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According to production budget, production manager of a shoe manufacturer was supposed to make...

Question:

According to production budget, production manager of a shoe manufacturer was supposed to make 100 pairs of shoes. but there was demand for more; so he made 120 pairs. All 120 were sold. Production manager's bonus was tied to meeting the production cost budget. Because the production manager production produced more, he couldn't meet the cost targets and lost his bonus.

Does the company have a reasonable performance measurement?

What Are Performance Measurement Techniques:

It is common for every company to have different Performance Measurement Techniques for their managers and employees. In order to set a suitable Performance Measurement Technique, management must track metrics that are aligned with the company's objectives.

Answer and Explanation:

The answer is no, the company does not have a reasonable performance measurement.

  • The current performance measurement method provides an incentive for managers to produce less since they want to keep total costs down. This is not congruent with the organization's goal of maximizing profit since the more items that are sold, (i.e. 120 versus 100), the more profit is generated.
    • It is recommended that the company implements a performance measurement system based on the cost per unit. This way, management will not have the incentive to produce less than required in order to keep total costs down.

Learn more about this topic:

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Managerial Accounting Functions

from Business Management: Help & Review

Chapter 9 / Lesson 1
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