A cost benchmark is valid only if the standards are
Part 1
reviewed by salaried assembly-line workers.
approved by management.
based on historical costs.
kept up to date.
The Correct Answer and Explanation is:
Correct Answer: Kept up to date.
A cost benchmark refers to a standard or reference point used to compare actual performance or costs within an organization. It helps assess efficiency, set budgets, identify variances, and drive continuous improvement. However, for a benchmark to be effective and meaningful, it must be kept up to date.
Over time, business environments change due to inflation, changes in production methods, labor rates, raw material prices, regulatory updates, and technological advancements. If cost benchmarks are not regularly reviewed and updated to reflect these changes, they become outdated and irrelevant. This can lead to inaccurate cost comparisons, poor decision-making, and misaligned performance evaluations.
For example, if a company set a benchmark for material costs five years ago and never updated it, the current actual costs might appear to be unfavorable simply due to inflation, not inefficiency. This could mislead managers into thinking cost controls are failing when, in fact, the benchmarks are outdated.
Keeping cost benchmarks up to date also ensures that performance evaluations are fair and aligned with current operational realities. Outdated standards can demotivate employees, especially if they’re held accountable to targets that no longer reflect achievable performance levels. Conversely, overly lenient or obsolete benchmarks can lead to complacency and missed opportunities for improvement.
The other options, while relevant in certain contexts, are not as critical. For example, approval by management is important for buy-in but does not ensure the benchmark’s validity. Historical costs may serve as a starting point, but relying solely on them can be misleading if they don’t reflect current conditions. Input from assembly-line workers might offer practical insights, but workers alone cannot validate cost benchmarks.
Thus, the validity of a cost benchmark is fundamentally tied to its accuracy and relevance — which requires it to be kept up to date.
