Part 1
Milton manufacturing is facing a number of issues that include:
Inaccurate costing of tables and chairs, there is an equal allocation of overheads to chairs and tables resulting in the chairs being allocated more than a fair share of the overheads while the tables under absorb overheads.
Resistance to change, Mr. Smith is reluctant to change the costing techniques arguing that they have traditionally allocated overheads to tables and chairs equally.
The organization has a closed climate where employees are not able to freely communicate. For instance, Mr. Smith tends to dominate the meeting and members are afraid of challenging him on any of his views. For instance, even though Mr. Jack believes that the equal apportionment of overheads to chairs and tables unfairly allocates more overheads to chairs because chairs take fewer labor hours to produce than tables, he is not able to authoritatively defend his view before Mr. Smith who seems to intimidate him.
Conflict in the group, the team members are in conflict. For instance, Mr. Smith thinks that the organization should abandon the manufacturing of chairs due to the apparent loss they make while Ms. Tink is adamant that they should continue producing chairs because most of the customers who buy tables also buy chairs to go with the tables. Ms. Rachel the head of table manufacturing is keen on reducing the production costs that result in delays of producing tables that gives the marketing department a rough time explaining to the customers the reasons for the delay.
Performance measurement, the organization is using financial measures to measure performance. Employee bonuses are based solely on how much profit a particular department makes this result in dysfunctional behavior. For instance, the table department is focused on minimizing expenses in order to maximize profits. However, their efforts to minimize expenses are causing delays that are a source of customer complaints.
Implications of the issues
Inaccurate costing will lead to inaccurate profit calculations. Since the organization uses profits at the basis of allocating bonus the tables department will be awarded the bonus unfairly. This will lead to demoralization of the chairs department.
Resistance to change will result in the adherence of traditions that may inhibit the competitiveness and the viability of the firm in the face of rapidly changing environment
The closed climate limits the flow of information because employees are afraid of discussing views that seem to contradict those of their seniors (The Open University, 2011).
The current scenario of looking at conflicts as win-lose situations will result in sub-optimal decision-making.
Ignoring non-financial performance measurements will result in employees neglecting other equally important qualitative factors such as customer satisfaction and this may lower the competitiveness of the business (Lindridge et al., 2011).
Practicalities of any proposed change
It is possible to change the basis of allocating overheads from an equal allocation to using direct labor as the basis of overhead allocation.
It is possible to overcome resistance to change by making the stakeholders see the problem and understand why the change is necessary (The Open University, 2011).
It is possible to create an open climate for communication by encouraging employees to communicate openly and freely.
There is no permanent way of eliminating conflicts. Instead, an organization can adopt strategies of dealing with conflicts such as conflict prevention and resolution.
It is possible to include other non-financial measures in performance measurement.
Recommendations
Use a fair basis such as labor hours to allocate overheads. The challenge the organization may face in switching the basis of allocating overheads would be the increase in cost in setting up a management information system to provide them with the relevant data. In addition, they may face resistance especially from the tables department that would end up with higher overheads meaning that the profitability of the tables and consequently the bonus that they may earn would reduce.
The organization should create an open climate for communication that will enable employees to voice their suggestions without fear of being criticized (The Open University, 2011). However, an open communication climate will lead to problems such as conflicts and grievances.
The organization can deal with the conflict by preventing or resolving the conflict. Preventing the conflict will entail establishing unifying goals, changing roles or groupings, and better communication (The Open University, 2011). On the other hand resolving the conflicts will entail facilitating, imposition, and negotiation (The Open University, 2011). The objective of the organization in dealing with conflict is in the end to have a win-win outcome instead of a win-lose outcome.
The organization should include other non-financial performance measurements as part of the performance measurement. However, including non-financial performance measurements will increase the time and cost of gathering the required information to conduct the appraisal.
Part 2: Management Report
The management report identifies the issues facing Milton Manufacturing, draws conclusions, and makes recommendations of the way forward. The key issues facing the organization are as follows:
Inaccurate costing techniques that allocate overheads equally to tables and chairs, this overhead allocation method assume that chairs and tables consume overheads in the same proportion. However, the tables take more labor hours to produce than chairs. Therefore, the overhead allocation technique allocates more than a fair share of overheads to chairs and under allocates overheads to the tables.
Resistance to change manifests in the organization reluctance to embrace a new overhead allocation system despite the equal allocation system producing distorted profit/ (loss) calculations.
A closed communication climate Mr. Smith in particular seems to intimidate contrary views by placing himself as the oldest and wisest in the organization. Mr. Smith exhorts himself as being the champion of the traditions and the heritage of the organization. For instance, Mr. Smith dismisses Jack’s opinion of sharing overheads using labor hours without listening to the merits of Jack’s argument.
There is conflict in the organization. For instance, the delays in production of tables are causing a conflict between the marketing department and the tables department. The allocation of overheads is causing a conflict between the chairs department and the tables department.
The organization only uses financial measures in performance measurement. While financial performance measures are commonly used because the information is readily available, quantifiable, and that they are fundamentally important (Lindridge et al., 2011), they may lead to the firm ignoring important qualitative factors such as customer satisfaction.
Financial implications of using direct labor hours to allocate overheads
Analysis
Using direct labor hours allocates £54.41 of production overhead to tables, an increase of £9.08 while chairs absorb £36.34 of production overhead representing a reduction of £9.09. Consequently, the total cost per table increases to £136.23 resulting in a loss of £1.23 per table and a total loss from tables of £757.50. On the other hand, the cost for a chair reduces to £108.56 resulting in a profit of £1.44 per chair and a total profit from chairs of £885.00. The company will therefore need to improve the profitability of the tables by either increasing the selling price or reducing costs.
Recommendations
In order to improve the profitability the organization should:
Change the basis of allocating overheads from equal allocation of overheads to using direct labor hours. The change is a developmental change aimed at remedying an inaccurate cost estimation technique (The Open University, 2011). Lewin Force-Field Model argues that in order to implement change it is important to identify the forces that are driving change and the forces that are restraining change. Some of the forces that can be at play will include:
Personal – The table department may lose out on their bonus
Interpersonal – Mr. Smith may feel that a change will indicate that he has lost his argument
Intergroup – there is likely to be hostility between the chairs department and the tables department
Financial – the organization may have inadequate resources to set up a management accounting system
Create an open climate that will foster open communication. Such a climate is a pre-requisite to establishing systems and structures for dealing with conflicts and grievances. In order to create an open climate managers will need to communicate various types of information including job information, operational information, strategic information, and personal information (The Open University, 2011).
Include nonfinancial measures in performance measurement. The use of Balanced Score Card is one such performance measurement that includes both financial measures and nonfinancial measures. The Balanced Score Card identifies four critical areas of performance measurement: customer perspective, internal processes perspective, innovation and learning perspective, and financial perspective (Lindridge et al., 2011). The Balance Score Card helps the organization to link goals to the strategy of the organization (Lindridge et al., 2011). However, for the Balanced Score Card to be effective it will require the commitment of top managers. In addition, the measures included in the scorecard must be limited and focused to the critical areas of the organization (Lindridge et al., 2011).
References
Lindridge et al., (2011). Understanding Marketing and Financial Information. London: The
Open University.
The Open University, (2011). Managing and Managing people. London: The Open University.
