Behavioral Effect of Standard Costs Merit Inc. has used a standard cost system for evaluating the…

Behavioral Effect of Standard Costs Merit Inc. has used a standard cost system for evaluating the…

Behavioral Effect of Standard CostsMerit Inc. has used a standard cost system for evaluating the performance of its responsibilitycenter managers for three years. Top management believes that standard costing has not producedthe cost savings or increases in productivity and profits promised by the accounting department.Large unfavorable variances are consistently reported for most cost categories, and employeemorale has fallen since the system was installed. To help pinpoint the problem with the system,top management asked for separate evaluations of the system by the plant manager, the controller,and the human resources director. Their responses are summarized here.Plant Manager—The standards are unrealistic. They assume an ideal work environment thatdoes not allow materials defects or errors by the workers or machines. Consequently, morale hasgone down and productivity has declined. Standards should be based on expected actual pricesand recent past averages for efficiency. Thus, if we improve over the past, we receive a favorablevariance.Controller—The goal of accounting reports is to measure performance against an absolutestandard and the best approximation of that standard is ideal conditions. Cost standards should becomparable to “par” on a golf course. Just as the game of golf uses a handicap system to allow fordifferences in individual players’ skills and scores, it could be necessary for management to inter-pret variances based on the circumstances that produced the variances. Accordingly, in one case, agiven unfavorable variance could represent poor performance; in another case, it could representgood performance. The managers are just going to have to recognize these subtleties in standardcost systems and depend on upper management to be fair.Human Resources Director—The key to employee productivity is employee satisfaction anda sense of accomplishment. A set of standards that can never be met denies managers of this vitalmotivator. The current standards would be appropriate in a laboratory with a controlled environ-ment but not in the factory with its many variables. If we are to recapture our old “team spirit,”we must give the managers a goal that they can achieve through hard work.Required:Discuss the behavioral issues involved in Merit Inc.’s standard cost dilemma. Evaluate each ofthe three responses (pros and cons) and recommend a course of action.

Behavioral Effect of Standard Costs Merit Inc. has used a standard cost system for evaluating the…

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