Some executives believe that it is extremely important to manage "by the numbers". This form of management requires that all employees with departmental or divisional responsibilities spend time understanding the company's operations and how they are reflected by the company's financial reports. Because of the manager's increased comprehension of the financial reports and the activities that they represent, the manager's subordinates will become more attuned to the meaning of financial reports and the important signposts that can be detected in these reports. Companies use a variety of numerical measurement systems including standard cost variances, financial ratios, human resource forecasts, and operating budgets.
Required:
(1) (a) Discuss the characteristics that should be present in a standard cost system to encourage positive employee motivation,
(b) Discuss how a standard cost system should be implemented to motivate employees positively.
(2) (a) Explain the meaning of management by exception.
(b) Discuss the behavioral implications of management by exception.
(3) Explain how employee behavior can be adversely affected when standard cost variance reports are used as the sole basis for performance evaluation.