 plants
!
i

il tractors making all lines of Grand Jean's pants as expense centers. Operations at each
plant
(including blue denim jeans)' Last year contrac- have been examined thoroughly by industrial
tors produced one-third of the total pants sold and cost engineers. You know, time-and-motion
by Grand Jean. studies and all. I'm quite proud of the standard
Tom Wicks, vice president for production op- times and costs we have in place. We have even
erations (see organization chart in Exhibit 1), developed learning curves that tell us how long
it will take production of a given type of pants
to reach the standard hours allowed per pair
Adapted (with permission) by Professor Joseph G. San Miguel from after initial start-up or a product switch-over.
a case prepared by Professor Charles T. Horngren, Cost Accounting, We know the rate at which total production
fr{th edition, Prentice-Hall, Inc. Copyright by Charles T. Horngren
and Joseph G. San Miguel.
time per pair reaches standard for every basic

h&-
 Chapter 3 Responsibility Centers: Reuenue and Expense Centers 161

Exnlsrr 1
Grand Jean
Company organization
chart

Vice President Vice President

Corporate Production
Planning Operations

Men's
Dress
and
Fashion
Jeans
Dept.

style of pants we make. We use this informa-
tion for budgeting a plant's cost. The marketing
staff estimates the quantity,of pants of each
type it wants produced each year. That infor-
mation is used to divide total production among
the plants. If possible, we like to put one plant
to work for a whole year on one type of pants.
That saves start-up and changeover costs. Since
we can sell all we make, we try to keep our
plants at peak efficiency. Unfortunately, the
marketing folks always manage to complicate
production schedules with a lot of midyear
changes in pant needs, so this objective is diffi-
cult to meet.
"The plant budgeting begins with me and my
staff determining what a plant's quota (in pairs
of pants) for each month should be for one year
ahead of time. We look at the plant's past per-
formance and add a little to this because we ex-
pect people to improve around here. These
yearly budgets are updated at the end of each
month in light of the previous month's produc-
tion. If a plant manager beats this budget fig-
ure, we feel he has done a goodjob. Ifhe cannot
meet the quota, his people have not been work-
ing at what the engineers feel is a very reason-
able level of speed and efficiency. Or possibly
absenteeism or worker turnover, big problems
in our plants, have been excessively high. When
the quota has not been reached, we want to
know why and want the problem corrected as
quickly as we can.
"Given the number of pants that a plant ac-
tually produces in a month, we can determine
the number of standard labor hours allowed for
that month. We compare this figure against the
actual labor hours to determine how a plant
manager performed as an expense center. I
phone every plant manager each month to give
prompt feedbaik on either satisfactory or un-
satisfactory peft rmance.
"We also look for other things in evaluating a
plant managbr. Have his community relations
been good? Are his employees happy? The own-
ers of this company are very concerned about
these factors."
An annual bonus constituted the core of
Grand Jean's reward system. Mr. Wicks and
his two chief assistants rated each plant man-
ager's performance on a 1-to-5 scale, where 5
was the highest rate. At year-end, Grand Jean's
top management determined a bonus base by
 162 Part I The Management Control Enuironment
evaluating the firm's overall performance and
profits for the year. The bonus base had been as
high as $10,000. The performance rating for
each member of Grand Jean's management
cadre was multiplied by this bonus base to de-
termine a given manager's bonus. For example,
a manager with a 3-point rating would receive
a $30,ooo bonus.
Grand Jean's management group included
many finance and marketing specialists. The
casewriter noted that these personnel, who
were located at corporate headquarters, were
consistently awarded higher ratings by their
supervisors than were plant managers. This
difference consistently approached a full point.
The five marketing departments listed in Ex-
hibit 1 under the vice president of marketing
are treated as revenue centers. Marketing fore-
casts are used to set sales unit and sales dollar
targets. The performance of marketing depart-
ment managers is measured on the basis of
meeting these targets. To meet changing con-
sumer demand, frequent changes in product
mix were necessary. The sales force sells all
