MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES

By Dennis Caplan, University at Albany (State University of New York)

 

 

CHAPTER 21: Budgetary Incentive Schemes

 

Exercises and Problems

 

21-1: The table below represents a bonus scheme, in which the sales representative is given a quota (called the objective), is asked to provide a forecast for her sales volume for the upcoming year, and then is given a bonus (expressed as a percentage of a baseline bonus) based on a combination of her forecast and actual results. The numbers in the grid represent the percentage of the baseline bonus that the sales representative will receive. For example, if the sales representative is given a quota of 300 units and she forecasts that she can sell 600 units, F/O = 2.0, and she will be working from the column with 2.0 in the heading. Then, if she sells 450 units, her bonus will be calculated from the number at the intersection of the column labeled 2.0 and the row labeled 1.5 (A/O = 450/300 = 1.5). The number in that box is 120, so she will receive 120% of the baseline bonus.

 

F/O = forecast objective

A/O = Actual Objective

 

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0

--

--

--

--

--

--

--

--

--

--

--

0.5

60

30

--

--

--

--

--

--

--

--

--

1.0

90

120

90

60

30

--

--

--

--

--

--

1.5

120

150

180

150

120

90

60

30

--

--

--

2.0

150

180

210

240

210

180

150

120

90

60

30

2.5

180

210

240

270

300

270

240

210

180

150

120

3.0

210

240

270

300

330

360

330

300

270

240

210

3.5

240

270

300

330

360

390

420

390

360

330

300

4.0

270

300

330

360

390

420

450

480

450

420

390

4.5

300

330

360

390

420

450

480

510

540

510

480

5.0

330

360

390

420

450

480

510

540

570

600

570

Required: Evaluate this bonus scheme, and discuss in two or three sentences how effective the incentives imbedded in this bonus scheme are likely to be, in terms of motivating the sales representative to provide her best forecast of her sales volume for the upcoming year, and to work hard to achieve and even exceed her forecasted sales volume, once her forecast has been made.


 

21-2: The table below represents a bonus scheme, in which the sales representative is given a quota (called the objective), is asked to provide a forecast for her sales volume for the upcoming year, and then is given a bonus (expressed as a percentage of a baseline bonus) based on a combination of her forecast and actual results. The numbers in the grid represent the percentage of the baseline bonus that the sales representative will receive. For example, if the sales representative is given a quota of 300 units and she forecasts that she can sell 600 units, F/O = 2.0, and she will be working from the column with 2.0 in the heading. Then, if she sells 450 units, her bonus will be calculated from the number at the intersection of the column labeled 2.0 and the row labeled 1.5 (A/O = 450/300 = 1.5). The number in that box is 180, so she will receive 180% of the baseline bonus.

 

F/O = forecast objective

A/O = Actual Objective

 

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0

--

--

--

--

--

--

--

--

--

--

--

0.5

--

30

60

30

--

--

--

--

--

--

--

1.0

30

60

90

120

90

60

30

--

--

--

--

1.5

60

90

120

150

180

150

120

90

60

30

--

2.0

90

120

150

180

210

240

210

180

150

120

90

2.5

120

150

180

210

240

270

300

270

240

210

180

3.0

150

180

210

240

270

300

330

360

330

300

270

3.5

180

210

240

270

300

330

360

390

420

390

360

4.0

210

240

270

300

330

360

390

420

450

480

450

4.5

240

270

300

330

360

390

420

450

480

510

540

5.0

270

300

330

360

390

420

450

480

510

540

570

Required: Evaluate this bonus scheme, and discuss in two to four sentences how effective the incentives imbedded in this bonus scheme are likely to be, in terms of motivating the sales representative to provide her best forecast of her sales volume for the upcoming year, and to work hard to achieve and even exceed her forecasted sales volume, once her forecast has been made.

 

 

Return to Chapter 21

 

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Return to the Table of Contents

 

 

 

Management Accounting Concepts and Techniques; copyright 2006; most recent update: November 2010

 

For a printer-friendly version, contact Dennis Caplan at dcaplan@uamail.albany.edu