Managerial Accounting
2002e
Belverd E. Needles, Jr.
Susan Crosson
----------Multimedia Slides by:
Harry Hooper
Santa Fe Community College
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1
Chapter 13
Quality Management
and Measurement
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2
LEARNING OBJECTIVES
1. Define cost management, describe a
management information system, and
explain how it enhances the management
cycle.
2. Define total quality management and identify
and compute the costs of quality for
products and services.
3. Use nonfinancial measures of quality to
evaluate operating performance.
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3
LEARNING OBJECTIVES
4. Discuss the evolving concept
of quality.
5. Identify the awards and
organizations that promote
quality.
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4
Management Information Systems
OBJECTIVE 1
Describe a management information system
and explain how it enhances the management
cycle.
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Management Information Systems
•A management information system (MIS)
is a management reporting system that
identifies
monitors
maintains
continuous, detailed analyses of a
company’s activities and provides
managers with timely measures of
operating results.
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Management Information Systems
• Primary focus of an MIS is on the
management of activities (not costs).
• Nonvalue-adding activities are
highlighted.
• Individual customer profitability is
analyzed.
• Resource usage and each activity cost is
identified.
• Managerial decision making is fostered,
leading to continuous improvement.
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Management Information Systems
• An MIS may consist of separate or linked
systems.
• An MIS may be a fully integrated data-base
system: an enterprise resource planning
(ERP) system.
• An ERP system combines the management
of all major business functions: purchasing,
manufacturing, marketing, sales, logistics,
order fulfillment, accounting, human
resources, etc.
• Managerial decision making is fostered,
leading to continuous improvement.
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The Management Cycle
1. Planning stage: Managers use the
MIS database for formulating
strategic plans, making forecasts,
and preparing budgets.
2. Executing stage: Managers use the
MIS database for implementing
decisions about personnel,
resources, and activities to minimize
waste and improve quality.
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The Management Cycle
3. Reviewing stage: Managers
track financial and nonfinancial
performance measures for
evaluating major business
functions.
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The Management Cycle
4. Reporting stage: Managers
generate customized reports to
evaluate performance and
support decision-making.
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The Management Cycle and a Management Information System
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Discussion
Q. What are some of the activities
included in a cost management
system?
A. 1. Purchasing
2. Manufacturing
3. Marketing
4. Sales
5. Logistics
6. Order fulfillment
7. Accounting
8. Human resources
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13
Accounting for
Product and Service Quality
OBJECTIVE 2
Define total quality management and
identify and compute the costs of quality
for products and services.
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Total Quality Management
• Total quality management (TQM)
exists when all business functions
work together to achieve quality.
• Quality means satisfying the customer
the first time.
• Costs of quality exist when quality is
achieved and when it is not achieved.
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Costs of Quality
• The costs of conformance
include prevention costs and
appraisal costs.
• The costs of nonconformance
include internal and external
failure costs.
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Financial Measures of Quality
Costs of Conformance to Customer Standards
Prevention costs
Technical support for vendors
Integrated system development
Quality improvement projects
Quality training of employees
Design review of products and
processes
Quality-certified suppliers
Quality circles
Preventive maintenance
Statistical process control
Process Engineering
Appraisal costs
Inspection of materials, processes, Maintenance of test equipment
and machines
Quality audits of products and
End of process sampling and
processes
testing
Vendor audits and sample testing Field testing
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Financial Measures of Quality
Costs of Nonconformance to Customer Standards
Internal failure costs
Scrap and rework
Reinspection and retesting of rework
Quality-related downtime
Scrap disposal losses
Failure analysis
Inventory control and scheduling
Downgrading because of defects
External failure costs
Lost sales
Restoration of reputation
Warranty claims and adjustments
Customer complaint processing
Returned goods
and replacements
Investigation of defects
Product recalls
Product-liability settlements
Measures of quality
Total costs of quality as a percentage of net sales
Ratio of costs of conformance to total costs of quality
Ratio of costs of nonconformance to total costs of quality
Costs of nonconformance as a percentage of net sales
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Financial Measures of Quality
Measures of Quality
Total costs of quality as a percentage of net sales
Ratio of costs of conformance to total costs of quality
Ratio of costs of nonconformance to total costs of quality
Costs of nonconformance as a percentage of new sales
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Discussion
Q. What are the four cost
categories in total quality
management?
A. 1. Prevention costs.
2. Appraisal costs.
3. Internal failure costs.
4. External failure costs.
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Nonfinancial Measures of Quality
OBJECTIVE 3
Use nonfinancial measures of quality
to evaluate operating performance.
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Nonfinancial Measures of Quality
• A business should establish a system
to detect poor quality early.
• Nonfinancial measures help determine
the degree of quality achieved.
• A commitment to ongoing
improvement enhances quality and
ultimately maximizes the financial
return from operations.
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Nonfinancial Measures
• Nonfinancial measures of quality
include:
• Measures of product design
quality.
• Measures of vendor performance.
• Measures of production
performance.
• Measures of delivery cycle time.
• Measures of customer satisfaction.
