...Armco, Inc.: Midwestern Steel Division 34. J. Roberts, The Modern Firm: Organizational Design for Performance and Growth (New York, Oxford University Press, 2004), p. 181; and D. L. Wenner and R. W. LeBer, “Managing for Shareholder Value From Top to Bottom,” Harvard Business Review, 67, no. 6 (November–December 1989), pp. 2–8. 35. S. Datar, S. L. Kulp and R. A. Lambert, “Balancing Performance Measures,” Journal of Accounting Research, 39, no. 1 (June 2001), pp. 75–92; G. A. Feltham and J. Xie, “Performance Measure Congruity and Diversity in Multi-Task Principal–Agent Relations,” The Accounting Review, 69, no. 3 (July 1994), pp. 429–53; R. A. Lambert, “Contracting Theory and Accounting,” Journal of Accounting and Economics, 32, no. 1–3 (December 2001), pp. 3 –87; and G. Baker, “The Use of Performance Measures in Incentive Contracting,” American Economic Review, 90, no. 2 (2000), pp. 415–20. 36. D. Solomons, Divisional Performance: Measurement and Control (Homewood, IL: Richard D. Irwin, 1965), p. 83. 37. K. J. Arrow, “Control in Large Organizations,” in M. Schiff and A. Y. Lewin (eds), Behavioral Aspects of Accounting (Englewood Cliffs, NJ: Prentice Hall, 1974), p. 284. Case Study Armco, Inc.: Midwestern Steel Division In January 1991 management of the Kansas City Works of Armco’s Midwestern Steel Division began implementing a new performance measurement system. Bob Nenni, Director of Finance for the Midwestern Steel Division, explained: With our old system, our managers...
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...- The implementation of the process was done so quickly, that the top managers could not trainother managers to use the new system. And they could not introduce the new system in a step bystep format so they can be more aware day by day on what is going to be changing in the future.Here are the changes that can be recommended for the new system:- Specify the different kind of costs (fixed and variable), so that managers can have an idea of thedifferences and variations of each type of costs.- Implement the proper training for the managers, so that they do not make any mistakes which cancreate problems for others.- Elaborate the correct verification of the data so it does not create differences of opinions or mistakes from period to period. 4. The first issue was about how to evaluate managers’ performances in situations where the numbers were distorted by uncontrollable factors. So Rob Cushman could try to dothe following:- Call some energy companies and ask them to diagnose the transformer problem further and figureout if there any other ways to fix the problem permanently.- Have some back up electrical units, such as generators, just in case the power failure continues toexist.- See if there is a pattern in the power failures. If there is, try to set a schedule around the power cutand work as fast an efficient as possible while power is still available.The second was an issue as to whether to increase the proportion of total compensationthat was linked to individual performance...
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...Team 4 Case #4 Armco, Inc.: Midwestern Steel Division 1. The old performance measurement system had the following problems: - It did not provide information on the product mix being produced. It provided data on total tonnage produced, but did not breakdown “what” was produced. - The system compared “actual” to “objective” but did not provide data on what factors caused variance. - Costs were not broken down by: o Fixed costs o Variable costs o Relevant Range - Reports were generated on the 15th day following each month end. Therefore, time lag would not allow the managers to take immediate corrective actions. - It did not measure Key Performance Index (KPIs’) for each department. - The system did not highlight data that was outside the norm. - Between 1985 – 1989, Melt Shop man-hours (MH) have been reduced by 20.4% but $/NT has only reduced by 8.4% - Reports generated by the system had too much information and not easy to read. The melt shop report (Exhibit 3) alone had 46 separate expense categories. Gary Downey, the melting shop manager, acknowledged that “some of the items were quite small in dollar value.” - The system did not provide information on bottlenecks related to the melt shop. - The system also did not provide any information on quality control. It did not provide breakdown on what percentage of production met quality standards...
