Uncle Grump Toys
– A Case Study on
Performance Evaluation
& Decision Making
R Sivakumar
1
Part – 1 The Case
One morning, John Worby, President of Uncle
Grumps Toys, sat down with Anne McMullen,
Executive Vice President, to discuss year-end
performance evaluations of the management group.
These discussions were important because the
company had traditionally given managers a sizeable
bonus based on their evaluation. To the extent that it
was possible, John and Anne preferred to base their
EVALUATION ON OBJECTIVE MEASURES
OF PERFORMANCE WITH AN EMPHASIS ON
ACHIEVEMENT OF BUDGETED GOALS.
2
The BUDGET PROCESS began in late August
and by mid-November the management team
supplied the board of directors with a complete
budget outlining monthly sales estimates,
production cost estimates, and capital spending
requirements. The directors then discussed the
implications of the budget and, upon
acceptance, authorized it.
The firm's progress throughout the year was
MONITORED AGAINST THIS BUDGET
EVERY SIX MONTHS at the board meetings
which were held on the 15th January and 15th
July. At the January meeting the board also
voted on the management bonuses for the prior
year.
3
Uncle Grumps toys was a BOSTONBASED COMPANY that manufactured a
very SUCCESSFUL LINE OF FOAM
RUBBER TOYS CALLED "UNCLE
GRUMPS". These were cuddly Hobbit-like
dolls with large noses, a discerning smile,
and enormous feet, which SOLD FOR
RS.25 WHOLESALE. From the moment of
introduction, they had been a runaway
success. Plans to expand the line were on the
drawing board and A SMALLER BABY
VERSION WAS TO BE INTRODUCED
IN THE SPRING OF 1988.
4
The business was HIGHLY SEASONAL
with over half of the sales occurring from
mid-August to early November. This was
followed by a two-month trough before
birthday and occasional gift sales picked up
again. Sales were then fairly STATIC until
the next Christmas rush began. BUDGETED
SALES FOR 1987 WERE RS.500 LACS
WITH A STANDARD GROSS MARGIN,
ON FULL COST, OF 25%.
5
Management had decided that even though sales
were highly seasonal, PRODUCTION
WOULD BE LEVEL THROUGHOUT THE
YEAR. This enabled Uncle Grumps Toys to
stabilize employment and to sell a greater
number of toys during the Christmas period than
would have been possible if a shift approach had
been used. Current production was at full
capacity using ONE SHIFT A DAY, FIVE
DAYS A WEEK. In 1986, sales were
considerably greater than expectation and had
almost resulted in orders being rejected due to a
lack of inventory. In fact, BY YEAR-END,
ONLY 50,000 TOYS WERE LEFT IN
STOCK.
6
John and Anne decided to discuss the
production manager's performance first. The
production manager, Holly Frost, had been
with the firm for just over a year and this was
to be her first bonus. John and Anne admired
Holly and felt she had been VERY
INNOVATIVE and had substantially
improved the production process. One
improvement, introduced at the beginning
of the third quarter, resulted in the
average material content of each toy being
reduced from 5 lbs. to 4.5 lbs., a
substantial savings.
7
In measuring Holly's managerial performance, John
and Anne felt that some adjustment was necessary
because 1987 had been a rather turbulent year.
The factory had been closed from February 5 to
March 4 (20 working days) due to "The Great
Blizzard of 1987", and then the factory roof
collapsed under the weight of three feet of snow.
During this period, employees DID NOT WORK
BUT WERE GIVEN HALF PAY.
To MAKE UP FOR LOST PRODUCTION, A
FOUR HOUR SATURDAY MORNING SHIFT
was introduced from March 7 until the end of the
year. Employees were paid time-and-a-half for this
8
work.
Additional overtime was required in the
fourth quarter when the sales department
managed to gain a Rs.10 lacs order from a
catalog sales company for an extra 50000
toys. The order was placed in the middle of
October and, along with other orders,
required that OVERTIME BE
INCREASED TO 16 HOURS PER
WEEK-END, at time-and-a-half, for six
week-ends (this includes the Saturday
morning time already planned). SALES For
1987 WERE 21 LACS UNITS.
9
John and Anne started with the budgeted and
actual figures reported in Exhibit 1. The
company had not implemented a STANDARD
COST SYSTEM (EXCEPT FOR VALUING
THE RAW MATERIAL INVENTORY).
