Standard Cost Systems Can Have Motivational Effects; Some Are Desirable

question 48

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 favorable 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 labor 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 unfavorable 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 behavioral outcome? Explain, being sure to note whether the manager would likely pursue acquisition of the grade 4A material.

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Definitions:

Greatest Pressure

Typically refers to the highest pressure within the cardiovascular system, often associated with systolic blood pressure during heartbeats.

Arterioles

Small diameter blood vessels that extend from an artery and connect to capillaries, playing a key role in regulating blood pressure and flow.

Veins

Veins are blood vessels that carry blood toward the heart, typically carrying deoxygenated blood, except for the pulmonary and umbilical veins.

Endothelium

The thin layer of cells lining the interior surface of blood vessels and lymphatic vessels, playing a key role in vascular function.