Standard Cost Systems Can Have Motivational Effects; Some Are Desirable

question 95

Essay

Standard cost systems can have motivational effects; some are desirable, some are not. Consider the following situation:
The materials purchasing manager is paid a salary plus a bonus based on the net favourable materials price variance. Generally, this bonus amounts to 30 - 40% of the manager's total compensation. Due to the bankruptcy of a company in a related field, there is an opportunity to buy a key raw material. The standards for this material call for grade 2A, usually purchased for $56 per ton. Because of the bankruptcy, the company can obtain a higher grade, 4A, for $62 per ton. While the quality of the final product will be the same regardless of the grade of material used, there will be substantial savings in material yield and labour productivity if 4A is used. These savings are expected to be two-to-three times the additional cost of $6 per ton.
Required:
A. How would an unfavourable price variance on a particular purchase affect the overall price variance for the year and the manager's bonus?
B. Would the use of the materials price variance as a basis for the manager's bonus lead to a desirable or undesirable behavioural outcome? Explain, being sure to note whether the manager would likely pursue acquisition of the grade 4A material.

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Definitions:

Food Webs

Complex diagrams that show the feeding relationships among species within a community, highlighting who eats whom and the transfer of energy through the ecosystem.

Keystone Species

A species that plays a critical role in maintaining the structure of an ecological community, affecting many other organisms in the ecosystem and helping to determine the types and numbers of various other species in the community.

Ecological Niche

The specific role or function of an organism or species in an ecosystem, including its use of resources and relationships with other organisms.

Biological Community

A group of interacting species living together in the same habitat, forming a complex network of relationships.