Chadd Fisher was recently appointed vice president of operations for Cary Corpor
ID: 2358114 • Letter: C
Question
Chadd Fisher was recently appointed vice president of operations for Cary Corporation. He has a manufacturing background and previously served as operations manager of Cary's building products division. The business units of Cary Corporation include divisions that manufacture building products, process food, and provide financial services. In a recent conversation with Drew Williams, Cary's chief financial officer, Chadd suggested evaluating unit managers on the basis of the business unit data in Cary's annual financial report. This report presents revenues, earnings, identifiable assets, and depreciation for each business unit for a five-year period. He believes that evaluating business unit managers by criteria similar to that used to evaluate the company's top management is appropriate. Drew has reservations about using information from the annual financial report for this purpose and suggested that Chadd consider other criteria to use in the evaluation. Required: 1. Explain why the business unit information prepared for public reporting purposes might not be appropriate for the evaluation of unit managers' performance. 2. Describe the possible motivational impact on Cary Corporation's unit managers if Chadd's proposal for their evaluation is accepted. 3. Identify and describe several types of financial information that would be more appropriate for Chadd Fisher to use when evaluating the performance of unit managers.Explanation / Answer
The business unit information prepared for public reporting purposes may not be appropriate for the evaluation of business unit management performance because:
an allocation of common costs incurred for the benefit of more than one business unit must be included for public reporting purposes, common costs are generally allocated on an arbitrary basis, the business units identified for public reporting purposes may not coincide with actual managerial responsibilities,
this information does not distinguish between a business unit that is a poor investment and the performance of manager who has done well despite adverse circumstances.
The balanced scorecard is now adopted by many firms to address the limitations of financial-based evaluations only. The balanced scorecard provides quantitative measures in other key areas for the organizations success, including: internal processes, customer satisfaction, and learning and growth of managers and staff.
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2. If their performance is evaluated on the basis of the information in the annual financial report, Cary Corporation's business unit managers may become frustrated and dissatisfied because they would be held responsible for an earnings figure that includes the arbitrary allocation of common costs and costs traceable to but not controllable by them. Performance evaluation on this basis could cause dissatisfaction, and the best managers may seek employment elsewhere
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Cary Corporation should define strategic business units that coincide with managers' actual responsibilities rather than using the rules developed for public financial reporting.
All reports should be prepared utilizing the contribution approach which would separate costs by behavior and assign costs to business units only if they could be controlled by the business unit.
The report should disclose contribution margin, contribution controllable by business unit managers, and contribution by each business unit after the allocation of common costs.
Also, the company should adopt the balanced scorecard as a means to comprehensively link the performance of managers with the critical measures necessary for success.