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

Exercise 13

Management Control Systems and Incentives

A Fortune 500 company that we shall call “Heavy” is a manufacturer of machinery and engines. This company is headquartered in a small city in the midwestern region of the United States. This company’s products have a well-respected brand name and receive a premium price in the market. The unionized work force is well paid and does quality work.

This company faces challenges from foreign companies that pay lower wages and have more modern and more efficient production equipment. Consequently, it is seeking ways to cut costs without reducing quality.

The company recently introduced a profit-sharing arrangement whereby workers receive a share of profits in profitable years. The workers gave up a wage increase to obtain this profit-sharing arrangement.

Required

Evaluate the advantages and disadvantages of giving the workers a profit-sharing bonus instead of a wage increase.

Step 1 of 2

Management control system

Management control system is needed to manage the complications arising out of decentralization like dysfunctional decision making. Owners of the organization use structure and procedures of management control system to influence the actions of its managers and other employees to ensure smooth implementation of organizational strategies. Management controls system comprises of three elements such as delegation fo decision making authorities, evaluation of performance and measurement systems and finally awarding compensation and rewards for performance.