José Flores is the manufacturing supervisor of Newmarket Manufacturing Company, which produces a variety of plastic products. Some of these products are standard items that are listed in the company’s catalogue, while others are made to customer specifications. Each month, Flores receives a performance report showing the budget for the month, the actual activity, and the variance between budget and actual. Part of Flores’s annual performance evaluation is based on his department’s performance against budget. Newmarket’s purchasing manager, Adriana Goster, also receives monthly performance reports, and she, too, is evaluated in part on the basis of these reports.
The monthly reports for June had just been distributed when Flores met Goster in the hallway outside their offices. Scowling, Flores began the conversation, “I see we have another set of monthly performance reports hand-delivered by that not-very-nice junior employee in the budget office. He seemed pleased to tell me that I’m in trouble with my performance again.”
1. Based on the conversation between Flores and Goster, describe the likely motivation and behaviour of these two employees resulting from Newmarket Manufacturing Company’s standard cost and variance reporting system.
2. When it is properly implemented, both employees and companies should benefit from a system involving standard costs and variances.
a. Describe the benefits that can be realized from a standard costing system.
b. Based on the situation presented above, recommend ways for Newmarket Manufacturing Company to improve its standard cost and variance reporting system so as to increase employee motivation.