Quincy Quilt Company 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.
Quincy uses a standard cost system to evaluate the performance of the assembly department. All negative variances at the end of the month are investigated. The assembly department rarely completes the operations in less time than the standard allows (which would result in a positive variance). Most months the variance is zero or slightly negative. Reasoning that the application of lower standard costs to the products manufactured will result in improved profit margins, the production manager had recommended that all standard times for assembly operations be drastically reduced. The production manager has informed the assembly personnel that she expects them to meet these new standards.
Will the lowering of the standard costs (by reducing the standard time for the assembly operations) result in improved profit margins and increased productivity?