Saturday, December 31, 2011

Some Perceptual errors

What are the different types of Perceptual errors that you have encountered in your workplace? As a manager, how will you correct these errors?

I work for an Export House, involved in the business of manufacturing and exporting readymade garments to Europe and the US. I have worked with this organization for more than 15 years and have been involved in different departments over the years – these are Accounts, Finance, Export Documentation and Merchandising. I currently head the Export Documentation & Shipping department. With my experience in various departments, I can list below the common Perceptual errors that I have encountered at my workplace.

# STEREOTYPING

Documentation department

My sub-ordinate, Ranjan K in the documentation department, is a Keralite and he is stereotyped as a stubborn person, as that is the perception for all Keralites in our country. Though he displays typical traits of the Malayali community, and is extremely stubborn and argumentative at times, he also has immense positive characteristics like being methodical; is extremely hard working and is a perfectionist. He does not get along with anyone in the organization because of his ill-tempered & stubborn nature. He was always getting a negative evaluation from other managers.

Also, due to the stereotyping of Ranjan K, fresh applicants who were Keralites, and who wanted to join my organization, were being rejected as they were all perceived to possess the same negative characteristics as that of Ranjan K.

Correcting the error

As a manager, I had to do something about the situation. I had an informal chat with Ranjan K and explained to him how his attitude of being hard-headed and not accepting change was detrimental to his growth in the organization. I valued his positive attributes and did not want to lose a good employee. He gave me a positive response and promised me he will try to implement the behavioral changes I had suggested. At the same time, I also spoke to the HR department head and urged him not to stereotype all prospective employees belonging to a particular community, as we could be missing the opportunity to hire good and valuable employees.


Production department

Our manufacturing units are in a town called Tirupur, which is located in Tamil Nadu. Tirupur is a major hub for knitted garment manufacturers and is known for it’s resources of skilled and semi-skilled labour essential for the manufacturing of knitted garments. The staff and the labour force, comprising of local Tamilians, are stereotyped as gossip-mongers and rhetorical. They would never say no to any task assigned to them or a deadline given to them, but would work at their own pace. Also, politics at workplace is a major problem.

Correcting the error

I have personally identified many merchandisers in Tirupur who are hard working, efficient & free from the stereotypical error mentioned above. I believe in identifying such individuals and empowering them with additional responsibility to choose their task force, and motivate them with performance based incentives.

# THE HALO EFFECT

I would like to cite the example of Mr. Sameer Mehta, who in the Finance department of our organization, and has excellent communication skills. He has not been very effective in his work, and we had lost a considerable amount of money in Forex dealings in the last financial year due to wrong decision-making on his part. His single attribute of good communicating skills, fuelled by his good relations with the Managing Director, has earned him the current position that he enjoys.

Correcting the error

I would highlight Mr. Mehta’s poor decision-making and his condescending manner to the directors and explain how his bad judgement in forex deals have resulted in financial losses to the organization.

# ATTRIBUTION

Mr. Manoj Sareen, who was heading the Production department in our manufacturing units in Tirupur, was a hard-working, efficient, honest and dedicated individual. Under his control, we had seen several years of successful & timely despatches of our export orders, without any quality claims or late shipment penalties from our overseas buyers. He had been instrumental in running efficiently, our five manufacturing units involved in finishing of goods, quality control, technical assistance to printing, embroidery, stitching and special processes in garment washing. It also involved sacrifice of family life on his part as Tirupur is a small town with limited educational or recreational facilities. After ten years of successfully running the manufacturing process of our organization, Mr. Sareen had a disagreement with the management over certain issues. He was also not getting certain perks that were due to someone in his capacity. When he confronted the management citing his contributions and sacrifices over the years, the management appreciated him for his good work but attributed the successful & timely despatch of orders to good decision-making by Administrative managers sitting in Mumbai. Mr. Sareen was shocked and argued as to how his contribution and efforts could be compared to the inputs given by people in Mumbai office, but his role was played down by the management and he had to leave the organization.

