Discussion – Behavioral Issues Involved in Merit Inc.’s Standard Cost Dilemma

Discussion – Behavioral Issues Involved in Merit Inc.’s Standard Cost Dilemma

Adopting a standard cost system at Merit Inc. has resulted in major behavioral issues with employees and management. The three responses provided by the Controller, the Human Resources Director, and the Plant Manager clarified the issue’s complexity. The main behavioral problem at Merit Inc. is that workers are becoming demoralized due to the unreasonable expectations that the standard cost structure sets. The viewpoint of the plant manager emphasizes the detrimental effects of unreachable standards on morale and output. Employee motivation and sense of achievement are negatively impacted when they believe that standards are unachievable. The director of human resources correctly highlights the significance of job happiness and a feeling of accomplishment in promoting efficiency. The controller also highlights the possibility of misinterpreting adverse variations, which would obscure and distort performance reviews. The existing standards’ inflexible character creates a hostile work atmosphere where staff members feel under continual scrutiny and can never live up to expectations. Notably, this results in a fractured corporate culture, lower morale, and difficulties with cooperation and teamwork.

Regarding the three manager’s perspectives, various pros and cons are identified. The plant manager’s views are advantageous for being realistic and based on expected actual prices and recent past averages that can enhance productivity. However, the perspective might entail a complacency risk if the standards are too lenient. Further, the task of determining appropriate standards as given in the perspective may prove to be challenging. On the other hand, the controller’s perspective is advantageous for emphasizing the need to interpret variances based on individual circumstances, thus promoting fairness. On the contrary, the suggestion by the controller regarding reliance on upper management for interpretation may lead to subjectivity. Also, it may entail a lack of standardized performance evaluation (Bhimani, 2020). From the human resource director’s perspective, it is advantageous because it emphasizes the importance of employee satisfaction. It also suggests achievable goals to restore motivation. On the contrary, a challenge lies in determining challenging but attainable standards.

As a measure to address the behavioral issues associated with Merit Inc.’s standard cost dilemma, various recommendations should be considered. First, there is a need to establish challenging yet attainable standards. Notably, this can be attained by considering the actual work environment, recent past averages, and expected prices, which is a proposal adopted from the plant manager’s proposal. However, the issue of demoralization should be factored in. Second, clear communication for the revised standards to all employees will be required. The communication should provide training on interpreting and handling variances in a way that promotes a constructive rather than punitive mindset (Blocher et al., 2019). Third, employees should be involved in the standard-setting process. Notably, this will ensure a sense of ownership and understanding. Overall, Merit Inc. has to acknowledge the behavioral consequences of its standard cost structure and comprehensively address the issues important staff members bring up. Merit Inc. may provide a more flexible and inspiring work environment consistent with its corporate objectives through the revision of standards, more communication, employee involvement, and a focus on continuous development.

 References

Bhimani, A. (2020). Digital data and management accounting: why we need to rethink research methods. Journal of Management Control, 31(1-2), pp. 9–23.

Blocher, E. J., Stout, D. E., Juras, P. E., & Smith, S. (2019). Cost Management (A Strategic Emphasis) 8e. McGraw-Hill Education.

Hilton, R. W., & Platt, D. E. (2020). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill.

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Behavioral Issues Involved in Merit Inc.’s Standard Cost Dilemma

Merit Inc. has used a standard cost system for evaluating the performance of its responsibility center managers for three years. Top management believes that standard costing has not produced the cost savings or increases in productivity and profits promised by the accounting department. Large unfavorable variances are consistently reported for most cost categories, and employee morale has fallen since the system was installed. To help pinpoint the problem with the system, top management asked for separate evaluations of the system by the plant manager, the controller, and the human resources director. Their responses are summarized here.

Plant Manager—The standards are unrealistic. They assume an ideal work environment that does not allow material defects or errors by the workers or machines. Consequently, morale has gone down and productivity has declined. Standards should be based on expected actual prices and recent past averages for efficiency. Thus, if we improve over the past, we receive a favorable variance.

Controller—The goal of accounting reports is to measure performance against an absolute standard and the best approximation of that standard is ideal conditions. Cost standards should be comparable to “par” on a golf course. Just as the game of golf uses a handicap system to allow for differences in individual players’ skills and scores, it could be necessary for management to interpret variances based on the circumstances that produced the variances. Accordingly, in one case, a given unfavorable variance could represent poor performance; in another case, it could represent good performance. The managers are just going to have to recognize these subtleties in standard cost systems and depend on upper management to be fair.

Human Resources Director—The key to employee productivity is employee satisfaction and a sense of accomplishment. A set of standards that can never be met denies managers of this vital motivator. The current standards would be appropriate in a laboratory with a controlled environment but not in the factory with its many variables. If we are to recapture our old “team spirit,” we must give the managers a goal that they can achieve through hard work.

Discuss the behavioral issues involved in Merit Inc.’s standard cost dilemma. Evaluate each of the three responses (pros and cons) and recommend a course of action.