Question

The manager of the manufacturing unit of a company is responsible for the costs of the manufacturing unit. The president is in the process of deciding whether to evaluate the manager of the manufacturing unit by the average cost per unit or the variable cost per unit. Quality and timely delivery would be used in conjunction with the cost measure to reward the manager.

Required:

a. What problems are associated with using the average cost per unit as a performance measure?
b. What problems are associated with using the variable cost per unit as a performance measure?

Answer 1

a) Average cost per unit rewards only the manager for removing tasks or materials from the process without any charge for quality issues.If average cost per unit is used it should be such that it should balance the quality measures.

• Quality issues are related to rejection,rework and returns of raw materials.
• Average cost per unit determines the average cost of rawmaterials and their performance measure determines the rawmaterial used for completion of different tasks.
• Quality and timely delivery of raw material are the problems associated with average cost per unit as a performance measure.

b) Variable costs are the costs associated with volume of goods or services.It increases with the increase in the activity and decreases with the decreases in the activity.

• Variable cost per unit provides the performance measures based on profitability.
• Manufacturing expenses tends to vary a single unit based on overall production.
• The difference between contribution per unit and selling price per unit determines the variable cost per unit.
• Problems associated with variable cost per unit can be determined through usage of different performance measures like fixed cost per unit, profit and selling price per unit..
• Performance measures helps in determining the variable cost per unit and displaying the ways to reduce the cost.