Formosa Plastics Group - Case Study Example

FORMOSA PLASTICS CASE STUDY Name: Course: Instructor: Institution: City: Date: QUESTION ONE Formosa Plastics Group seems to have faced quite a number of management problems especially in the early 1990s. The very first problem was the issue of low supply of ethylene for FPG’s Polyolefin Division. Ethylene was actually the only raw material that was used in the production of polyethylene. The biggest problem, however, was that there was only one local ethylene supplier i.e. CDC, a government institution. Moreover, if FPG wanted to directly import ethylene, it would have meant undergoing an even more complex and expensive situation especially due to the delicate and, therefore, very expensive storage requirements of ethylene. Due to all these challenges, the Polyolefin Division sales kept dipping since the production of high density polyethylene was somewhat inadequate. In addition, as a result of frequent fluctuations in ethylene prices in Taiwan, some financial planning problems emerged. In one way or another, this caused financial management problems. Still in the same division with regards to the ethylene problems, around 1991, ethylene was allegedly being sold at slightly higher prices in Taiwan than the US – up to 105% of the prices in the US, to be specific. This was set around that time by the Taiwanese government. After many years of trial, FPG had been denied the permission to build its own ethylene plant. Its only hope was in the plant that was under construction by the local supplier – CPC. This, however, was not to be relied upon due to the many delays as a result of radicalization of environmental activism. Even then, it was clear in the minds of the division’s administration that this would not be able to sufficiently meet the then increasingly high demand of ethylene in the country. QUESTION TWO Major Elements of FMG’s MACS Action In terms of its financial control system, FPG was quite synonymous with a cost accounting and reporting system that was very detailed. Actions taken in this detailed system included estimating the costs for every single production parameter. This meant setting these costs for all manufacturing processes so that there is some stability in the manufacturing processes of the company. Still in the financial control system of FPG, the administration involved configuring the transfer prices for products sold within the system in one of these two ways. One, at the prevailing price in the market without including the costs incurred while transferring internally. Alternatively, the configuration would be done at complete conventional price with a mark-up on top. FPG’s president’s close monitoring of the company’s performance was also a critical management accounting control system at FPG. He would hold a meeting at least once in every month in which he would host 30 managers in the very senior-most positions in the company. In such meetings, the main agenda would be the review, in detail, of FPG’s performance in the immediate previous month. The meeting would take up to three hours. Some of the other areas in which the president would seek for clarifications include the competition, progress in sales, projection of future trends in the field in which FPG was operating and projection of possible future products as well. Subjective evaluation of performance of both employees as well as the various divisions within FPG was also another action usually performed by the company. Even though the assessment would be done objectively, the decision as to whether an employee or division is to be rewarded was purely based on subjective observation. In this case, therefore, some of the parameters considered were the overall profit attained with respect to the laid plan set originally, the efficiency of the manufacturing processes, the costs incurred in those production processes, quantity produced, the safety of products as well as safety of the production processes, and issues to do with environment. Results The actions discussed above yielded, or were expected to yield some results. The detailed cost accounting and reporting system was in itself a means of ensuring that there is some stability in the manufacturing processes. By estimating the cost for every single production parameter, the ultimate goal would be to ensure that accountability in the costs incurred in production is coherently achieved. The results achieved, or perhaps those expected in the president’s monthly meetings with the 30 managers were performance assessment and improvement of the current performance as well as processes. The subjective performance evaluation, on its part, had the results of ending up with a motivated staff who are dedicated to their work. Personnel FPG had a variety of performance-related plans for bonuses meant for its employees and managers alike. These plans were indeed so important parameters in any management accounting control system. One such plan was the year-end bonuses which were awarded to everyone in the company. The other package was one that was based on performance and was majorly meant for all staff under section chief level. The foundations upon which this bonus was determined were both the ranks held by the staff under this category and the extent to which they had accomplished their set performance targets. Other packages were bonuses for good ideas generated by the staff, and Management’s Special Bonus Fund. Culture Controls FPG’s culture controls can basically be explained from the various packages set for the personnel. Most of these bonus plans for the staff and the management at large were implemented within specific times, to the extent that they became the organizational culture for Formosa Plastics Group. QUESTION THREE Formosa Plastics Group had implemented quite a number of strategies in evaluating performance of its staff, and almost all of these strategies are subjective in nature. In terms of results control, this strategy can be extremely effective. In some cases though, it has turned out to be ineffective. In the case of FMG, however, it can be effective in the sense that it is has higher chances of leading to an empowered and motivated staff. Subjective evaluation of performance allows the evaluators, the managers, in this case, to quite clearly elaborate the terms of evaluating performance to the employees of the organization. In the case of Formosa Plastics Group, the subjective performance evaluation includes such strategies as the various bonus plans and other performance-based parameters. As a result, therefore, it might be somewhat difficult for the employees to clearly understand some of these aspects of performance that attract bonuses. This is where the benefits of subjective performance evaluation emerge. When employees have a vivid understanding of the way their performance is evaluated, chances are that they will put in all their efforts at work. The eventual results of all these would be an improved overall organizational performance. In Formosa Plastics Group, therefore, it is likely that the performance evaluation subjectively will be effective. What comes out more vividly in subjective performance evaluation is the fact that most people, or employees for that matter, would get more motivated when they feel someone is personally monitoring their performance with an award thereafter. Subjective performance evaluation takes advantage of this. This proves the point that FMG’s subjective performance evaluation will turn out to be effective. QUESTION FOUR Some FMG’s managers’ management control choices are indeed affected by national or cultural factors. The detailed cost accounting and recording system was prone to influences from the national factors – majorly, government decisions. A good example is around early 1990s when the Taiwanese government standardized ethylene prices at the prices that were even higher than the then prices in the US and Europe. This decision by the Taiwanese government is indeed a national factor that had significant impacts, especially in the Polyolefin Division. As a result, therefore, the profit margins of FPG had to considerably reduce. The choice in which FPG’s president was supposed to hold meetings together with some 30 managers is largely attributable to organizational cultural practice. This is so because once a practice is applied over and over again, it becomes a cultural activity. In FPG ‘s case, it was a culture that the president had to meet all the 30 managers at least once every month in order to discuss matters performance improvement. Since this had become an organizational culture kind of, for FPG, any twist to this would definitely have some effects on the way the top management coordinates functions in the course of their duties. References Emmanuel, C., Otley, D. & Merchant, K. (1990). Accounting for organisational control. Accounting for Management Control, Chapter 1, pp. 3-37, Chapman & Hall. Macintosh, N. & Quattrone, P. (2010). Issues: why management accounting and control systems (MACS)? Management Accounting and Control Systems – An Organisational and Sociological Approach, Chapter, 1, pp. 3-8, Wiley. Uddin, S. & Hopper, T. (2011). A Bangladesh soap opera: privatisation, accounting, and regimes of control in a less developed country. Accounting, Organizations and Society, Vol. 26, pp. 643-672. Read More