Allsolution is a consulting firm and uses a budgetary control system to control and manage their operating costs. The senior partner estimated the demand for the year for each of the firm’s three divisions: A, B and C. A separate partner is responsible for each division. Each divisional partner then prepared a cost budget based on the senior partner’s demand estimate for the division. These budgets were then submitted to the senior partner for his approval. He then amended them as he thought appropriate before issuing each divisional partner with the final budget for the division. He did not discuss these amendments with the respective divisional partners. Actual performance is then measured against the final budgets for each month and each divisional partner’s performance is appraised by asking the divisional partner to explain the reasons for any variances that occur. The trouble with our present system is that it focuses on financial performance and ignores the other performance indicators found in modern performance management systems.” The company uses a “total cost plus” pricing strategy. Recent results show that profits are falling and that the company is losing market share in what is becoming a very competitive market.

(a) Discuss the present budgeting system and its likely effect on divisional partner motivation.

(b) Explain why is it important to distinguish between the performance of a manager and the performance of the division for which the manager is responsible.

(c) Explain TWO disadvantages of “total cost plus” pricing strategy.

(d) Explain how target costing could be of value to Allsolution.