Some executives believe that it is extremely impor- tant to manage "by numbers." This form of man- agement requires that all employees with departmental or divisional responsibilities spend time understanding the company's operations and how they are reflected by the company's financial reports. Because of the managers' increased com- prehension of the financial reports and the activi- ties that they represent, their subordinates will become more attuned to the meaning of financial reports and the important signposts that can be detected in these reports. Companies use a variety of numerical measurement systems, including standard costs, financial ratios, human resource fore- casts, and operating budgets.

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Required: a. Discuss the following aspects of a standard cost system. 1. Discuss the characteristics that should be present to encourage positive employee motivation. 2. Discuss how the system should be imple- mented to positively motivate employees. b. The use of variance analysis often results in management by exception. 1. Explain the meaning of "management by exception." 2. Discuss the behavioral implications of management by exception. c. Explain how employee behavior could be adversely affected when actual-to-budget com- parisons are used as the basis for performance evaluation.