Question

Instruction for students:

Assume that you are the plant manager for Brice Company. The company is plan to implement a bonus system for purchasing and production managers that provides an annual 10 percent bonus for favorable direct materials variances (MPV and MQV).

Required:

Write a report for the CEO in which you explain the primary assumptions and considerations used in making your recommendation.

1. In your opinion, does having a favorable variances is better than unfavorable? In other words, does achieving favorable variances means that managers in charge have to be rewarded? Conversely, does unfavorable variances always reflect a poor performance by the manager in charge?
2. Explain the potential benefits associated with the new bonus system.
3. Elaborate the potential costs associated with the new bonus system.
4. Identify the potential ethical concerns on the new bonus system.
5. Finally, provide the CEO with a recommendation on whether to adopt or not to adopt the new bonus system.

Answer 1

Favorable variance in an organization-A favorable variance occurs when the cost to produce is less than the budgeted cost. It means a company is making more profit than originally anticipated. It can result in increase efficiency of manufacturing, cheaper material cost, and increased sales.

Unfavorable variance-A favorable variance is encountered when an organization is comparing its actual results to a budgeted or standard. The variance can apply to either revenues or expenses and is defined as when the amount of actual expense is greater than the budgeted one.

Requiring managers to determine what caused the unfavorable variances forces them to identify potential problem areas or consider if the variance was a one-time occurrence. Requiring managers to explain the favorable variance allows them to access whether the favorable variance allows management to plan for it in the future, depending on its occurrence.

Many managers use variance analysis only to determine the short term goal and they do not analyze the variance from a long term perspective.

For example -A manager might decide to make manufacturing division results look profitable in the short term at the expense of reaching the organization's long term goals. The variance could indicate that equipment is not working efficiently and increasing the overall cost. In the short term, it is more economical to repair outdated machines. But in the long term is more beneficial to purchase the new equipment that would help the organization reach its goal of eco-friendly manufacturing.

A manager needs to be cognizant of his or her organization's goals when making a decision from variance.

In, the above case having a favorable variance is better than unfavorable variance, but it also depends on the circumstances of the organization. Yes, managers need to be awarded for their work and especially when it comes to favorable variance. Unfavorable does not mean poor performance of managers, because if you think about it, it is likely actual costs will deviate from budgeted cost to some extent. Utility prices are affected by the weather, and the prices of raw material can change suddenly owing to shortages, surplus and new sources of competing products. The unexpected breakdown of machines affects the amount of time workers spend manufacturing products. The managers need to measure all of this but we can't blame the unfavorable managers for unfavorable variance always

Potential benefits for having a bonus

1)Increased motivation-It will increase the manager's input in the work and morale will be high.

2)Builds team collaborations-Paying bonus when managers meet the business goals, will lead to teamwork and all the managers from different departments will give their 100%.

3)Financial support- Most incentives are tied to earnings. The more revenue managers generate for the business, the more he/she rewarded through incentives. And managers become more loyal to the company.

The potential cost for a bonus -

A company set aside a predetermined amount, a typical bonus percentage would be 2.5 to 7.5 %of payroll but sometimes it may be as high as 15%, as a bonus on top of base salary. Such a bonus depends on the profit of the business or from given line of business.

1)Bonus criteria-The The criteria management uses for issuing bonuses and rewards to an employee is critical to analyzing the ethical implications of the incentives.

2) Wage gaps-Bonuses and formal reward might create a wage gap in the office which is disproportionate to the productivity levels between employees who receive a bonus and those who do not.

Yes, the company should go with new bonus system.