Managerial accounting and introduction to concepts methods and user 11e by maher chapter 04

CHAPTER 4
Strategic
Management of
Costs, Quality, and
Time

PowerPoint Presentation by
LuAnn Bean
Professor of Accounting
Florida Institute of Technology
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Managerial Accounting 11E
Maher/Stickney/Weil

1


☼

CHAPTER GOAL

☼

This chapter illustrates the significance of
quality.

Prizes recognize improvements in quality.
Japan: Deming Prize
US: Baldrige Quality Award

International standards measure quality
ISO 9000: standards for quality management
ISO 14000: standards for communicating financial
impact of environmental issues
2


LO 1

TRADITIONAL VIEW
The traditional view of quality assumes that
improving quality always requires increasing
costs.
Firms can reduce total costs by
Producing lower-quality goods
Tolerating some level of defective goods

3


LO 1

QUALITY-BASED VIEW
The quality-based view holds that firms should
always attempt to improve quality.
Attempts to improve quality will succeed without

limit
Firms
Should not wait for inspections of finished products to
reveal defects
Must establish quality goals and procedures
Aim for zero defects

High quality pays for itself
4


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

EXHIBIT 4.1

TRADITIONAL VS. QUALITYBASED VIEW

LO 1

5


LO 2

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
6


LO 2

VALUE CHAIN
Prevent quality
problems here

Design

Identify quality
problems here

Production

Marketing

Distribution
Deal with unhappy
customers here

Customer Service

EXHIBIT 4.3

Research and Development

7


LO 3

COSTS OF QUALITY
Prevention
Procurement inspection
Processing control
Design
Quality training
Machine inspection

Appraisal
End-process sampling
Field testing
8


LO 3

COSTS OF FAILING TO
IMPROVE QUALITY
Internal failure costs: detection before delivery
Scrap
Rework
Reinspection/retesting

External failure costs: detection after delivery

Warranty repairs
Product liability
Marketing costs
Lost sales
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LO 4

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.
Continued
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LO 4

COST OF QUALITY REPORT:
Cost Categories

Costs of Quality % of Sales

Prevention Costs
Quality training

Materials inspection

$ 5,800
10,400

$ 16,200

1.62%

10,000

1.00

14,400

1.44

Customer complaints

3,000

0.30

Cost of lost business

17,000

1.70

Appraisal Costs

End-of-process sampling
Internal Failure Costs
Scrap
External Failure Costs

Total costs of quality

$ 60,000 6.06%

What
What
actions
actionscan
can
Steve
Steve
forego
foregoififhe
he
can’t
can’tdo
do
everything?
everything?

EXHIBIT 4.4

Steve’s Sushi

11

LO 4

Generally
Generallythere
thereisis
aalong-run
long-rundecline
decline
inintotal
totalcosts
costsof
of
quality
quality

EXHIBIT 4.5
12


LO 5

TOOLS
Tools to identify quality problems include
Control charts
Cause-and-effect analysis
Pareto charts

Produce signals about quality control

13


LO 5

SIGNAL:
SIGNAL: Definition
Definition
Is information provided to a decision
maker.
 Warning signal indicates something is
wrong
 Diagnostic signal suggests cause of
problem and possible solutions
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LO 5

Control
Controlcharts
charts
distinguish
distinguish
between
betweenrandom
random
variations
variationsand

and
variations
variationstoto
investigate.
investigate.

EXHIBIT 4.6
15


LO 5

CAUSE
CAUSE and
and EFFECT:
EFFECT: Definition
Definition

Is analysis that first defines the
effect and then identifies the
cause.

16


LO 5

Pareto
Paretocharts
charts

illustrate
illustrate
graphically
graphicallythe
the
problems
problemsor
or
defects.
defects.

EXHIBIT 4.7
17


LO 6

JUST-IN-TIME:
JUST-IN-TIME: Definition
Definition
Is a philosophy that seeks to
purchase/produce goods and/or
services just when the company
needs them.

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LO 6

JIT
Factors for success in JIT
Total quality
Smooth production flow
Purchasing quality materials
Well-trained, flexible workforce
Short customer-response times
Backlog of orders

19


LO 7

IMPORTANCE OF TIME
Success
Success in
in competitive
competitive markets
markets demands
demands
shorter
shorter new-product
new-product development
development time
time and
and
more
more rapid
rapid response

response to
to customers.
customers.
Customer
Customer response
response time
time is:
is: (1)
(1) newnewproduct
product development
development time
time and
and (2)
(2)
operational
operational measures
measures of
of time.
time.

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LO 7

NEW-PRODUCT
NEW-PRODUCT DEVELOPMENT
DEVELOPMENT
TIME:
TIME: Definition

Definition
Refers to the period between a
firm’s first consideration of a
product and its delivery to the
customer.

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LO 7

BREAK-EVEN TIME EQUATION
Break-even time =
(Investment ÷ Annual Discounted Cash Flow)
+
Time period from Project approval until Sales begin

22


LO 7

LIMITATIONS: Break-even Time
Break-even time
Ignores cash flows after break-even point
Does not consider strategic, nonfinancial reasons
for new product
Varies from one business to next, depending on
product life cycles and investment requirements.

23


LO 7

OPERATIONAL MEASURES
Indicate
Speed
Reliability

Customer response time
Delivery cycle time
Time from order to delivery

On-time performance
Delivered as scheduled
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LO 8

BALANCED
BALANCED SCORECARD:
SCORECARD:
Definition
Definition

Reports an integrated group of
financial and nonfinancial
performance measures based on

vision and strategy.

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