Combined or Joint Price-Efficiency Variances and Incentives The MTT Company had a long history of using bonuses that were specifically tied to performance. Minimal inventories of any kind were kept. The purchasing manager was given a bonus of 5 percent of the favorable purchase-price variance for the year. The production manager was given a bonus of 5 percent of the favorable direct-material efficiency variance for the year plus additional bonuses regarding labor and overhead variances.

In 19_4, the performance regarding Material A, an important chemical ingredient, was:

Standard pounds allowed @ $1.00, one per finished unit Actual pounds consumed, 500,000 Actual production, 520,000 finished units Actual unit purchase price, $.90 Compute the material price and efficiency variances.
Split the price variance into a “pure” price variance and a combined priceefficiency variance. As the purchasing manager, would you be pleased by the favorable efficiency variance? Why? Would your attitude change if the actual unit price were $1.10? :
_ As the production manager, what would be your attitude toward the bonus system? ‘
_ Given that top management is committed to a bonus system based on variances, what modifications in the bonus system would you favor? Why?