Because unit costs were relatively stable, direct
materials were tracked in pounds, direct labour
in hours, and actual usage was compared with
budget. Before they could adequately Judge
Holly's performance, however, John and Anne
decided they needed additional information.
John spoke with the materials inventory clerk
and came back with an inventory listing
(Exhibit 2) and a reminder that the COMPANY
USED FIFO INVENTORY COSTING.
10
Anne spoke with the pay-roll clerk and was
given a summary of monthly payroll listings
(Exhibit 3).
Looking at the pile of information they had
collected, John and Anne settled down to the
process of evaluating Holly's performance.
After several hours, John and Anne took a
break.
They felt they had made progress but still
were NOT CERTAIN THAT THEY
KNEW HOW HOLLY HAD
PERFORMED.
11
Over coffee, Anne remarked to John, "Well, now we have a
lot of facts, but it is not clear to me how we can use these
figures to analyze Holly's performance". "I have the same
concern", replied John. 'There are so many numbers and
only some are relevant to Holly"."I know, but which ones?
That's the question". "That's first on the agenda, when we
finish coffee. But there is something else that is bothering
me and that is a comment Holly made about those catalog
sales", said John.
"What was that?" asked Anne. "Well, Holly thinks we lost
money on the deal because we sold them to the catalog
company below cost".
"Didn't you explain to her about contribution analysis?",
asked Anne. "Well, yes, but she said she understood that,
and we were still losing out. Unfortunately, she was called
away before she could explain to me what she meant".
12
QUESTIONS:
Evaluate the performance of Holly Frost
as production manager in each quarter of
1987.
Was the special deal made with the catalog
company a good idea? Explain.
13
EXHIBIT 1 : QUARTERLY PRODUCTION REPORT
(all figures in thousands)
Quarterly
Budget
Rs.
Quarterly Actuals
1
2
3
Rs.
Rs.
Rs.
Total
4 1987
Rs.
Rs.
Variable Costs:
Raw Materials:
Direct Labour
Indirect Labour
Supplies
Power
2000*
5000**
400
100
500
2,250
3,400
300
75
360
2,750
5,220
450
100
570
3,300
5,860
420
115
540
1,700
7,350
480
130
600
10,000
21,830
1,650
420
2,070
Fixed Costs:
Repairs & Maintenance
Depreciation
Insurance
Total
500
1,000
500
10,000
465
1,000
500
8,350
385
1,000
525
11,000
550
1,000
550
12,335
540
1,000
500
12,300
1,940
4,000
2,075
43,985
Units Produced
500
* Budget based on 5 lbs. / toy.
350
550
550
600
2,050
14
** Budget based on 1 hour / toy
EXHIBIT 2 : SUMMARY OF RAW
MATERIAL INVENTORY MOVEMENTS
(All figures in thousands)
Opening Balance (Dec. 6, 1986)
Purchases (Dec.6, 1986 - Dec.4, 1987)
Usage (Dec.6, 1986 - Dec.4, 1987)
Closing Balance (Dec.4 , 1987)
Purchases
* 13 weeks ending 6.3.87
13 weeks ending 5.6.87
13 weeks ending 4.9.87
13 weeks ending 4.12.87
Total
2500 lbs
2500 lbs
3000 lbs
2000 lbs
10000 lbs
200 lbs
10000*
-9600
600
Rs. 160
10000
-9680
480
Rate / lb
Consumption
in Rs.
0.90
1855 lbs
1.10
2860 lbs
1.10
2365 lbs
0.85
2520 lbs
9600 lbs.
