Overview
River Beverages is a food and soft-drink company with worldwide
operations. The company is organized into five regional divisions with
each vice president reporting directly to the CEO, Cindy Wilkins. Each
vice president has an R&D department, controller, and three divisions;
carbonated drinks, juices and water, and food products. Management
believes that the structure works well for River Beverages because
different regions have different tastes and the division?s products
complement each other. River Beverages? company wide and divisional
organization charts are shown here.
CEO
Vice President Vice President Vice President Vice President Vice President
Strategic research Team
Controller
Division Manager, Division Manager, Division Manager,
Carbonated Drinks Juices & Water Food Products
Division Manager
Controller
Plant Manager
Operations Manager. Maintenance Manager. Quality Control Manager.
Division Sales Manager
District Manager. Distrcit Manager. Distrcit Manager.
NOTE: Plant Manager and Divisional Sales Manager are side by side in actual.
Industry
The US beverage industry has become mature with its growth matching
population growth. In one recent year alone, consumers drank about 50
billion gallons of fluids. Most of the industry growth has come from
the nonalcoholic beverage market, which is growing by about 1.1
percent annually. In the nonalcoholic arena, soft drinks are the
largest segment, accounting for 53.4 percent of the beverages
consumed. Americans consume about 26 billion gallons of soft drinks,
ringing up retail sales of $50 billion every year. Water (bottled and
tap) is the next largest segment, representing 23.7 percent of the
market. Juices represent about 12 percent of the beverages consumed.
The smallest but fastest-growing segment is ready to-drink teas, which
is growing by more than 91 percent in volume but accounts for less
than 1 percent of the beverages consumed.
Sales Budgets
Susan Johnson, plant manager at River Beverages? non-carbonated drink
plant in St. Louis, recently completed the annual budgeting process.
According to Johnson, division managers have decision-making authority
in their business units except for capital financing activities.
Budgets keep the division managers focused on corporate goals. At the
beginning of December, division managers submit a report to the vice
president for the region summarizing capital, sales, and income
forecasts for the upcoming fiscal year beginning July 1. Although the
initial report is not prepared with much detail, it is prepared
carefully because it is used in the strategic planning process.
Next, the strategic research team begins a formal assessment of each
market segment in its region. The team develops sales forecasts for
each division and compiles them into a company forecast. The team
considers economic conditions and current market share in each region.
Management believes the strategic research team is effective because
it is able to integrate division products and more accurately forecast
demand for complementary products. In addition, the team ensures
continuity of assumptions and achievable sales goals.
Once the corporate forecast has been completed, the district sales
managers estimate sales for the upcoming budget year. The district
sales managers are ultimately responsible for the forecasts they
prepare. The district sales forecasts are then compiled and returned
to the division manager. The division manager reviews the forecast but
cannot make any revisions without discussing the changes with the
district sales managers. Next, the strategic research team and the
division controller review the district sales forecasts. Finally, top
management reviews each division?s competitive position; including
plans to increase market share, capital spending, and quality
improvement plans.
Plant Budgets
After top management approves the sales budget, it is separated into a
sales budget for each plant. Plant location is determined by product
type and where the product needs to be distributed. The budget is
broken down further by price, volume, and product type. Plant managers
budget contribution margins, fixed costs, and pretax income using
information from the plant sales budget.
Budgeted profit is determined by subtracting budgeted variable costs
and budgeted fixed costs from the sales forecast. If actual sales fall
below forecasts, the plant manager is still responsible for achieving
the budgeted profit. One of the most important aspects of the plant
budgeting process is that plant managers break the plant budget down
into various plant departments.
