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MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 27

MANAGING ACCOUNTING IN

A CHANGING ENVIRONMENT

I. Questions

1. The American Heritage Dictionary defines quality as 1. a characteristic

or attribute of something; property; a feature. 2. the natural or essential

character of something. . e!cellence; superiority."

#uality for a product or ser$ice can be defined as a product or ser$icethat conforms %ith a design %hich meets or e!ceeds the e!pectations of

customers at a price they are %illing to pay."

2. &rocter ' (amble defines T#) as the unyielding and continually

impro$ing effort by e$eryone in an organi*ation to understand+ meet+ and

e!ceed the e!pectations of customers." Typical characteristics of T#)

include focusing on satisfying customers+ stri$ing for continuous

impro$ement+ and in$ol$ing the entire %or,force.

T#) is a continual effort and ne$er completes. (lobal competition+ ne%

technology+ and e$er-changing customer e!pectations ma,e T#) a

continual effort for a successful firm.

. The core principles of T#) include 1/ focusing on satisfying thecustomer+ 2/ stri$ing for continuous impro$ement+ and / in$ol$ing the

entire %or, force.

0. ontinuous impro$ement ai*en/ in total quality management is the

belief that quality is not a destination; rather+ it is a %ay of life and firms

need to continuously stri$e for better products %ith lo%er costs.

In today3s global competition+ %here firms are fore$er trying to

outperform the competition and customers present e$er-changing

e!pectations+ a firm can ne$er reach the ideal quality standard and needs

to continuously impro$e quality and reduce costs to remain competiti$e.

4. The Institute of )anagement Accountants I)A/ belie$es an effecti$e

implementation of total quality management %ill ta,e bet%een three andfi$e years and in$ol$es the follo%ing tas,s5

Year 1

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Managing Accounting in a Changing Environment Chapter 27

reate a quality council and staff

onduct e!ecuti$e quality training programs

onduct quality audits

&repare gap analysis

De$elop strategic quality impro$ement plans

Year 2

onduct employee communication and training programs

6stablish quality teams

reate measurement systems and set goals

Year 3

7e$ise compensation 8 appraisal 8 recognition systems 9aunch e!ternal initiati$es %ith suppliers

7e$ie% and re$ise

:. 7e%ard and recognition are the best means of reinforcing the emphasis

on T#). )oreo$er+ proper re%ard and recognition structures can be

$ery po%erful stimuli to promote T#). 6fforts and progress %ill most

li,ely be short-li$ed if no change is made to the compensation 8 appraisal

8 recognition systems to ma,e them in line %ith the obecti$es of the

firm3s T#).

. ?ome e!amples of costs associated %ith cost of quality categories are5

Prevention costs5 Training costs such as instructors3 fees+ purchase of

training equipment+ tuition for e!ternal training+ training %ages andsalaries; salaries for quality planning and e!ecutions+ cost of pre$enti$e

equipment+ printing and promotion costs for quality programs+ a%ards

for quality.

Appraisal costs5 osts of ra% materials+ %or,-in-process+ and finished

goods inspections.

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Internal failure costs5 ?crap+ re%or,+ loss due to do%ngrades+

reinspection costs+ and loss due to %or, interruptions.

External failure costs5 ?ales returns and allo%ance due to quality

deficiency+ %arranty cost+ and canceled sales orders due to quality

deficiency.

1@. &re$ention costs rise during the early years of implementing T#) as the

firm engages in education to prepare its employees and in the planning

and promotion of the quality program. Appraisal costs %ill also li,ely

rise during the early years of T#)+ because the firm needs to ensure that

quality is actually being achie$ed. The increase in appraisal cost+

ho%e$er+ is most li,ely to occur at a slo%er pace than those of the

pre$ention costs because at the beginning of a T#) program there %ill

be substantial increases in quality training and in promotion to raisea%areness on the importance of quality.

The firm may see some decreases in internal and e!ternal failure costs in

the early years of implementing a T#). Ho%e$er+ these t%o costs most

li,ely %ill remain at about the same le$el as before during the first

se$eral years of T#). )any firms may actually see internal failure cost

rise+ because of the higher standard demanded by the T#) or the higher

le$el of employees3 a%areness on the critical importance of perfection in

e$ery step of the process. As the firm ma,es progress in T#)+ both

internal failure and e!ternal failure costs should decrease.

11. osts of conformance are costs incurred to ensure that products or

ser$ices meet quality standards and include pre$ention costs andappraisal costs.

Internal and e!ternal failure costs are costs of non-conformance. They

are costs incurred or opportunity costs because of reection of products orser$ices.

12. etter pre$ention of poor quality often reduces all other costs of quality.

Bith fe%er problems in quality+ appraisal is needed because the products

are made right the first time. Ce%er defecti$e units also reduce internaland e!ternal failure costs as the occasion for repairs+ re%or,+ and recalls

decrease.

It is easier to design and build quality in than try to inspect or repair

quality in. Theoretically+ if pre$ention efforts are completely successful+there %ill be no need to incur appraisal costs and there %ill be no internal

failure or e!ternal failure costs. In practice+ appraisal costs usually do

not decrease+ partly because management needs to ensure that quality is

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Chapter 27 Managing Accounting in a Changing Environment

there as e!pected. onconformance costs+ ho%e$er+ decrease at a much

faster pace than pre$ention costs increase.