# SELF-FULFILLING PROPHECY

I have a classic example of the above perceptual error in my organization and it is none other than the Managing Director, Mr. Rajesh Kapoor. Mr. Kapoor is a pessimist by nature and always has negative thoughts about the future. Though he had been instrumental in establishing the business, we have not seen much growth in the last 2-3 years, as he has been against expansion of any kind. Since the garment export industry has seen a tough phase in the last few years and never really recovered after the global recession, Mr. Kapoor would advise us in the board meetings that the next 2 years are crucial, and if we survive this phase, we will grow substantially and the sky would be the limit. A lot of time has passed, but those “2 years” have never really gone by, and we are still given the same advice by Mr. Kapoor. This has deteriorated the situation to an extent that he is consulting several fortune-tellers. Though he claims that his pessimistic nature enables him to foresee problems and find solutions before they occur, the fact is that he visualizes a dark future and has convinced himself that there is no way out. As a result, there are no efforts taken to get the business back on track, or to expand customer base, even though we enjoy tremendous goodwill in the market & are getting several enquiries from prospective customers. Therefore, there is a severe negative impact on the business, and Mr. Kapoor’s self-fulfilling prophecy of doomsday is actually coming true and we are facing the risk of a possible closure.

Correcting the error

Despite several attempts by managing partners to convince him, Mr. Kapoor has been adamant about not entertaining new business enquiries. As Self-fulfilling prophecy works the same for both positive and negative thoughts, we need to convince Mr. Kapoor to think and act in a positive manner and manufacture ways to achieve those positive outcomes.

# CONTRAST EFFECT

Mr. Arun Goyal, who was heading the Accounts department in my organization, resigned 2 months back. He was extremely organized, orderly and meticulous in his work. Because of his systematic way of working, any kind of data / financial reports required by the departmental heads would be presented by him almost immediately on demand. Stepping into his department would give a complex to most of the other employees.

After he left, his position has been taken by Ms. Seema Dhar, who is not as organized as him, but is a good worker, nevertheless. Ms. Dhar is a victim of bias as the Finance Head is used to getting all sorts of reports within minutes of his asking for them, thanks to the efficiency that Mr. Goyal had displayed while he was working with the company. Ms. Dhar always seems to be falling short of the high expectations of the Finance Head, Mr. Mishra, even though she is a hard worker. This is an example of Contrast effect which is having a negative impact on Ms. Dhar’s career due to high standards set by Mr. Goyal.

Correcting the error

If I were in the Finance Head’s position, I would give more time to Ms. Dhar to settle down and to understand the responsibilities allotted to her. She is new to the organization, it is unfair to immediately compare her performance to that of Mr. Goyal’s. But I would certainly talk to her about the precedent that Mr. Goyal had set and the fact that I would expect similar dedication and efficiency in the near future.

Friday, December 30, 2011

Variance Analysis-A classic case

A study of COST CONTROL and VARIANCE ANALYSIS
  • Pete Potter was known for the high quality & distinctive custom features of its ceramic bathroom fixtures.

  • His company had grown from a two-man operation to the present group of 20 master potters located in 2 large warehouses.

  • By 1980, Pete felt the need for a systematic COST-CONTROL as his business had expanded substantially. With increase in business, Peterson realized the need for better cost control and control over production scheduling, thereby adopting a STANDARD COST system.
  • Pete, with his Cost Accountant, calculated Standard cost of a toilet at $55.00 with Budgeted Volume of 1200 ceramic toilets per month.

STANDARD COST PER UNIT OF A TOILET

Material Cost

Input

unit

cost/lb

Cost/Unit

Raw Clay

25

lb

0.95

23.75

Glazing Mix

5

lb

0.75

3.75

Direct Labour Cost

Input

Unit

cost/hr


Molding

1

hr

15

15.00

Glazing

0.5

hr

15

7.50

Manufacturing OH





Variable

1


1.94

1.94

Fixed

1


3.06

3.06

COST / UNIT




55.00


ANALYSIS OF OPERATIONS

  • After 6 months of operations with new Cost system, Pete felt Standards were not met.
  • He observed that the potters were too set in their ways to adopt & follow new system properly & there was resistance to change.
  • Production for June was only 1145 toilets i.e. a shortage of 55 units from the Budgeted Volume.

ACTUAL COSTS FOR 1145 UNITS


Actual Vol.

Actual Vol.

