Sheila Lufty manages the plant that produces dining room furniture for Bastile Furniture Company. Sheila’s annual performance is evaluated based on how well she manages all the costs incurred to run the plant and produce the furniture. For her annual evaluation, the costs incurred for the year are compared to the budgeted costs that were established at the beginning of the year. Sheila receives a large bonus if the total costs are less than those budgeted at the beginning of the year.
Recently, Sheila provided the following end-of-year explanation to her boss, the division head, Rose Pantle:
Rose, I know that the plant costs were over budget again this year. However, during the year I only receive four reports from accounting about the plant costs. These quarterly reports from accounting tell me what the actual plant costs are each quarter. Because the budget is based on yearly totals, it is difficult to tell from the accounting reports if we are falling behind budget. In addition, the sales department decides how many sets of dining room furniture we will produce during the year. This year, sales demanded 1,000 more dining room sets than budgeted at the beginning of the year. These extra sets increased the plant costs significantly.
On the basis of the three principles of management accounting system design discussed in this chapter, identify three problems with Bastile Furniture Company’s management accounting system. What would you recommend that Bastile do to fix the problems?