Merit Inc. has used a standard cost system for evaluating theperformance of its responsibility center managers for 3 years. Topmanagement believes that standard costing has not produced the costsavings or increases in productivity and profits promised by theaccounting department. Large unfavorable variances are consistentlyreported for most cost categories, and employee morale has fallensince the system was installed. To help pinpoint the problem withthe system, top management asked for separate evaluations of thesystem by the plant manager, that controller, and the humanresources director. Their responses are summarized here. Plantmanager - The standards are unrealistic. They assume an ideal workenvironment that does not allow materials defects or errors by theworkers or machines. Consequently, morale has gone down andproductivity has declined. Standards should be based on expectedannual prices and recent past averages for efficiency. Thus, if weimprove over the past, we receive a favourable variance. Controller- The goal of accounting reports is to measure performance againstan absolute standard and the best approximation of that standard isideal conditions. Cost standards should be comparable to "par" on agolf course. Just as the game of golf uses a handicap system toallow for differences in individual players' skills and scores, itcould be necessary for management to interpret variances based onthe circumstances that produced the variances. Accordingly, in onecase, a given unfavorable variance could represent poorperformance; in another case, it could represent good performance.The managers are just going to have to recognize these subtletiesin standard cost systems and depend on upper management to be fair.Human resources director - The key to employee productivity isemployee satisfaction and a sense of accomplishment. A set ofstandards that can never be met denies managers of this vitalmotivator. The current standards would be appropriate in alaboratory with a controlled environment but not in the factorywith its many variables. If we are to recapture our old "teamspirit," we must give the managers a goal that they can achievethrough hard work.
Required: Discuess the behavioral issues involved in MeritInc.'s standard cost dilemma. Evaluate eavh of the three responses(pros and cons) and recommend a course of action.
Merit Inc. has used a standard cost system for evaluating theperformance of its responsibility center managers for 3 years. Topmanagement believes that standard costing has not produced the costsavings or increases in productivity and profits promised by theaccounting department. Large unfavorable variances are consistentlyreported for most cost categories, and employee morale has fallensince the system was installed. To help pinpoint the problem withthe system, top management asked for separate evaluations of thesystem by the plant manager, that controller, and the humanresources director. Their responses are summarized here. Plantmanager - The standards are unrealistic. They assume an ideal workenvironment that does not allow materials defects or errors by theworkers or machines. Consequently, morale has gone down andproductivity has declined. Standards should be based on expectedannual prices and recent past averages for efficiency. Thus, if weimprove over the past, we receive a favourable variance. Controller- The goal of accounting reports is to measure performance againstan absolute standard and the best approximation of that standard isideal conditions. Cost standards should be comparable to "par" on agolf course. Just as the game of golf uses a handicap system toallow for differences in individual players' skills and scores, itcould be necessary for management to interpret variances based onthe circumstances that produced the variances. Accordingly, in onecase, a given unfavorable variance could represent poorperformance; in another case, it could represent good performance.The managers are just going to have to recognize these subtletiesin standard cost systems and depend on upper management to be fair.Human resources director - The key to employee productivity isemployee satisfaction and a sense of accomplishment. A set ofstandards that can never be met denies managers of this vitalmotivator. The current standards would be appropriate in alaboratory with a controlled environment but not in the factorywith its many variables. If we are to recapture our old "teamspirit," we must give the managers a goal that they can achievethrough hard work.
Required: Discuess the behavioral issues involved in MeritInc.'s standard cost dilemma. Evaluate eavh of the three responses(pros and cons) and recommend a course of action.