1. The role of management accountants in total quality management

includes gathering all rele$ant quality information+ participating acti$ely

in all phases of the quality program+ and re$ie%ing and disseminating

quality cost reports.

10. To meet the challenges of total quality management+ management

accountants need to ha$e a clear understanding of T#) methodology.

They must be able to design+ create+ or modify information systems that

measure and monitor quality and e$aluate progress to%ard total quality

as e!pected of each organi*ational unit and the total enterprise.

14. Eust-in-time EIT/ purchasing is the purchase of goods or materials such

that a deli$ery immediately precedes demand or use. enefits include

lo%er in$entory holdings reduced %arehouse space required and less

money tied up in in$entory/ and less ris, of in$entory obsolescence and

spoilage.

1:. The sequence of acti$ities in$ol$ed in placing a purchase order can be

facilitated by use of the Internet. A company can streamline the

procurement process for its customers F e.g.+ ha$ing online a completeprice list+ information about e!pected shipment dates+ and a ser$ice order

capability that is a$ailable 20 hours a day %ith email or fa! confirmation.

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a. Throughput contribution equal to sales re$enue minus direct

materials costs.b. In$estments in$entory/ equal to the sum of materials costs of direct

materials in$entory+ %or,-in-process in$entory and finished goods

in$entory+ research and de$elopment costs+ and costs of equipmentand buildings.

c. Gther operating costs equal to all operating costs other than direct

materials/ incurred to earn throughput contribution.

2@. The four ,ey steps in managing bottlenec, resources are5

?tep 15 7ecogni*e that the bottlenec, operation determines throughput

contribution.

?tep 25 ?earch for+ and find the bottlenec,.

?tep 5 eep the bottlenec, busy+ and subordinate all nonbottlenec,

operations to the bottlenec, operation.

?tep 05 Increase bottlenec, efficiency and capacity.

21. a/ &roduct %arranty costs should be lo%er because a %orld-class

manufacturer B)/ %ill ma,e fe%er defecti$es.b/ ?alaries of quality control inspectors should be lo%er because a

B) %ill ha$e its %or,ers inspect as they go+ rather than ha$ing

separate inspections. or %ill a B) inspect incoming materials

and components because it %ill deal only %ith $endors %hose quality

has been demonstrated.

c/ Amounts paid to $endors for parts and components should be higherbecause a B) %ill not search out the lo%est prices+ but %ill see,

high-quality components deli$ered %hen needed.

d/ Bages rates for direct laborers should be higher because a B)3s

%or,ers %ill multis,illed and should therefore command premium

%ages.

e/ Total super$isory salaries should be lo%er because a B)3s

%or,ers %ill not need as much super$ision.

f/ Barehousing costs should be lo%er because a B) %ill produce asneeded and so %ill not require storage space for materials or finished

product.

22. At the final assembly stage in a EIT system+ a signal is sent to the

preceding %or,station as to the e!act parts and materials that %ill beneeded o$er the ne!t fe% hours for the final assembly of products. Gnly

those parts and materials are pro$ided. The same signal is sent bac,

through each preceding %or,station so that a smooth flo% of parts and

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Chapter 27 Managing Accounting in a Changing Environment

materials is maintained %ith no buildup of in$entories at any point. Thus+

all %or,stations respond to the pull" e!erted by the final assemblystage.

The pull" approach ust described can be contrasted to the push"

approach used in con$entional systems. In a con$entional system+

in$entories of parts and materials are built upoften simply to ,eep

e$eryone busy. These semi-completed parts and materials are pushed"

for%ard to the ne!t %or,station %hether or not there is actually any

customer demand for the products they %ill become part of. The result is

large stoc,piles of %or, in process in$entories.

2. A number of benefits accrue from reduced setup time. Cirst+ reduced

setup time allo%s a company to produce in smaller batches+ %hich in turn

reduces the le$el of in$entories. ?econd+ reduced setup time allo%s acompany to spend more time producing goods and less time getting

ready to produce. Third+ the ability to rapidly change from ma,ing one

product to ma,ing another allo%s the company to respond more quic,ly

to customers. Cinally+ smaller batches ma,e it easier to spotmanufacturing problems before they result in a large number of defecti$e

units.

II. Exercises

Eer!ise 1 "#ualit$ Cost Classi%i!ation&

Prevention Appraisal

InternalFailure

ExternalFailure

a. Barranty repairs !

b. ?crap !

c. Allo%ance granted dueto blemish !

d. ontribution margins of

lost sales !

e. Tuition for quality

courses !

f. 7a% materials

inspections !g. Bor,-in-process

inspection !

h. ?hipping cost for

replacements !

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i. 7ecalls !

. Attorney3s fee forunsuccessful defense of

complaints about quality !

,. Inspection of re%or,s !

l. G$ertime caused by

re%or,ing !

m. )achine maintenance !

n. Tuning of testingequipment !

Eer!ise 2 "Cost o% #ualit$ (eport&

Requirements 1 & 2

ali ompany

ost of #uality 7eportCor 2@@4 and 2@@:

Cost of ualit! 2""# 2""$

Categor! Peso % Peso %

&re$ention costs5

#uality manual & 0@+@@@ & 4@+@@@&roduct design @@+@@@ & 0@+@@@ 4.:< 2@+@@@

Disposal of defecti$eunits >@+@@@ 0@+@@@ 4.:< =4+@@@ 024+@@@ @+@@@ >.= 4@+@@@ =4@+@@@ 10.1

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