Questions:
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:
1. Explain why the behavior of the production manager is unacceptable for a continuous improvement environment.
2. Explain how an activity-based responsibility accounting approach would discourage the kind of behavior described.