Question

A company rewards its production department employees for meeting budgeted cost levels by giving out bonuses. If the department’s costs exceed the budget, employees do
not get a bonus. What problems might arise with such a plan?  

Answer 1

Production managers play an important role in preparation of budgets and achieving the budget targets and at the same time meeting the organization goals. The managers of the organization are rewarded for achieving the set targets in the form of incentives and bonuses. This is called the incentive system.

In case of any organization, production budget involve the cost of the production department and the production department employees would be entitled to incentives or bonuses if the cost of the department are within the budget. This method of incentive system has it own advantages as well as disadvantages.

This plan of bonus system encourage the production department employees but also at the same time it may have some adverse effects which is mentioned as follows:-

• Overestimation of production department costs on a safe side.
• It results in extra costs in form of incentives and bonuses.
• If the targets are so tight to be met, then there could be a need for re-viewing the entire incentive system.

Therefore the employees should be rewarded for their honest target predictions along with bonuses for meeting the targets.