| Book Edition | 4th Edition |
| Author(s) | Hansen, Mowen |
| ISBN | 9781305970663 |
| Publisher | Cengage |
| Subject | Management |
Financial-Based Responsibility Accounting versus Activity-Based Responsibility Accounting
The labor standard for a company is two hours per unit produced, which includes setup time. At the beginning of the last quarter, 20,000 units had been produced and 44,000 hours used. The production manager was concerned about the prospect of reporting an unfavorable labor efficiency variance at the end of the year. Any unfavorable variance over 9 to 10 percent of the standard usually meant a negative performance rating. Bonuses were adversely affected by negative ratings. Accordingly, for the last quarter, the production manager decided to reduce the number of setups and use longer production runs. He knew that his production workers usually were within 5 percent of the standard. The real problem was with setup times. By reducing the setups, the actual hours used would be within 7 to 8 percent of the standard hours allowed.
Required:
Explain why the behavior of the production manager is unacceptable for a continuous improvement environment.
Financial-Based Responsibility Accounting versus Activity-Based Responsibility Accounting
The labor standard for a company is two hours per unit produced, which includes setup time. At the beginning of the last quarter, 20,000 units had been produced and 44,000 hours used. The production manager was concerned about the prospect of reporting an unfavorable labor efficiency variance at the end of the year. Any unfavorable variance over 9 to 10 percent of the standard usually meant a negative performance rating. Bonuses were adversely affected by negative ratings. Accordingly, for the last quarter, the production manager decided to reduce the number of setups and use longer production runs. He knew that his production workers usually were within 5 percent of the standard. The real problem was with setup times. By reducing the setups, the actual hours used would be within 7 to 8 percent of the standard hours allowed.
Required:
Explain how an activity-based responsibility accounting approach would discourage the kind of behavior described.
The continuous improvement environment means that we improve our production efficiency and focus on reducing the wastage, down time and increase worker efficiency. When we use continuous production it automatically reduces the effective time and also the quality of work. The standard are established in order to carve out a process which includes the machinery setting, change in any parts and checking whether product is up to the mark. The production manager may reduce his time and make positive image and earn bonus but this would mean that we are not improving at last. We cannot just all time skip few steps in order to earn more bonus. So in future in order to access true performance we need the whole process complete.
The continuous improvement means to work and develop on the given resources and not necessary devising a means and manner to outshine the rules and show good performance.
The solution to the above problem is given in the above section along with the complete explanation.
Thanks!!!
Please go through the solution and do let me know if you have any concerns regarding the solution. I will be happy to help you with the same.
Here, in the given case the Production Manager has decided to reduce the number of set ups and use the longer production runs. The Production believes that by doing this he will be able to reduce his unfavorable labor variance.
But he is only looking over entire labor hours used for producing 20,000 units rather he should go with each and every single activities that is used in producing the product.
The Activity Based accounting helps to divide the activities according the cost pools so that each and every activity gets its equal weightage and costs are assigned to each activity.
Activity Based Accounting makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them.
In financial based accounting the costs are assigned based on single cost driver while in Activity based cost accounting the costs are assigned based on various cost drivers which ultimately results in better costing and pricing of the product.
Here in the above given case the production manager has decided to reduce the set up hours and increase the production runs without considering the Activity Based analysis. His decision might go wrong as he has taken this decision based on single cost driver that is labor cost and that to labor cost shown as per the financial records.
Activity Based Accounting discourages this kind of behavior as one should consider multiple drivers rather than going for a single cost driver.
The Production Manager will get the actual results once he adopts the Activity Based Accounting and he should act accordingly based on the results generated rather than taking decisions based on the financial based accounting.
