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Average costs and Variable costs as a Performance measure

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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?

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Solution Summary

Your tutorial is 227 words and is suitable for a novice. The concepts are explained in everyday language. Three problems are discussed for average costs and three for using variable costs.

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a. What problems are associated with using the average cost per unit as a performance measure?

Average cost per unit only rewards the manager for removing tasks or materials from the process without any charge for quality issues (re-work, rejection, returns). If average cost per unit is used, it must be balance with quality measures to be sure the manager isnââ?¬â?¢t tempted to tinker with the product creation in ways that ...

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Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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