Actual

Actual Material

Materials

Purchased

Used

Cost/lb

Cost of units used

Raw Clay

30000 lb

28900 lb

$ 0.92

26588

Glazing Mix

6000 lb

5900 lb

$ 0.78

4602

Direct Labour Cost


Actual Hours

Cost/hr

Total Labour Cost

Molding


1200 hrs

15.25

18300

Glazing


600 hrs

15.00

9000

Manufacturing OH


Units


Total OH Cost

Variable


1145


2300

Fixed


1145


3800

  • Pete met with his Master Potter, Jason, to discuss the variances and accused him of not meeting the standards.
  • The Master Potter, who was never impressed with the new system, advised Pete to ask the Cost Accountant for an explanation on Variances.
  • We will try to study the Price and Efficiency Variances in this case.


SUMMARY OF COSTS

MATERIAL COST






Raw Clay

Output

Input

Total lb

Price

Total Cost

Budget

1200

25

30000

0.95

28500

Actual

1145

25.24

28900

0.92

26588

Flexible

1145

25

28625

0.95

27194

Glazing Mix

Output

Input

Total lb

Price

Total Cost

Budget

1200

5

6000

0.75

4500

Actual

1145

5.15

5900

0.78

4602

Flexible

1145

5

5725

0.75

4294

DIRECT LABOR COST





Molding

Output

Input

Total Hrs

Price

Total Cost

Budget

1200

1

1200

15

18000

Actual

1145

1.05

1200

15.25

18300

Flexible

1145

1

1145

15

17175

Glazing

Output

Input

Total Hrs

Price

Total Cost

Budget

1200

0.5

600

15

9000

Actual

1145

0.52

600

15

9000

Flexible

1145

0.5

573

15

8588








VARIABLE OVERHEADS





VOH

Output

Rate

Total

Budget

1200

1.94

2328

Actual

1145

2.01

2300

Flexible

1145

1.94

2221

FIXED OVERHEADS




FOH

Output


Total

Budget

1200


3672

Actual

1145


3800


VARIANCE ANALYSIS


BUDGET

ACTUAL

FLEXIBLE

Vol. Var.

Price Var.

Eff. Var. /





(Budget-Flexible)


Usage Var.

Material Cost

(1)

(2)

(3)

(1) – (3)



Raw Clay

28500

26588

27194

1306 (F)

867 (F)

261 (U)

Glazing Mix

4500

4602

4294

206 (F)

177 (U)

131 (U)








Direct Labour Cost







Molding

18000

18300

17175

825 (F)

300 (U)

825 (U)

Glazing

9000

9000

8588

412 (F)

0

412 (U)








Manufacturing Overheads







Variable

2328

2300

2221

107 (F)

80 (U)

0

Fixed

3672

3800

3672

0

128 (U)

0

F – FAVOURABLE

U – UNFAVOURABLE / ADVERSE


PRICE VARIANCE

Costs

Budgeted

Actual

Cost

Actual

Price


cost

Cost

Diff.

units

Variance

Raw Clay

0.95

0.92

0.03

28900

867 F

Glazing Mix

0.75

0.78

-0.03

5900

177 U







Molding

15

15.25

-0.25

1200

300 U

Glazing

15

15

0

600

0







Manufacturing VOH

1.94

2.00873

.06793

1145

79 U



EFFICIENCY VARIANCE

Costs

Flexible

Actual

Vol

Budgeted

Efficiency


input Vol

input Vol

difference

unit price

Variance

Raw Clay

28625

28900

-275

0.95

261 U

Glazing Mix

5725

5900

-175

0.75

131 U







Molding

1145

1200

-55

15

825 U

Glazing

572.5

600

-28

15

413 U


FIXED OVERHEAD VARIANCE

COST

Budgeted

Cost

Actual Cost

Fixed OH Variance

FIXED OH

3672

3800

79 U

CONCLUSIONS

  • In his quest for reducing costs and increasing profits, Pete had used a cheaper brand of raw material which resulted in lower output.
  • Though there was Favorable Price Variance of $ 867 in Raw Clay Material cost, it lead to the following Unfavourable Efficiency Variances:

Raw Clay Material - $ 261 U

Glazing Mix Material - $ 131 U

D. Labor (Molding) - $ 825 U

D. Labor (Glazing) - $ 413 U

SUGGESTIONS

  • Pete should have taken his master potter into confidence about his intentions of procuring cheaper raw material.
  • Pete needs clear focus on objectives – whether to maintain his quality or to increase sales at the cost of quality.