types of jeans within an assigned territory.
Their compensation.consists of salary plus
8 percent sales commissions. Commissions rep-
resent roughly half the average salesperson,s
compensation. The ctmtomers are retail stores
,and-plothing distributors. For marketing de-
pqrr1ng.r{t perrorrnance assessment, the sales oI
'tratllpnt4erformance
* g[ J,lt f]tdrfffs arq as slgne{tp thllespective
mE rltetlii$
T g'.,,t Ji;?,r.],ffi.j e i n s, e t c. ) .
y"flFtf"f @rryt ticipated
ln
Evaluation irf the System
Mia Packard, a recent business school gradu-
ate, gave the casewriter her opinions regarding
Grand Jean's production operations and its
management control procedures: "Mr. Wicks is
one of the nicest executives I've ever met, and a
very intelligent businessman. But I really don,t
approve of the system he uses to evaluate his
plant managers. On a recent plant visit as part
of my company orientation program, I acciden_
tally discovered that the plant manager was
'hoarding' some of the pants produced over
quota. He does this in good months to protect
himself against futuie production deficiencies.
That plant manager was really upset that I
stumbled onto his pant storehouse. He insisted
that other managers did the same thing and
begged me not to tell Mr. Wicks. This is odd be-
havior for a company that usually has to turn
away orders near the end ofthe year! I suspect
that most plant managers aren't really pushing
for maximum production. If they do increase
output, their quotas are going to go up, and yet
they won't receive any immediate monetary re-
wards to compensate for the increase in their
responsibilities or requirements. If I were a
plant manager, I wouldn't want my production
exceeding quota until the end ofthe year.
"Also, Mr. Wicks worked his way up the
ranks of the company. He was a very good plant
manager himself and feels that everyone should
run a plant the way he did. For example, in
Mr. Wicks's plant there were 11 workers for
every supervisor or member of the office and
administrative staff. Since then, Mr. Wicks has
elevated this supervision ratio of 11:1 to some
sort of sacred index of leadership efficiency. All
of plant managers aim for it and, as a result, usu-
ally understaff their offices. Because of this, we
can't get timely and accurate reports from
plants. There simply aren't enough people in
the offices out there to generate the information
we desperately need when we need it!
"Another thing! Some of the plants have been
built within the last five years and have much
newer equipment. Yet there is no difference be-
tween the standard hours determined in these
plants and the older ones. The older sewing ma-
chines break down more often, require more
maintenance, and probably aren't as easy to
work with."
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 Chapter 3 Responsibility Centers: Reuenue and Etpense Centers
Questions
1. How would you describe the goal(s) of the
company as a whole? Is this, or are these,
the same as the goal(s) of the company's
marketing organization and the
company's 25 managers of manufacturing
plants? Explain.
4. If Grand Jean's manufacturing plants
2. Evaluate the current management
planning and control system for the
manufacturing plants and the marketing
departments. What are the strengths and
weaknesses?
3. One plant manager recommended that
plants be operated as profrt centers
because it would overcome some of the
problems discovered by Mia Paikard and
the casewriter. This plant manager
commented, "[My] competitor is the
nearby independent manufacturer that
makes the same pants for Grand Jean as
my plant makes. And this outsider might
also make pants for Grand Jean's
competitors. Because of the competitive
market, only the best managed plants
survive in this business. Therefore, like
163
the outside company's manager I should
have bottom line responsibility and be
rewarded accordingly." Do you agree or
disagree with the profit center concept for
Grand Jean's 25 manufacturing plants?
How would this approach affect the plant
managers' decisions, performance, etc'?
were treated as profrt centers, three
alternatives were suggested for recording
revenues for each plant:
o. Use the selling price recorded by
Grand Jean's sales personnel for pants
sold to retailers and distributors.
b. Use full standard manufacturing cost
per unit plus a "fair" fixed percentage
markup for gross profrt.
c. IJse the average contract price Grand
Jean paid outside companies for
making similar pant types.
Evaluate these three alternatives. Which
one would you recommend? Why is Your
selection the best one?
ffi^-l:t:I