1 Strategic Management of Costs, Quality, and Time CHAPTER 4 Managerial Accounting 11E Maher/Stickney/Weil PowerPoint PowerPoint Presentation by Presentation by LuAnn Bean LuAnn Bean Professor of Accounting Professor of Accounting Florida Institute of Florida Institute of Technology Technology © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use.
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1
Strategic Management of
Costs, Quality, and Time
CHAPTER 4
Managerial Accounting 11E
Maher/Stickney/Weil
PowerPointPowerPoint Presentation by Presentation by
LuAnn BeanLuAnn BeanProfessor of AccountingProfessor of AccountingFlorida Institute of TechnologyFlorida Institute of Technology
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.
2
CHAPTER GOAL
This chapter illustrates the significance of quality. Prizes recognize improvements in quality.
Japan: Deming PrizeUS: Baldrige Quality Award
International standards measure qualityISO 9000: standards for quality managementISO 14000: standards for communicating financial
impact of environmental issues
☼ ☼
3
TRADITIONAL VIEW
The traditional view of quality assumes that improving quality always requires increasing costs.Firms can reduce total costs by
Producing lower-quality goodsTolerating some level of defective goods
LO 1
4
QUALITY-BASED VIEW
The quality-based view holds that firms should always attempt to improve quality. Attempts to improve quality will succeed without
limitFirms
Should not wait for inspections of finished products to reveal defects
Must establish quality goals and proceduresAim for zero defects
High quality pays for itself
LO 1
5
TRADITIONAL VS. QUALITY-BASED VIEW
LO 1
Traditional View Quality-based View
Quality increases costs Quality decreases costs
Goods require inspection Defect-free goods require no inspection
Workers cause most defects System causes most defects
Require standards, quotas, goals Eliminate standards, quotas, goals
Buy from lowest cost supplier Buy on basis of lowest total cost
Focus on short-run profits Focus on long-run profits EX
HIB
ITE
XH
IBIT
4.14.1
6
QUALITY: Customer View
Three success factors to meet customer requirements Service
All the products features, tangible and intangible
Quality Firm’s ability to deliver its service commitments
Cost Customers will buy product that provides them with
preferred mix of quality, service, price
LO 2
7
VALUE CHAIN
LO 2
Research and Development
Design
Production
Marketing
Distribution
Customer Service
Prevent quality problems here
Identify quality problems here
Deal with unhappy customers here
EX
HIB
ITE
XH
IBIT
4.34.3
8
COSTS OF QUALITY
Prevention Procurement inspectionProcessing controlDesignQuality trainingMachine inspection
AppraisalEnd-process samplingField testing
LO 3
9
COSTS OF FAILING TO IMPROVE QUALITY
Internal failure costs: detection before delivery ScrapReworkReinspection/retesting
External failure costs: detection after deliveryWarranty repairsProduct liabilityMarketing costsLost sales
LO 3
10
EXAMPLE
Steve’s Sushi makes sushi for delivery only. Steve has concerns about quality and so he considers various ways he can ensure/improve quality. He throws away any prepared sushi that does not meet strict quality standards. A quality report follows.
LO 4
Continued
11
LO 4
EX
HIB
ITE
XH
IBIT
4.44.4
COST OF QUALITY REPORT: Steve’s Sushi
COST OF QUALITY REPORT: Steve’s Sushi
Prevention Costs
Quality training $ 5,800
Materials inspection 10,400 $ 16,200 1.62%
Appraisal Costs
End-of-process sampling 10,000 1.00
Internal Failure Costs
Scrap 14,400 1.44
External Failure Costs
Customer complaints 3,000 0.30
Cost of lost business 17,000 1.70
Total costs of quality $ 60,000 6.06%
Cost Categories Costs of Quality % of Sales
What actions can
Steve forego if he
can’t do everything?
What actions can
Steve forego if he
can’t do everything?
12
EXHIBITEXHIBIT 4.54.5
LO 4
Generally there is a long-run decline
in total costs of quality
Generally there is a long-run decline
in total costs of quality
13
TOOLS
Tools to identify quality problems includeControl chartsCause-and-effect analysisPareto charts
Produce signals about quality control
LO 5
14
SIGNAL: DefinitionSIGNAL: Definition
Is information provided to a decision maker.
Warning signal indicates something is wrong
Diagnostic signal suggests cause of problem and possible solutions
LO 5
15
EXHIBITEXHIBIT 4.64.6
LO 5
Control charts distinguish
between random variations and variations to investigate.
Control charts distinguish
between random variations and variations to investigate.
16
CAUSE and EFFECT: DefinitionCAUSE and EFFECT: Definition
Is analysis that first defines the effect and then identifies the
cause.
LO 5
17
EXHIBITEXHIBIT 4.74.7
LO 5
Pareto charts illustrate
graphically the problems or
defects.
Pareto charts illustrate
graphically the problems or
defects.
18
JUST-IN-TIME: DefinitionJUST-IN-TIME: Definition
Is a philosophy that seeks to purchase/produce goods and/or services just when the company
needs them.
LO 6
19
JIT
Factors for success in JITTotal qualitySmooth production flowPurchasing quality materialsWell-trained, flexible workforceShort customer-response timesBacklog of orders
LO 6
20
IMPORTANCE OF TIME
Success in competitive markets demands shorter new-product development time and
more rapid response to customers. Customer response time is: (1) new-
product development time and (2) operational measures of time.
Success in competitive markets demands shorter new-product development time and
more rapid response to customers. Customer response time is: (1) new-
product development time and (2) operational measures of time.
LO 7
21
NEW-PRODUCT DEVELOPMENT TIME: Definition
NEW-PRODUCT DEVELOPMENT TIME: Definition
Refers to the period between a firm’s first consideration of a product and its delivery to the
customer.
LO 7
22
BREAK-EVEN TIME EQUATION
LO 7
Break-even time =
(Investment ÷ Annual Discounted Cash Flow)
+Time period from Project approval until Sales begin
23
LIMITATIONS: Break-even Time
Break-even timeIgnores cash flows after break-even pointDoes not consider strategic, nonfinancial reasons
for new productVaries from one business to next, depending on
product life cycles and investment requirements.
LO 7
24
OPERATIONAL MEASURES
IndicateSpeedReliability
Customer response timeDelivery cycle timeTime from order to delivery
On-time performanceDelivered as scheduled
LO 7
25
BALANCED SCORECARD: Definition
BALANCED SCORECARD: Definition
Reports an integrated group of financial and nonfinancial
performance measures based on vision and strategy.
LO 8
26
EXHIBITEXHIBIT 4.94.9
LO 8
Balanced scorecard can
maximize profits and improve
performance if used effectively.
Balanced scorecard can
maximize profits and improve
performance if used effectively.
27
TOTAL QUALITY MANAGEMENT (TQM)
TQM requires five changes to traditional managerial accounting systemsSystem includes information to help solve
problemsLine employees collect information for feedbackInformation should be available quicklyInformation should be more detailedBase rewards on quality, customer satisfaction
LO 9
28
End of CHAPTER 4
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