Let’s face it, Lew. Our new management control system is in trouble. As far as I can tell, Frank [Baum, Barrington’s president] doesn’t use the reports in any meaningful way. In fact, he told me this afternoon that he finds the reports useless. He said that the variances from budget always seem to be large but there’s always a good explanations. More importantly, Frank says that some divisions are showing favorable variances when he knows they’re doing a poor job!

Hank Anderson, Controller of Barrington Products Inc. (BPI), was speaking to Lew Carroll, one of his deputies. Mr. Carroll had come to BPI three years before, from a large industrial company where he had been a budget analyst in one of the divisions. He was responsible for developing and installing the present management control system. The system had gone into effect 18 months ago, and for the first year, it was considered experimental. In 1998, it became fully operational. Now, some four months later, Mr. Baum was questioning its utility, and Mr. Anderson evidently was agreeing. Mr. Carroll was confused:

I don’t understand, Hank. The system is similar to the one I used at IP [Industrial Products] and it worked really well there. If a manager deviated from the budget, he or she had to have a really good explanation, and, even then, there were consequences.

Mr. Anderson responded:

Well, it may have worked at IP, but it isn’t working here. I’ll arrange for you to talk with Frank about it. Then, I want you to figure out how to make the system work better.

BACKGROUND

Barrington Products, Inc. began during World War II as a family-owned manufacturer of cotton textiles for the military. The original plant was located in the town of Barrington in western Massachusetts. A few years after the war, the family sold the company. The new owners renovated the Barrington plant, built a knitting plant nearby, and purchased a woolen plant. By 1970 Barrington’s annual profit was $3 million on a sales of about $28 million.

During the next ten years, sales increased but profits declined. In 1980, the owners appointed Mr. Baum, who had a reputation as a no-nonsense manager skilled at turnarounds, as CEO. Under his leadership, sales in the three core divisions (cotton, knitted goods, and woolens) grew, and by 1995 the company had added two new divisions: artificial fiber products and artificial leather.

By this time, Barrington’s sales were approaching $100 million a year. However, as Exhibit 1 shows, after tax profits still were only about $3 million.

Assignment

1. You are an investor looking for a company with an after-tax return of at least 15 percent. Is Barrington Products, Inc. such a company? How do you know?
2. What kind of responsibility center is a division at BPI? How do you know? Is the responsibility center design a good one? Why or why not?
3. Exhibit 2 shows negative variances for Sales volume, raw material usage, and advertising and sales promotion during the month of April. What is a plausible explanation for each negative variance?
4. Why might the most capable DGM show the poorest financial performance? Why might a DGM who is doing a poor job show good financial performance? Please be specific about this matter for the Cotton Textiles Division. What additional information would you like to have to assist you in your assessment of this division’s performance?
5. What changes should be made to the management control system to make it more responsive to Mr. Baum’s concerns and BPI’s needs.