Motivational Effects of Standard Cost Systems

question 43

Essay

Motivational effects of standard cost systems
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 to 40 per cent 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 AA, usually purchased for $56 per tonne. Because of the bankruptcy, the company can obtain grade AAAA for $62 per tonne. While the quality of the final product will be the same regardless of the grade of raw material used, there will be substantial savings in production if the grade AAAA material is used. These savings are expected to be two to three times the additional cost of $6 per tonne.
i. How would an unfavourable price variance on a particular purchase affect the overall price variance for the year?
ii. Will the use of the materials price variance to provide a bonus to the purchasing manager lead to a desirable or undesirable behavioural outcome? Explain.

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Definitions:

Need for Affiliation

An individual's desire to build relationships, feel connected to others, and be part of a group or community.

Decision-making

Decision-making involves selecting a course of action from several alternatives, often based on judgment, research, and deliberation.

McClelland's Acquired Needs Theory

A psychological theory that suggests human needs are acquired over time and shaped by life experiences, emphasizing needs for achievement, affiliation, and power.

Achievement

The accomplishment of a goal or objective, typically requiring effort, skill, or courage.