15
EXHIBIT 3 : SUMMARY OF DIRECT LABOUR
EXPENSES
(All figures in thousands, except employees)
Average
No. of
employees
13 weeks ending 6.3.87
13 weeks ending 5.6.87
13 weeks ending 4.9.87
13 weeks ending 4.12.87
Total
1,000
1,000
1,000
1,000
Regular
hours
505*
502
508
514
2,029
Overtime
hours
52
52
124
228
Cost **
3,400
5,220
5,860
7,350
21,830
*Includes the 1,60,000 hours when factory was closed for 20
days during which time employees receive half the pay.
**Holly was responsible for negotiating all labour contracts.
16
Wish you all the best
R Sivakumar
17
UNCLE GRUMPS’
TOYS
Part II - Case Analysis
R Sivakumar

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Understanding the inputs
Process of Budget Preparation
Difficulty of Evaluation.
Segregation of Expenses
Preparation of Variances
Controllable analysis
Preparation of A Responsibility Report,
Relevant cost for decisions
Relevancy of Cost For Pricing
Pricing policies
19
Principles of Performance Evaluation
Management function that compares
actual results with budget goals.
Includes both behavioral and
reporting principles.
Principles of Performance Evaluation
Behavioral Principles
1. Managers of responsibility centers should have direct
input into the process of establishing budget goals of
their area of responsibility. Without such input,
managers may view the goals as unrealistic or arbitrarily
set by top management. Such views adversely affect the
managers’ motivation to meet the targeted objectives.
2. The evaluation of performance should be based
entirely on matters that are controllable by the
manager being evaluated. Criticism of a manager on
matters outside his or her control reduces the
effectiveness of the evaluation process. It leads to
negative reactions by a manager and to doubts about the
fairness of the company’s evaluation process.
Principles of Performance Evaluation
Behavioral Principles
3. Top management should support the evaluation process. As
explained earlier, the evaluation process begins at the lowest
level of responsibility and extends upward to the highest level
of management. Managers quickly lose faith in the process when
top management ignores, overrules, or bypasses established
procedures for evaluation a manager’s performance.
4. The evaluation process must allow managers to respond to
their evaluations. Evaluation is not a one-way street. Managers
should have opportunity to defend their performance. Evaluation
without feedback is both personal and ineffective
5. The evaluation should identify both good and poor
performance. Praise for good performance is a powerful
motivating factor for a manager. This is especially true when a
manager’s compensation includes rewards for meeting budget
goals.
Principles of Performance Evaluation
Reporting Principles
1. Contain only data controllable by manager of
responsibility center.
2. Provide accurate and reliable budget data to measure
performance.
3. Highlight significant differences between actual
results and budget goals.
4. Be tailor-made for intended evaluation.
5. Be prepared at reasonable intervals.
Standard Cost Card
Particulars
Materials
Labour
Variable OHs
Fixed OHs
TOTAL COST
Profit
SELLING PRICE
Amount
in Rs.
5lbs @ Rs.0.80/lbs
4
1 hour @ Rs.10/hour
10
1 hour @ Rs.2/hour
2
Rs. 4 per unit
4
20
@25% on Full Cost
5
25
24
Material Usage Variance
Units Produced
Standard Consumption (5 lbs per unit)
Revised Standard (4.5 lbs per unit)
Actual Consumption
Material Usage Variance (lbs)
Material Usage Variance (Rs.) @0.80 / lbs
Proportion
Basic Production
Additional Production
Extra Order
TOTAL
Revision Variance for Basic Production (lbs)
Revision Variance for Basic Production (Rs.)
Qtr 1 Qtr 2 Qtr 3 Qtr 4
350 550 550 600
1,750 2,750 2,750 3,000
2,475 2,700
1,855 2,860 2,365 2,520
-105 -110 110 180
-84 -88
88 144
-84
0
0
-84
-80
-8
0
-88
80
8
0
88
250
200
120
12
12
144
250
200
25
MATERIAL PRICE VARIANCE
NOTE : Raw Material Price Variance can also be computed
with Actual Purchase quantity
26
Labour Analysis
STD. HRS. FOR ACT. PRODN
BASIC
RESCHEDULE
SPECIAL ORDER
TOTAL
ACTUAL HOUR
BASIC
RESCHEDULE
SPECIAL ORDER
HALF DAY
TOTAL
EQUIVALENT HRS.
