Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 12

Management Control Systems and Incentives

A company that we call “DC” is a Fortune 100 diversified conglomerate with operations in many industries around the world. Top management focuses on the annual earnings in evaluating the performance of division managers. Each year is a new ballgame for division managers.

The incentive plan includes an annual bonus that ranges from 7 to 40 percent of division managers’ salaries. There is an element of relative performance evaluation in that the target earnings for each year are based on how well companies in the same industry are performing. Once the target is set, it is not changed during the year.

Failing to meet a division’s target has serious consequences for the division manager. First, the manager loses some or all of the potential bonus. Second, a manager who misses a target will find her job in jeopardy. Missing a target two years in a row generally means that the manager will be fired.

Required

a. What incentives does this plan give to division managers?

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b. Is this a good plan? Would you want to be a division manager in this company?

Step 1 of 2

The company D have top personnel’s for evaluating the annual earnings and performances of division managers. On the basis of performance of division managers the bonus of 7 to 40% on their salaries are been paid.

The responsibility of the division managers is to achieve the targets set by the company. The company set targets based on the other company’s performance of the similar industry and if the targets not achieved they will be fired.

a.

The company set the target for the year and if the targets are been achieved by the division managers then they will get bonus on their salaries as incentives for their performances.