Ethics and Quality Costs. Watts Dairy Products operates a network of 30 dairy processing plants across the eastern United States. A portion of the bonus system considers improvements in reducing waste and costs of quality. The payment is 5 percent of the annual improvement over the prior year. The company defines the categories of improvement as follows:

Lost product due to operational problems (waste, production yield, or scrap) Product returns Prevention costs Inspection costs Operational efficiency savings The results are reported as part of the overall responsibility accounting process with most of the initial transaction classification and recordkeeping done at

the plant level. The data are then transferred to the corporate office for report preparation purposes. The controller is concerned about several issues:
- In several plants, the patterns of earned bonuses are erratic for certain managers-high in some years and none in others. In fact, the pattern often includes high gains in prevention and inspection cost reductions and strong efficiency savings one year, with the reverse occurring the next year.
- In another case, a frequently promoted manager (and as a result frequently moved manager) has had a record of generating high quality bonuses each year. Yet, in each case the next manager who takes over that location after a transfer seems to have quality problems - In a recent executive staff meeting, several vice-presidents mentioned problems with product yields, customer satisfaction surveys, and several small product recalls.
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1. Comment on the bonus system and how the issues of concern to the controller might be interrelated.
2. Suggest ways the system might be improved (using both accounting and operational methods) to help resolve the issues.