The manager of the manufacturing unit of a company is responsible for the costs
ID: 2435625 • Letter: T
Question
The manager of the manufacturing unit of a company is responsible for the costs of the manufacturing unit. The president is in the process of deciding whether to evaluate the manager of the manufacturing unit by the average cost per unit or the variable cost per unit. Quality and timely delivery would be used in conjunction with the cost measure to reward the manager.a. What problems are associated with using the average cost per unit as a performance measure?
b. What problems are associated with using the variable cost per unit as a performance measure?
Explanation / Answer
a Problems associated with using the Average Cost per Unit as a performance measure : These costs (A sum of fixed and Variable costs ) are incured during a particular period irrespective of whether anything was manufactured during that period. Often the Net income under this appraoch shows a wide descrepancy with the Cash Flows Variance analysis is very difficult where average costing is used. Estimating profitability is difficult under average costing. b Problems associated with using the Variable Cost per Unit as a performance measure : Variable cost does not match the revenues properly with the expenses Variable Costing method is not accepted for tax purposes and external financial reporting.
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