Because of the previous lack of effective control of expenditure by the Han Dan Company, a system of responsibility accounting and standard costing was introduced. The basic principles underlying the responsibility cost control system included:
(1) setting cost and profit targets (responsibility standards) that take into account market pressures;
(2) assigning target costs to various levels of responsibility centre;

(3) evaluating performance based on fulfilment of the responsibility targets; and

(4) implementing a reward scheme with builtin incentive mechanisms. In order to facilitate performance measurement and evaluation, noncontrollable common costs were excluded from the responsibility costs decomposed within primary production factories. Responsibility contracts between factory managers and managers at lower levels must also be signed. Breakdown of the aggregated responsibility targets to all profit centres and their subordinates are conducted by the Department of Finance and Accounting. In addition, the department is responsible for monthly and yearly reporting of the execution results of the responsibility cost control system. It also reports and analyses the variances between actual outcomes and responsibility targets and determines the necessary bonus rewards (or penalty) for each responsibility centre in terms of the fulfilment of the cost and profit targets signed by managers. If a responsibility centre or individual worker fails to meet the cost targets specified in the responsibility contracts, all bonus and other benefits relating to the responsibility unit or worker will be forfeited.
Question:
1 What are the limitations of linking bonuses to meeting cost targets?