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...Case – The Armco Kansas City Works The previous performance measuring system at Armco was based on cost and safety factors, which were considered the primary desired results parameters. But looking at the nature of operation of the company, which is based on manufacturing, the higher management recognized that these parameters of measurement were not adequate to measure the performance and efficiency of the process. In other words, more knowledge of the desired results was to be gathered and performance dimensions were needed to be redefined. Hence, the management determined 10 important factors for its performance measuring system which are broadly focused on three areas - 1) the primary and most potential bottleneck area of the process, 2) the overall manufacturing process and 3) plant wide activities. Redefining the factors would help the company to measure the performance more effectively especially in terms of objectivity and understandability. At the same time, the new system has also pushed the organization towards more of a decentralized type by making its employees responsible for more areas that before. Still, the new system has left out two concerns. The first concern talks about how to evaluate performance in situations where numbers might get distorted by uncontrollable factors. As the performance measurement system is results oriented, it would be hard to measure from numbers so managers should also come out with a subjective measure for such situations, where...
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...ARMCO INC. CASE CHAPTER 2 Armco Inc. is a producer of a variety of steel products such as stainless, electrical, and carbon, and many more. Armco was a leading steel manufacturer in the United Stated, being ranked sixth in 1990. Within Armco Inc., their Midwest division, Kansas City Works, was the largest. In 1990, Kansas City Works division approximately accounted for $250 million in sales, but within the last decade, sales declined. Two products were primarily produced in Kansas City Works, grinding media and carbon wire rod. Kansas City Works’ manufacturing areas were divided into five centers which were: melting, casting, the 19” mill, the mod mill department, and the grinding media department. Kansas City Works was however not a low cost manufacturer. Each center consisted on one or more cost centers. The cost performance measurement used mainly was a summary measure called “Cost Above”. By using Cost Above measurement, manufacturing managers received an Operating Statistics Report. The Operating Statistics Report’s out gave managers five-year history, monthly and year-to-date actuals, monthly and year-to-date objectives, and variances. This report provided the same information that was used for financial reporting and inventory valuations purposes so when the manager’s familiar report was eliminated they became upset. The Director of Finance, Bob Nenni, implemented a new system in 1991 which he believed would create two major improvements. He believed the new system...
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...| Management & Control Systems | Learning Group 4 | | [Geef de naam van de auteur op] | 9-2-2014 | This document contains all the cases made by learning group 4. | 1. What was wrong with the Midwestern Steel Division’s old system? (As part of your analysis, study Exhibit 3 carefully and figure out what the columns tell you, individually and in total.) Before 1991 the performances of the cost center managers and their superiors in the plant were evaluated in terms of cost control and safety. The key cost performance measure was a summary called ‘Cost above’ which included the cost added per ton of steel at each production stage and for the entire plant. Cost above and the items that comprised it were reported to the manufacturing managers on an operating statistics report that was produced on approximately the 15th day following each month end. For a performance management system, this period is way too long. By the time you have the information about your performance; it is almost a month later. Therefor the information that you get is actually out dated by the time you receive it. The entire report, printed on five computer pages, included detailed information about 46 separate expense categories. For a performance management system, this can be helpful but it can also be too much. With these amounts of information being shown to you, it can be possible that you lose focus on what is important for the process. The operating statistics report used...
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...1. Context 1.1 Brief analysis of the situation The management of Armco, Inc.: Midwestern Steel Division began implementing a new performance measurement system in January 1991. Bob Nenni, Director of Finance for the Midwestern Steel Division, explained the rationale for this new system: The old system had managers spending more time explaining why changes in cost were due to accounting system problems than they did fixing the problems. The new system will provide for management better management focus on the things that are most important for managers to worry about, earlier warning of problems, and improved commitment to achieve objectives. 1.2 Background on Armco, Inc.: Midwestern Steel Division Armco Inc. is a producer of steel products. Within the Armco Inc. Midwestern Steel Division, the Kansas City Works was the largest entity, accounting for approximately $250 million in sales. However, business at Kansas City Works had declined significantly in the last decade. The Kansas City Works produced two primary products: grinding media and carbon wire rod. Armco was recognized as the leading supplier of grinding media products in the United States. Carbon wire rods, on the other hand, were made by Armco’s rod mill, which used relatively old technology and was not cost competitive, so rods were not a profitable product. But the rods did generate volume and helped cover some of the fixed costs of the plant. The Kansas City Works was not a low-cost...
