Identify the relevant costs and benefits of quality improvements 4.. Provide examples of nonfinancial quality measures of customer satisfaction and internal performance 5.. Describe the
Trang 1CHAPTER 19 QUALITY, TIME, AND THE THEORY OF CONSTRAINTS LEARNING OBJECTIVES
1 Explain the four cost categories in a cost-of-quality program
2 Use three methods to identify quality problems
3 Identify the relevant costs and benefits of quality improvements
4 Provide examples of nonfinancial quality measures of customer satisfaction and internal performance
5 Describe the benefits of financial and nonfinancial measures of quality
6 Describe customer-response time and explain why delays happen and their costs
7 Apply the three measures in the theory of constraints
8 Manage bottlenecks
CHAPTER OVERVIEW
Chapter 19 provides a broad view of the factors of quality and time in the manufacture of a product or performance of a service The role of the management accountant is emphasized Management
accountants assist managers in taking initiatives in the areas of quality and time by maintaining and presenting financial and nonfinancial measures of customer satisfaction and internal performance They help companies improve quality by computing the costs of quality, assisting in developing cost-effective solutions to quality problems, and providing feedback about quality improvement
Quality is studied through examining the costs of quality (COQ), the methods for identifying quality problems, and using both financial and nonfinancial measures of quality The costs of quality are
categorized as to prevention, appraisal, internal failure, and external failure Chapter 18 presented basic costs in the internal failure category—spoilage, rework, and scrap—of manufacturing the product Time is studied through calculation of average waiting time and the components of customer-response time Explanation is provided as to the reasons for delays and the costs associated with them
The theory of constraints (TOC) is also presented as an approach when dealing with multiple parts and multiple processes that are interdependent in the manufacture of a product The terminology and basic methods are presented for this short-run approach to improving the performance of the production system
as a whole Management accountants also assist managers in making decisions when faced with multiple constraints such as those described in this section of the chapter
Trang 2CHAPTER OUTLINE
I Quality as a competitive weapon
A Focus on quality: reduces costs and increases customer satisfaction
1 International quality standards developed—ISO 9000
2 Creates expertise about products and processes
3 Benefits in preserving revenues, not necessarily generating higher revenues
4 Environmentally responsible
B Two basic aspects of quality
1 Quality of design: how closely the characteristics of a product or service meet the needs and
wants of customers
2 Conformance quality
a Definition: refers to the performance of a product or service relative to its design and product specifications
b Diagram in texts illustrates interaction of two basic qualities and customer satisfaction
C Issues in managing conformance quality
1 Costs of quality (COQ)
Learning Objective 1:
Explain the four cost categories in a cost-of-quality program
a Four categories [Exhibit 19-1]
i Prevention costs—costs incurred to preclude the production of products that do not
conform to specifications
ii Appraisal costs—costs incurred to detect which of the individual units of products
do not conform to specifications
iii Internal failure costs—costs incurred by a nonconforming product before it is
shipped to customers
iv External failure costs—costs incurred by a nonconforming product detected after it
is shipped to customers
b Seven-step activity-based costing approach to determine costs of quality
i Step 1: Identify the chosen product
Trang 3ii Step 2: Identify the product’s direct costs of quality iii Step 3: Select the cost-allocation bases to use for allocating indirect costs of quality
to the product [Exhibit 19-2]
iv Step 4: Identify the indirect costs of quality associated with each cost-allocation base
v Step 5: Compute the rate per unit of each cost-allocation base used to allocate indirect costs of quality to the product
vi Step 6: Compute the indirect costs of quality allocated to the product vii Step 7: Compute the total costs of quality by adding all direct and indirect costs of quality assigned to the product
c Opportunity costs excluded in cost of quality reports
i Forgone contribution margin and income from lost sales
ii Lost production iii Lower prices as a result of poor quality
2 Techniques used to analyze quality problems
Do multiple choice 1 Assign Exercise 19-16 and Problem 19-37.
Learning Objective 2:
Use three methods to identify quality problems
a Control charts [Exhibit 19-3]
i Statistical quality control (SQC) or statistical process control (SPC): formal means
of distinguishing between random and nonrandom variation in an operating process
ii Control chart: graph of a series of successive observations of a particular step,
procedure, or operation taken at regular intervals of time iii Observations outside control limits are ordinarily regarded as nonrandom and worth investigating
b Pareto diagrams [Exhibit 19-4]
i Observations outside control limits serve as inputs to Pareto diagrams
ii Pareto diagram: chart that indicates how frequently each type of defect occurs,
ordered from the most frequent to the least frequent
c Cause-and-effect diagrams [Exhibit 19-5]
i Definition: identifies potential causes of failures or defects
Trang 4ii Major categories of potential causes of failure identified with each cause noted with arrow within category: general appearance of bone structure of a fish
iii Analysis of quality problems facilitated by automated equipment and computers that maintain records of number and types of defects and operating conditions that existed
at time defects occurred
Do multiple choice 2 Assign Problems 19-29 and 19-36.
