Benerux Industries has been in business for 30 years. The firm’s major product i

Question

Benerux Industries has been in business for 30 years. The firm’s major product is a control unit for elevators. The firm has a reputation for manufacturing products of exceptionally high quality, resulting in higher prices for its units than competitors charge. Higher prices, in turn, have meant that the firm has been comfortably profitable. A major reason for the high product quality is a loyal and conscientious workforce. Production employees have been with the firm for an average of 18 years.

Recently, the firm hired a cost accountant from the local university. After a few months at the firm, the new accountant proposed a performance measurement report consisting of two parts. The first part will report the actual number of units started during each month, the target number of units that should have been started, and a variance. The second part will calculate an actual cost per good unit completed during each month, the target cost per unit, and a variance. The new accountant provided the following additional information concerning the performance report: The first part of the report concentrates on units started because many units are scrapped in the manufacturing process (to maintain high quality). Therefore, the best measure of effort expended is the number of units on which work was begun. The target number of units to be begun in a month is the number of units started in the corresponding month last year plus 5%. In the second part of the report, actual costs per unit will be calculated by dividing total production cost incurred during the month by the number of good units completed during the month. The target cost per unit is the average cost for manufacturing this kind of product as determined from industry newsletters.

The proposal concluded with the following comments: “This report should be prepared and distributed quarterly. For maximum benefit I suggest that a bonus be awarded whenever units started exceeds target and costs are below target. This system will result in substantially improved profits for the firm. It should be implemented immediately.”

REQUIRED

A. Is it possible to develop a perfect system for monitoring and motivating worker performance? Why or why not?

B. Explain what the managers might learn by monitoring each of the variances in the proposed performance measurement system.

C. Discuss possible reasons why the company did not previously use a variance system to monitor and motivate worker performance.

D. Describe weaknesses in the proposed performance measurement system.

E. If you were the CFO of Benerux Industries, how would you respond to the new cost accountant’s proposal? Discuss whether you agree with the proposal and explain how you would communicate your response.

Explanation / Answer

A. Monitoring the activities of your employees is a simple task; however, measuring and monitoring subjective matters, including motivation, job satisfaction and performance, take a great degree of skill, innovation and expertise from your human resources department. There are several methods to consider for each measurement, and in many instances trial and error may be the only road to perfecting a system that works well for your organization.

B. It has been said that before you can improve something, you have to be able to measure it, which implies that what you want to improve can somehow be quantified. Additionally, it has also been said that improvement in performance can result just from measuring it. Whether or not this is true, measurement is the first step in improvement. But while measuring is the process of quantification, its effect is to stimulate positive action. Managers should be aware that almost all measures have negative consequences if they are used incorrectly or in the wrong situation. Managers have to study the environmental conditions and analyze these potential negative consequences before adopting performance measures.

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