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...New Horizon Development is a construction company that purchased pipes from Armco, Inc., a pipe manufacturer, to be used in the construction of a passive solar heating system. Armco’s ten foot pipes were designed to be able store water horizontally but had also proven to be successful in previous construction projects when installed vertically. New Horizon’s solar heating system design called for five, thirty foot, vertically installed pipes which had not been tested. However, Armco didn’t manufacture this length of pipe so ten and twenty foot pipes were delivered to New Horizon’s building site to be joined to create the desired length. After installment, New Horizon discovered that leaks were developing in the joints of the pipes. New Horizon sued Armco for “breach of express and implied warranties” in an attempt to receive payment for the damages but Armco argued that it was not liable because New Horizon had accepted/acknowledged the written contract upon payment of the pipes and it “excluded all warranties and remedies except those provided for therein.” The case was tried first in a trial court and then later reviewed in an appellate court. The big legal issue that became the determining factor in the different judgments of the two courts was which set of requirements (the U.C.C. regarding specifications on limiting terms or clauses or Code § 11-4 regarding text size of written contracts) would be used to govern the courts’ decisions. If the latter, then the jury would be...
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...I. Introduction In January 1991, the management of the Kansas City Works of Armco’s Midwestern implemented a new performance measurement system that was “designed to give us better management focus on the things that are most important for them to worry about, earlier warning problems and improved commitment to achieve objectives”. However, the changes top management wanted to institute and integrate into the system were met with less than favorable impressions, not excluding outright dissatisfaction and resistance to change, evidenced when“managers kept using the old data and never seriously considered improvements that could be made”. As a result, this has caused the accounting group to temporarily discontinue the initial implementation of the system in April 1991. However, they promised to attempt to reintegrate the system by 1992. This consequently puts the pressure on top management to change the mindset of the company’s managers as implementing a good performance measurement system could spell out as much as $30 million per annum. Furthermore, a couple of other issues remains to plague the company. The first issue raised was how to evaluate managers’ performances in situations where the outcome of their performance was influenced by fortuitous events. The second issue problematizes whether or not top management should implement a system that would compensate exemplary individual performance among employees. II. Problem How can top management change the mindset of...
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...Armco Inc. Armco Inc is a steel manufacturer that used to be the sixth largest in its industry in United States in 1990. The Kansas City Works within its Midwestern Steel Division was hit by the decline in the business in the US steel industry. The firm produces grinding media and carbon wire rod. The first on has been successful in the industry with its great durability compared to the competitors. Carbon wire rods on the other hand were non profitable and covered only some of its fixed costs through its production volume. The old performance measurement system used by Armco Inc did not work properly because it had some problems. First, it did not provide information on the product mix being produced while it provided data on total tonnage produced but didn’t breakdown what was produced. Second the measurement system compared actual to objective but didn’t provide data on what factors exactly caused variance. Third, the costs were not broken down by fixed costs, variable costs and relevant range. Also the reports were generated on the 15th day following every month ending so I think managers could not take immediate corrective actions which would have been sometimes very necessary. In my opinion, also the fact that the system did not measure Key Performance Index for each department such as the new system, is one important reason why the old system was inadequate. there was inconsistency with organization’s current strategy. The objective of Armco Inc. is maximizing profits...
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...Armco, Inc.: Midwestern Steel Division Armco Inc. is a steel manufacturer that used to be the sixth largest in its industry in US (in 1990). The Kansas City Works within its Midwestern Steel Division was hit by the decline in the business in the US steel industry despite its good performance in the past. Consequently, it downsized and incurred significant losses in most of the 1980s. This entity produces two primary products including grinding media and carbon wire rod, one being recognized in the industry for its durability while the later being non profitable and only covering some of its fixed costs through volume. The Objective of Armco Inc. is maximizing profits and sustaining its position among the leaders in the US manufacturing steel industry. To achieve this objective, Armco has adopted a cost leadership strategy with a broad appeal and has managed to grow bigger through joint ventures and expansion of its product lines in implementing its strategy. However, the strategy adopted by the Kansas City Works is based on differentiation due to its cost disadvantages such as union labor costs and inefficient plant infrastructure. In addition to this inconsistency with the strategies of the company as a whole, the management control system put in place at Kansas City Works is holding the entity back from potential improvements in performance. The management at this entity is introducing a new performance measurement system to replace the old one that was based on production...