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Measures of Product Design Quality
• Computer-aided design
(CAD) helps detect product
design flaws.
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Measures of Vendor Performance
• Companies analyze vendors to
determine which are most
reliable, furnish high-quality
goods, deliver on time, and
charge competitive prices.
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Measures of Production Performance
• Companies adopt computerintegrated manufacturing (CIM)
systems to evaluate performance
of production equipment and to
evaluate performance of
maintenance personnel.
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Measures of Delivery Cycle Time
• Delivery cycle time (time between
accepting an order and final delivery
of the product or service) consists of:
• Purchase order lead time (time to order
and receive materials).
• Production cycle time (time to make the
product).
• Delivery time (time between completion
of product and its receipt by the
customer).
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Measures of Customer Satisfaction
• Customer follow-up helps
evaluate customer satisfaction.
• Companies may develop their
own customer satisfaction
indexes.
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Nonfinancial Measures of Quality
Measures of Product Design Quality
Product design flaws
Number and types of design
defects detected
Average time between defect
detection and correction
Number of unresolved design
defects at time of product
introduction
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Nonfinancial Measures of
Quality
Measures of Vendor Performance
Vendor quality
Defect-free materials as a percentage of
total materials received; prepared for
each vendor
Vendor delivery
Timely deliveries of materials as a
percentage of total deliveries; prepared
for each vendor
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Nonfinancial Measures of
Quality
Measures of Production Performance
Production quality
Number of defective products per million produced
Parts scrapped
Number and type of materials spoiled during
production
Equipment utilization rate Productive machine time as a percentage of total time
available for production
Amount of time each machine is idle
Machine downtime
Machine maintenance time Amount of time each machine is idle for maintenance
and upgrades
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Nonfinancial Measures of Quality
Measures of Delivery Cycle Time
On-time deliveries
Shipments received by promised date as a percentage of total
shipments
Orders filled
Orders filled as a percentage of total orders received
Average process time
Average time required by production to make a product available
for shipment
Average setup time
Average amount of time elapsed between the acceptance of an
order and the beginning of production
Purchase order lead time
Time it takes for materials to be ordered and received so that
production can begin
Production cycle time
Time it takes to make a product available for shipment
Delivery time
Time between the completion of a product and its receipt by the
customer
Delivery cycle time
Time between the acceptance of an order and the final delivery of
the product or service (purchase order lead time + production
cycle time + delivery time)
Waste time
Production cycle time – average process time – average setup time
Production backlog
Number and type of units waiting to begin processing
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Nonfinancial Measures of Quality
Measures of Customer Satisfaction
Customer complaints
Warranty claims
Returned orders
Number and types of customer
complaints
Number and causes of claims
Shipments returned as a percentage
of total shipments
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Measuring Service Quality
• Many of the quality cost categories
and nonfinancial measures can be
applied to service organizations.
• Flaws in service design lead to
poor-quality services.
• Poor service development leads to
internal and external failure costs.
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Discussion
Q. What five areas of nonfinancial
measures can help determine the
degree of quality achieved?
A. 1. Product design quality.
2. Vendor performance.
3. Production performance.
4. Delivery cycle time.
5. Customer satisfaction.
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The Evolving Concept of Quality
OBJECTIVE 4
Discuss the evolving concept of quality.
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The Evolving Concept of Quality
• In the past, the benefits of quality were
weighed against the costs of improving
quality.
• A “return on quality” was required.
• In the 1980s, Deming and others promoted
Total Quality Management (TQM).
• Companies came to believe that quality
gave companies a competitive edge.
• Quality control methods were implemented
to eliminate defects in product design and
manufacture.
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The Evolving Concept of Quality
• Companies expanded quality management
to include nonmanufacturing processes.
• Benchmarking compares the quality of a
process with a parallel process at the bestin-class company (from any industry).
• Process mapping diagrams process
inputs, outputs, constraints, and flows to
identify unnecessary efforts and
inefficiencies.
• Service businesses also seek to maximize
customer satisfaction.
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The Evolving Concept of Quality
• The concept of quality evolves to
fulfill customer needs and
expectations as the business
environment changes.
• Quality dimensions include freedom
from defects, dependability, prestige,
good taste, customer expectations,
innovation.
• The goal is customer satisfaction and
customer retention.
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Full Cost Profit Margin
OBJECTIVE 5
Identify the awards and organizations
that promote quality.
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Recognition of Quality
Awards to recognize and promote the
importance of quality include:
• The Deming Application Prize—awarded by
the Japanese Union of Scientists and
Engineers.
• The Malcolm Baldrige Quality Award—
awarded to U.S. organizations for
achievements in quality and business
performance excellence.
The International Standards Organization
(ISO) has developed ISO 9000, setting
quality management and quality assurance
standards.
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OK, Let’s Review
1. Describe a management information
system, and explain how it enhances
the cycle.
2. Define total quality management and
identify and compute the costs of
quality for products and services.
3. Use nonfinancial measures of quality
to evaluate operating performance.
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42
And Finally . . .
4. Discuss the evolving concept
of quality.
5. Identify the awards and
organizations that promote
quality.
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43