Operations and maintenance managers work together to develop cost
standards and cost-reduction targets for all departments. Budgeted
cost reductions from productivity improvements, unfavorable variances,
and facility-level costs are developed for each department, operation,
and cost center in the plant. Before plant managers submit their
budgets, a member of the strategy team and the regional controller
visit the plant to keep corporate management in touch with what is
happening at the plant level and to help corporate management
understand how plant managers determine their budgets. The visits also
allow corporate management to provide budget preparation guidance if
necessary. The visits are especially important because they force
plant management to keep in touch with corporate-level managers. The
final budgets are submitted and consolidated by April 1. The vice
president reviews them to ensure that they are in line with corporate
objectives. After all changes have been made by the vice presidents
and the chief executive officer (CEO), the budgets are submitted to
the board of directors for approval. The board votes on the final
budget in early June.
Performance Measurement
The corporate office generates variance reports monthly. River
Beverages has a sophisticated information system that automatically
generates reports based on input downloaded daily from each plant.
Managers in the organization also can manually generate the reports.
Most managers generate variance reports several times during the
month, allowing them to solve problems before the problems get out of
control. Corporate management reviews the variance reports, looking
closely at over budget variance problems. Plant managers are
questioned only about over budget items. Management believes that this
ensures that the plant managers are staying on top of problem areas,
and that this keeps the plants operating as efficiently as possible.
One week after the variance reports are generated, plant managers are
required to submit a response outlining the causes of any variances
and how they plan to prevent the problems in the future. If a plant
manager has repeated problems, corporate management might send a
specialist to the plant to work with the plant manager to solve the
problems.
Sales and Manufacturing Relations
?We are expected to meet our approved budget,? remarked Kevin Greely,
a division controller at River Beverages. ?A couple years ago, one of
our major restaurant customers switched to another brand. Even though
the restaurant sold over one million cases of our product annually, we
were not allowed to make revisions to our budget.?
Budgets are rarely adjusted after approval. However, if sales decline
early in the year, plant managers might file an appeal to revise the
budgeted profit for the year. If sales decline late in the year,
management usually does not revise the budgeted amounts but asks plant
managers to cut costs wherever possible and delay any unnecessary
expenditure until the following year. Remember that River Beverages
sets budgets so it is able to see where to make cuts or where it can
find any operating inefficiencies. Plant managers are not forced to
meet their goals, but they are encouraged to cut costs below budget.
The sales department is primarily responsible for product price, sales
volume, and delivery timing while plant managers are responsible for
plant operations. As you might imagine, problems occur between plant
and regional sales managers from time to time. For example, rush
orders could cause production costs to be higher than normal for some
production runs. Another problem could occur when a sales manager runs
a promotional campaign that causes margins to shrink. In both
instances, a plant manager?s profit will be affected negatively while
a sales manager?s sales will be affected positively. Such situations
are often passed up to the division level for resolution; however, the
customer is always the primary concern.
Incentives
River Beverages? management has devised what it thinks is an effective
system to motivate plant managers. First, plant managers are promoted
only when they have displayed outstanding performance in their current
position. Second, monetary incentives reward plant managers for
reaching profit goals. Finally, charts produced monthly display
budgeted items versus actual results. Although not required to do so,
most plant managers publicize the charts and use them as a
motivational tool. The charts allow department supervisors and staff
to compare activities in their department to similar activities in
other plants around the world.
CEO?s Message
Cindy Wilkins, CEO of River Beverages, looks to the future and
comments, ?Planning is an important aspect of budget preparation for
every level of our organization. I would like to decrease the time
spent on preparing the budget, but I believe that it keeps people
thinking about the future. The negative aspect of the budgeting
process is that sometimes it over controls our managers. We need to
stay nimble enough to react to customer demands while staying
structured enough to achieve corporate objectives. For the most part,
our budget process keeps our managers aware of sales goals and alerts
them when sales or expenses are off track.?
Required
a. Discuss each step in River Beverages? budgeting process. Begin with
the division manager?s initial reports and end with the board of
directors? approval. Is each step necessary? Explain.
b. Evaluate River Beverages? responsibility-accounting system.
Specifically, should the plant managers be held responsible for costs
or profits? Why?
c. Write a report to River Beverages? management stating the
advantages and disadvantages of the company?s budgeting process. Start
your report by stating your assumption(s) about what River Beverages?
management wants the budgeting process to accomplish. |
