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P
rofessor Kenneth A. Merchant wrote this teaching note as an aid to instructors using the City of Yorba Linda case.
Marshall School of Business
University of Southern California
City of Yorba Linda
Teaching Note
Purpose of Case
The City of Yorba Linda case was written to illustrate a financial control system in a
Suggested Assignment Questions
1. Does the City of Yorba Lindas current budgeting process meet the goals set for it? Are
those goals the right ones? Does the city councils failure to approve the budget
unanimously reflect badly on the city manager and his staff and/or the budgeting process?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Case Analysis
Similarities and Differences between the Yorba Linda MCS and That of a For-Profit
Organization
Similarities Differences
Bottom-up budgeting Use fund accounting
Question 1
Mr. Simonians three goals for the citys budget and budgeting process are given in the case: (1)
easy for City Council to understand; (2) easy for community to understand; (3) allowed the city
department directors to analyze current and projected activities and available resources so that
priorities could be evaluated.
Most students will conclude that while these goals are reasonable, Yorba Lindas system fails
on all three counts. Students who have trouble understanding the system will conclude that the
budget is not understandable. But the budgeting system is built along fund accounting lines.
Once individuals understand fund accounting and the citys chart of accounts, it is relatively
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
466
Other critiques:
1. While the system might provide the means to analyze current and projected activities and to
evaluate priorities, it is not linked with any formal (extrinsic) incentives the managers might
be given to motivate them to do a good job.
There is considerable pressure for efficiency. Its political pressure. The City Council and
the citys citizens can see the services provided, how large the budget is, and how other
cities are performing.
2. Is there too much incentive for the department managers to create budget slack? If so, the
3. A possible useful goal that is missing from Mr. Simonians list is to have the budget serve
as a plan of work and as a means of control.
Does the lack of City Council unanimity on the vote signify a problem? It might in some
Question 2
Strengths and weaknesses of fund accounting:
Strengths:
2. Focus is on measurement of financial flows
Weaknesses:
1. Difficult to measure overall performance
3. Difficult for many people to understand
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
467
Other questions that can be posed regarding fund accounting:
1. What does it mean to break-even if the city manager can move revenues (e.g., property tax
2. Did the City of Yorba Linda have a good year in 19911992?
Question 3
Yorba Lindas system provides information that is useful for making operating decisions. The
motivation of employees is mostly informal, based on peer pressure. The recession was taking
its toll on cities through a decline in sales taxes and fees. The key questions in the evaluation
may be: Can Yorba Linda cope with the bad economic times? When economic conditions
improve, can Yorba Linda allocate its additional resources effectively?
Students evaluations will lead them to propose any of a number of suggestions, including the
following:
1. Use accrual accounting (The city cannot legally have two accounting systems.)
2. Add some form of a bonus system
Many cities do have bonus plans. If a public works manager, for example, saves $500,000,
3. Improve the program submissions.
Many of the objectives and measurements are vague and nonquantifiable. (For example, in
5. Benchmark performance against other cities
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7. Use more modern management methods. For example, add more formal performance
Other Questions for Discussion
1. Is the City of Yorba Linda better off budgeting revenues and expenses conservatively,
optimistically, or realistically?
The answer to this question relates directly to the purposes of budgeting. As was discussed
in Chapter 8 of the textbook, is the most important purpose of budgeting at Yorba Linda
2. Should the extent of budget conservatism change with economic conditions?
Gordon Vessey was less conservative in forecasting revenue because there was a recession,
3. The departments provide services and spend money. Should they be set up as profit
centers?
Probably not. There is generally little relationship between the value of the services
