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.