Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 55

Change of Policy to Improve Productivity

Osage 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.

?Osage 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 unfavorable. 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?

Step 1 of 2

Cost accounting

This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.