Performance Measures for Cost Centers
A soft drink company has three bottling plants throughout the country.Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks.The parent company supplies each plant with the syrup.The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks.The bottled soft drinks are then sent to regional grocery stores.
The bottling plants are treated as costs centers.The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered.Each bottling plant uses the same equipment,but some produce more bottles of soft drinks because of different demand.The costs and output for each bottling plant are: Required:
a.Estimate the average cost per unit for each plant.
b.Why would the manager of plant A be unhappy with using the average cost as the performance measure?
c.What is an alternative performance measure that would make the manager of plant A happier?
d.Under what circumstances might the average cost be a better performance measure?

Question

Performance Measures for Cost Centers
A soft drink company has three bottling plants throughout the country.Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks.The parent company supplies each plant with the syrup.The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks.The bottled soft drinks are then sent to regional grocery stores.
The bottling plants are treated as costs centers.The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered.Each bottling plant uses the same equipment,but some produce more bottles of soft drinks because of different demand.The costs and output for each bottling plant are:  Required:
a.Estimate the average cost per unit for each plant.
b.Why would the manager of plant A be unhappy with using the average cost as the performance measure?
c.What is an alternative performance measure that would make the manager of plant A happier?
d.Under what circumstances might the average cost be a better performance measure?

Quizplus · Accepted Answer

The Answer is Solution to Performance Measures for Cost Centers (15 minutes)
a.The average cost per unit of each plant is:

Solution to Performance Measures for Cost Centers (15 minutes) a.The average cost per unit of each plant is: b.The manager of plant A would be unhappy with using the average cost as the performance measure because the lower output of plant A means that the fixed costs (which are the same for all firms)are spread over fewer units.If the managers of the bottling plants cannot control output,then they cannot control the average cost per unit. c.The managers could be evaluated based on the variable cost per unit.In that case,the manager of plant A has the lowest variable cost per unit.The danger of using the variable cost per unit is that managers will claim that most of their costs are fixed not variable.Therefore,evaluating managers on both variable cost per unit and fixed costs is appropriate.Ideally,the performance measure should reflect controllable costs. d.The average cost could be a good performance measure if the managers can control sales and output.By increasing sales and output,the managers can lower the average cost per unit and be rewarded accordingly.

b.The manager of plant A would be unhappy with using the average cost as the performance measure because the lower output of plant A means that the fixed costs (which are the same for all firms)are spread over fewer units.If the managers of the bottling plants cannot control output,then they cannot control the average cost per unit.
c.The managers could be evaluated based on the variable cost per unit.In that case,the manager of plant A has the lowest variable cost per unit.The danger of using the variable cost per unit is that managers will claim that most of their costs are fixed not variable.Therefore,evaluating managers on both variable cost per unit and fixed costs is appropriate.Ideally,the performance measure should reflect controllable costs.
d.The average cost could be a good performance measure if the managers can control sales and output.By increasing sales and output,the managers can lower the average cost per unit and be rewarded accordingly.