CASE 10–36 Behavioural Impact of Standard Costs and Variances [LO1] José Flores is the…

  CASE 10–36 Behavioural Impact of Standard Costs and Variances [LO1]

José Flores is the manufacturing supervisor of Newmarket Manufacturing Company, which pro- duces a variety of plastic products. Some of these products are standard items that are listed in the company’s catalogue, while others are made to customer specifications. Each month, Flores receives a performance report showing the budget for the month, the actual activity, and the variance between budget and actual. Part of Flores’s annual performance evaluation is based on his depart- ment’s performance against budget. Newmarket’s purchasing manager, Adriana Goster, also receives monthly performance reports, and she, too, is evaluated in part on the basis of these  reports.

The monthly reports for June had just been distributed when Flores met Goster in the hallway outside their offices. Scowling, Flores began the conversation, “I see we have another set of monthly performance reports hand-delivered by that not-very-nice junior employee in the budget office. He seemed pleased to tell me that I’m in trouble with my performance again.”

Goster: I got the same treatment. All I ever hear about are the things I’ve done wrong. Now I’ll have to spend a lot of time reviewing the report and preparing explanations. The worst part is that it’s now July 21, so the information is almost a month old and we have to spend all this time on history.

Flores: My biggest gripe is that our production activity varies a lot from month to month, but we’re given an annual budget that’s written in stone. Last month we were shut down for three days when a strike delayed delivery of the basic ingredient used in our plastic formulation, and we had already exhausted our inventory. You know about that problem, though, because we asked you to call all over the country to find an alternative source of supply. When we got what we needed on a rush basis, we had to pay more than we normally do.

Goster: I expect problems like that to pop up from time to time—that’s part of my job—but now we’ll both have to take a careful look at our reports to see where the charges are reflected for that rush order. Every month I spend more time making sure that I really should be charged for each item reported than I do making plans for my department’s daily work. It’s really frustrating to see charges for things I have no control over.

Flores: The way we get information doesn’t help, either. I don’t get copies of the reports you get, yet a lot of what I do is affected by your department, and by most of our other depart- ments. Why do the budget and accounting people assume that I should be told only about my operations, even though the president regularly gives us pep talks about how we all need to work together as a team?

Goster: I seem to get more reports than I need, and I am never asked to comment on them until top management calls me onto the carpet about my department’s shortcomings. Do you ever hear comments when your department shines?

Flores:  I guess they don’t have time to review the good news. One of my problems is that all the reports are in dollars and cents. I work with people, machines, and materials. I need information  to  help  me  solve  this  month’s  problems—not  another  report  of  the  dollars expended last month or the month before.

Required:

1.              Based on the conversation between Flores and Goster, describe the likely motivation and behaviour of these two employees resulting from Newmarket Manufacturing Company’s standard cost and variance reporting system.

2.              When it is properly implemented, both employees and companies should benefit from a system involving standard costs and variances.

a.       Describe the benefits that can be realized from a standard costing system.

b.       Based on the situation presented above, recommend ways for Newmarket Manufacturing Company to improve its standard cost and variance reporting system so as to increase employee motivation.

(CMA, adapted)

 

 

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