ACTUAL PAY
ACTUAL RATE PER HR.
1
350
-----
-----
2
500
50
---
3
500
50
---
350
550
550
345
502
52
508
52
4
500
50
50
600
514
52
72
----160 ------505
554
560
638
425
580
586
700
3400
5220
5860
7350
8
9
10
10.5
27
Labour Variances
Labour efficiency basic
Additional
Extra
Rate basic
Additional
Spl. Order
Cost
Overtime (p)
1
50
50
690
690
740
(640)
2
(20)
(20)
(40)
502
52
554
814
26
3
(80)
(20)
(100)
(100)
-
4
(140)
(20)
(220)
(380)
(257)
(26)
(36)
(319)
(699)
(31)
28
Overhead Variances
Qtr 1 Qtr 2 Qtr 3 Qtr 4
Var OHs Efficiency
10
-8
-20
-76
Expenses
-45
-12
45
66
Cost
-35
-20
25
-10
Fixed OH Repairs
35
115
-50
-40
Depreciation
-25
-50
Cost
35
90 -100
-40
29
Performance Evaluation – Comparison of
Actuals With Revised Budget
Units
Raw material
Labour
Overtime
Half day
Variable oh
Fixed oh
Repairs
Dep & insu
Total
Variance
REVISED BUDGET
1
2
3
350
550
550
Rs.
Rs.
Rs.
1,400
2,200
1,980
3,500
5,500
5,500
260
260
700
1,100
1,100
500
1,500
7,600
500
1,500
11,060
500
1,500
10,840
ACTUALS
4
600
1
350
2
550
3
550
4
600
Rs.
2,160
6,000
620
1,200
Rs.
1,734
2,760
640
735
Rs.
3,038
4,986
234
1,120
Rs.
2,792
5,600
260
1,075
Rs.
2,116
6,699
651
1,210
500
1,500
11,980
465
1,500
7,834
(234)
385
1,525
11,288
(228)
550
1,550
11,827
(987)
540
1,500
12,716
(736)
30
Segregation of Controllable Variances
MUV
MPV
MCV
LEV
LRV
LCV
OTP
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
-84
-88
88
144
60
-250 -750 -900 -100 -2,000
-334 -838 -812
44 -1,940
Controllable
Variance
Diff
36
24
0 -2,000
36 -1,976
50
690
740
-640
-40
554
514
26
-100
0
-100
0
-380
-319
-699
-31
-470
925
455
-645
-190
935
745
0
-280
-10
-290
-645
-35
35
-20
90
25
-100
-10
-40
-40
-15
-40
60
0
-75
-234 -228
Revision Variance
-987
-736
-2,185
VOHC
FOHC
801 -2,986
400
31
Performance Report
Controllable Variances
Matl. Redn.
At Std. Price
Revision
Variance
Material Usage
Labour Efficiency
Labour Rate
Variable Overheads – Cost
Fixed Overheads
Repairs & Maintenance
Total
(RS. IN ‘000)
1
QUARTERS
2
3
(84)
50
690
(35)
(80)
(20)
502
(20)
200
80
(80)
25
200
120
(140)
(257)
(10)
400
36
(190)
935
(40)
35
656
115
497
(50)
175
(40)
(127)
60
1,201
4 TOTAL
 Note 1. : Variances concerning extra production and
special order are not included in the above report.
 Note 2.: Labour rate is controllable as it is negotiable.
 Note 3.: Fixed overheads repairs & maintenance is
assumed to be controllable.
32
SPECIAL ORDER
Analysis of Price through Relevant Cost
ACTUAL COST
STANDARD COST
Rs.
Rs.
Direct Material
(50 x 4.5 x 0.85)
191 4.5 x 0.8
3.60
Direct Labour
(72 x 10.5)
756 1 x 10
10.00
Overtime Premium (72 x 10.5 x 0.5)
378 1 x 5
5.00
Variable Overheads (1210 / 600 x 50)
101 1 x 2
2.00
Total Cost
1,426
20.60
Cost per Toy
(1426 / 50)
28.52
Actual Price per Toy
20.00
33
All the best
R Sivakumar