Berkshire Controls Analysis for Management Accounting

2448 Words Mar 25th, 2011 10 Pages
Berkshire Industries PLC
Berkshire’s Strategy
Founded in 1852, Berkshire Industries PLC grew from a brewery serving local pubs to a medium-sized publicly held corporation focused on the beverages and snack foods industry. The brewery used a decentralized strategy in terms of the structure of its operations, focusing on four divisions; beer, spirits, soft drinks and snack foods. Up until 2000, the company’s annual planning process related to the incentive systems was a bottom-up process where each operating divisions proposing their earning targets and how they will achieve them. Each division was united under a common goal: maximize shareholders’ value.
Berkshire’s Objectives of its Incentive Plan
Ever since Berkshire went public, it
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Even though the plan is more precise and objective than the old plan, there is a lack of understandability from managers as to how it works, even after training sessions. The consulting firm considers the performance measurement “simple” but the managers still do not understand how to compute “economic profit” and some even continue to manage their division under the old EPS system. With Berkshire paying for expensive training sessions and consulting fees, management may need to consider the cost-effectiveness of the new plan. It can be argued that the incentive plan lacks controllability in terms of management influence on “economic profit” with the absence of external factor considerations. This issue is of significance to the Spirits Division at Berkshire as the recession caused a shift in demand and lowered “economic profit” which was out of the division manager’s control. This scenario creates discouragement and a lack of motivation among division managers as they cannot control their performance targets due to the current economic climate. These bad attitudes can also lead to game-playing as some managers are taking advantage of CLA’s adjustments to advertising by overspending the account as it is adding back to their Adjusted Net Operating Profit after Taxes and amortized slowly over five years. These actions can be seen in the exhibit 1 as advertising expense rapidly increased after the implementation of the new incentive
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