CHAPTER 4
Strategic
Management of
Costs, Quality, and
Time
PowerPoint Presentation by
LuAnn Bean
Professor of Accounting
Florida Institute of Technology
© 2012 Cengage Learning. All Rights Reserved. May
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Managerial Accounting 11E
Maher/Stickney/Weil
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☼
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
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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
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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
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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
EXHIBIT 4.1
TRADITIONAL VS. QUALITYBASED VIEW
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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
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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
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LO 3
COSTS OF QUALITY
Prevention
Procurement inspection
Processing control
Design
Quality training
Machine inspection
Appraisal
End-process sampling
Field testing
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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:
Steve’s Sushi
Prevention Costs
Quality training
Materials inspection
Appraisal Costs
End-of-process sampling
10,000
1.00
14,400
1.44
Customer complaints
3,000
0.30
Cost of lost business
17,000
1.70
$ 60,000
6.06%
Internal Failure Costs
Scrap
External Failure Costs
Total costs of quality
EXHIBIT 4.4
Cost Categories
What
actions can
Costs of Quality % of Sales
Steve
forego if he
can’t do
$ 5,800
everything?
10,400
$ 16,200
1.62%
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LO 4
Generally there is
a long-run decline
in total costs of
quality
EXHIBIT 4.5
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LO 5
TOOLS
Tools to identify quality problems include
Control charts
Cause-and-effect analysis
Pareto charts
Produce signals about quality control
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LO 5
SIGNAL: 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 charts
distinguish
between random
variations and
variations to
investigate.
EXHIBIT 4.6
15
LO 5
CAUSE and EFFECT: Definition
Is analysis that first defines the
effect and then identifies the
cause.
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LO 5
Pareto charts
illustrate
graphically the
problems or
defects.
EXHIBIT 4.7
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LO 6
JUST-IN-TIME: 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
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LO 7
IMPORTANCE OF TIME
Success in competitive markets demands
shorter new-product development time and
more rapid response to customers.
Customer response time is: (1) newproduct development time and (2)
operational measures of time.
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LO 7
NEW-PRODUCT DEVELOPMENT
TIME: 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
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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.
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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 SCORECARD:
Definition
Reports an integrated group of
financial and nonfinancial
performance measures based on
vision and strategy.
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LO 8
Balanced
scorecard can
maximize profits
and improve
performance if
used effectively.
EXHIBIT 4.9
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LO 9
TOTAL QUALITY
MANAGEMENT (TQM)
TQM requires five changes to traditional
managerial accounting systems
System includes information to help solve
problems
Line employees collect information for feedback
Information should be available quickly
Information should be more detailed
Base rewards on quality, customer satisfaction
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End of CHAPTER 4
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