Performance Measures for Cost Centers

question 36

Essay

Performance Measures for Cost Centers
A soft drink company has three bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company supplies each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores.
The bottling plants are treated as costs centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same equipment, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are: Required:
a. Estimate the average cost per unit for each plant.
b. Why would the manager of plant A be unhappy with using the average cost as the performance measure?
c. What is an alternative performance measure that would make the manager of plant A happier?
d. Under what circumstances might the average cost be a better performance measure?

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Definitions:

Schemas

Cognitive structures or frameworks that help organize and interpret information, based on past experiences and knowledge.

Hierarchy Of Needs

Maslow’s pyramid of human needs, beginning at the base with physiological needs that must first be satisfied before people can fulfill their higher-level safety needs and then psychological needs.

Physiological Needs

Basic physical requirements for human survival and health, such as food, water, shelter, and sleep, considered the foundation of Maslow's hierarchy of needs.

Self-Actualized

Achieving or meeting one's own abilities and potential, viewed as an inherent desire or requirement in all people.