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...1.0 Introduction Armco Inc. is a steel manufacturer that used to be the sixth largest in its industry in US (in 1990). The Kansas City Works within its Midwestern Steel Division was hit by the decline in the business in the US steel industry despite its good performance in the past. Consequently, it downsized and incurred significant losses in most of the 1980s. This entity produces two primary products including grinding media and carbon wire rod, one being recognized in the industry for its durability while the later being non profitable and only covering some of its fixed costs through volume. 2.0 What’s wrong with the old system? (a) Inconsistency with organization’s strategy The Objective of Armco Inc. is maximizing profits and sustaining its position among the leaders in the US manufacturing steel industry. To achieve this objective, Armco has adopted a cost leadership strategy with a broad appeal and has managed to grow bigger through joint ventures and expansion of its product lines in implementing its strategy. However, the strategy adopted by the Kansas City Works is based on differentiation due to its cost disadvantages such as union labor costs and inefficient plant infrastructure.Union labor costs in Kansas City were higher than those of some of its nonunion competitors, particularly those located in the Southeastern U.S. and non-U.S. locations. The Works had an inefficient plant infrastructure because the plant was designed to accommodate five times as many employees...
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...Case Armco Case Study: Armco, Inc.: Midwestern Steel Division What do you think was the problem with the implementation of the new performance measurement system? In January 1991, Top management of the Kansas City Works of Armco’s Midwestern Steel division began implementing its new performance measurement system. It was designed to give better management focus on the things, which are most important. The new system included less data’s: it allows managers to focus on the 5-6 more important which cause 80% of the costs. In fact, the old system was not enough efficient. « Managers spent more time explaining why changes in costs were caused by problems with the accounting system than they did fixing the problems. ». Managers are focused on their objectives rather than the performance of the entire company: that may cause some problem if objectives of top management and those of middle and lower managers are not the same. Hence, for top management appeared the need to create a new system to increase competitiveness, and to avoid unnecessary expenses.But the way the implemented it leaded to were problems: The operating managers’ initial reaction to the sample reports they were given was dissatisfaction. Indeed, Top management didn’t take managers’ reactions and feelings into account: for example; “Paul Phillips, the Rolling and Finishing manager, liked having the monthly and annual trends and the information comparing actual costs with objectives”. So that managers...
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...rmco – implementation of the new performance measurement system My task was to write my opinion about the problems of the implementation of the new performance measurement system in Armco, Inc.: Midwestern Steel Division, Kansas City. First, I think there wasn’t a problem with the new performance measurement system itself, as it was stated by the numerous employees. The old system suffers from lack of direction, as employees didn´t really understand the relationship between their responsibility and their final results. Thus managers didn´t comprehend what´s expected of them. The new system came up with better “explanation” of employee’s responsibility. Managers could much better understand how their actions and decisions are related to the final economic results of the company. However, there were some difficulties in the form of implementation, in my opinion. From what I understood, new system lacks communication between creators and employees. I don´t think managers felt and understood the necessity of change. More communication in form of meetings and seminars would improve their attitude towards progress in the company. Misinterpreting of implementation of the new system is proved when managers complained “It almost seems like the operating managers finally understood the old report, so they decided change it." This is the evidence that managers didn´t understand the purpose of writing reports and weren´t able to recognize the importance of specific information in the...
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...eam 4 Case #4 Armco, Inc.: Midwestern Steel Division 1. The old performance measurement system had the following problems: - It did not provide information on the product mix being produced. It provided data on total tonnage produced, but did not breakdown “what” was produced. - The system compared “actual” to “objective” but did not provide data on what factors caused variance. - Costs were not broken down by: o Fixed costs o Variable costs o Relevant Range - Reports were generated on the 15th day following each month end. Therefore, time lag would not allow the managers to take immediate corrective actions. - It did not measure Key Performance Index (KPIs’) for each department. - The system did not highlight data that was outside the norm. - Between 1985 – 1989, Melt Shop man-hours (MH) have been reduced by 20.4% but $/NT has only reduced by 8.4% - Reports generated by the system had too much information and not easy to read. The melt shop report (Exhibit 3) alone had 46 separate expense categories. Gary Downey, the melting shop manager, acknowledged that “some of the items were quite small in dollar value.” - The system did not provide information on bottlenecks related to the melt shop. - The system also did not provide any information on quality control. It did not provide breakdown on what percentage of production met quality standards, what percentage failed, and what percentage of items...
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