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Texas Eastman Company Objectives To illustrate how financial profitability measures can be used by workers to manage day-to-day operating decisions Understand how to push down profitability information to empower employees Know the design and information-processing prerequisites for daily profitability analysis Appreciate the role of finance staff experts in preparing profitability analysis Case Background The Texas Eastman case provides an excellent opportunity to discuss how financial measurements can support a companys Total Quality Management program Occasionally industrial engineering and operations management types denigrate financial measurements and encourage companies to cut all ties between their direct physical and operational measurements and their companys financial system In effect they are saying that quality improvement efforts can only be inhibited by financial measurements The Texas Eastman case provides a vivid counter-example to such claims First the financial measurement system is devised by a chemical engineer department manager not a finance or accounting person Second and more important the financial system he develops plays a vital role in the success of the quality program Discussion Q What kind of financial reporting system is being used to provide feedback on operations The Period Report is actually a well-designed system Building from projections and commitments made in the budgeting process as encapsulated in the Annual Operating Plan the report is a sensible summary of period operations It is flexed with respect to the volume and mix of actual output The five variances help to identify the principal sources of variation of actual from budget such as volume mix and external price changes I particularly like how promised improvements from capital expenditures are linked into the standards The thoughtful treatment of volume variances also deserves mention In most companies production managers receive favorable volume variances for producing in excess of budgeted amounts Also they are penalised with an unfavorable volume variance during a period when production falls short of budgeted amounts This practice usually
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