Question

Change of Policy to Improve Productivity

Orange Electronics has been experiencing declining profit margins and has been looking for

ways to increase operating income. It cannot raise selling prices for fear of losing business to

its competitors. It must either cut costs or improve productivity.

The company uses a standard cost system to evaluate the performance of the soldering

department. It investigates all unfavorable variances at the end of the month. The soldering

department rarely completes the operations in less time than the standard allows (which

would result in a favorable variance). In most months, the variance is zero or slightly unfavor-

able. Reasoning that the application of lower standard costs to the products manufactured

will result in improved profit margins, the production manager has recommended that all

standard times for soldering operations be drastically reduced. The production manager has

informed the soldering personnel that she expects the soldering department to meet these new

standards.

Required

Will the lowering of the standard costs (by reducing the time of the soldering operations)

result in improved profit margins and increased productivity? Explain.

Answer 1

Lets consider the question,

Current the soldering personnel rarely complete the operations in less time than the standard allows. Assuming that the soldering department is working efficiently, it is not likely that the tightening of the standards (reducing the allowed time per operation) will result in increased productivity. More likely the soldering personnel will resent having the standards tightened without their input into the decision making process. They currently view the standards as achievable since they do, although rarely, complete the operations in less than the standard time. Tightening the standards will result in decreased motivation and morale as they strive for what they will view as an unrealistic standard.

Improved profit margins will not be achieved. The production manager fails to understand that by tightening the standards (all other things being equal) she will simply increase the unfavorable variances. Simply lowering the standard time allowed per operation does not reduce the cost of manufacturing the product, unless an actual reduction in processing time occurs on the shop floor. As stated above the tightening of the standards will probably decrease morale and motivation resulting in an increased processing time. This will decrease productivity and increase the costs of production.