Learning Objective 3:
Identify the relevant costs and benefits of quality improvements
3 Relevant costs and benefits of quality improvement [Exhibit 19-6]
a Relevant costs: incremental costs to implement quality program
b Relevant benefits: cost savings and estimated increase in contribution margin from higher sales due to quality improvements
c Relevant cost and relevant revenue analysis ignores allocated amounts [Chapter 11]
d Key question: How will total costs and total revenues change under each solution?
e Look for opportunities to generate higher total revenues from quality improvements
f Trends compared over time in cost of quality (COQ) reports
Do multiple choice 3 Assign problems 19-27 and 19-28.
D Costs of design quality
1 Designing products that satisfy customer needs
2 Significant component of these costs is opportunity cost of sales lost from not producing a product that customers want
3 Many of these costs are very difficult to measure objectively (Most companies do not
measure financial costs of design quality but rely on nonfinancial measures.)
E Nonfinancial measures of quality and customer satisfaction [Concepts in Action]
1 Nonfinancial measures of customer satisfaction
Learning Objective 4:
Provide examples of nonfinancial quality measures of customer satisfaction and internal performance
a Examples of routine nonfinancial measures of quality of design and external failure
i Market research information on customer preferences and customer satisfaction with specific product features
Trang 5ii Number of defective units shipped to customers as a percentage of total units shipped iii Number of customer complaints
iv Percentage of products that fail soon or often
v Delivery delays
vi On-time delivery rate
b Surveys used to measure customer satisfaction: customer experiences and preferences about products and glimpses of features customers would like in future products
2 Nonfinancial measures of internal performance
a Examples of nonfinancial measures of prevention, appraisal, and internal failure
i Number of defects for each product line
ii Process yield (ratio of good output to total output) iii Employee turnover (ratio of the number of employees who leave the company to the average total number of employees)
iv Employee empowerment (ratio of the number of processes in which employees have right to make decisions without consulting supervisors to the total number of
processes)
v Employee satisfaction (ratio of employees indicating high satisfaction ratings to the total number of employees surveyed)
Do multiple choice 4 Assign Exercise 19-17.
b Examine trends over time
c Role of management accountant: review nonfinancial measures for accuracy and
consistency
F Evaluating quality performance
Learning Objective 5:
Describe the benefits of financial and nonfinancial measures of quality
1 Advantages of costs of quality (COQ) measures
a Consistent with attention-directing role of management accounting, COQ focuses
managers’ attention on cost of poor quality
b Financial COQ measures assist in problem solving by comparing costs and benefits of different quality-improvement programs and setting priorities for cost reduction
Trang 6c Financial COQ measures provide a single, summary measure of quality performance for evaluating trade-offs among prevention costs, appraisal costs, internal failure costs, and external failure costs
2 Advantages of nonfinancial measures of quality
a Nonfinancial measures of quality are often easy to quantify and easy to understand
b Nonfinancial measures direct attention to physical processes and hence focus attention on the precise problem areas that need improvement
c Nonfinancial measures provide immediate short-run feedback on whether quality
improvement efforts have succeeded
d Nonfinancial measures are useful indicators of future long-run performance
Do multiple choice 5 and 6 Assign Exercises 19-18 and 19-20.
II Time as a driver of strategy
A Need to measure time in order to manage it properly
Learning Objective 6:
Describe customer-response time and explain why delays happen and their costs
B Use of operational measures of time
1 Customer-response time: duration between time a customer places an order for a product or
a service to time the product or service is delivered to the customer
a Components of customer-response time [Exhibit 19-7]
i Receipt time: how long it takes to specify exact requirements in the customer’s order for manufacturing
ii Manufacturing lead (or manufacturing cycle) time: duration between time an
order is ready to start on the production line to when it becomes a finished good (sum
of waiting time and manufacturing time of an order) Delivery time: how long it takes to deliver a completed order to the customer
b Some companies use manufacturing lead time as base for allocating indirect
manufacturing costs to products to motivate managers to reduce time taken to manufacture products
Do multiple choice 7 and 8 Assign Exercises 19-19, 21, 22, and 23 and Problems 19-31 and 32.
2 On-time performance: refers to situations in which the product or service is actually
delivered by the time it is scheduled to be delivered
a Important element of customer satisfaction
Trang 7b Trade-off between customer-response time and on-time performance
C Time drivers and costs of time
1 Time driver: any factor in which change in the factor causes a change in the speed of an
activity
a Two important drivers of time or reasons for delay [Concepts in Action]
i Uncertainty about when customers will order products or services (more random the placement of orders, the more likely queues will form and delays will occur)
ii Bottlenecks due to limited capacity (bottleneck: an operation at which the work to be
performed approaches or exceeds the available capacity)
b Calculation of average waiting time: average amount of time that an order will wait in
line before set up and processed (for single-product case under certain assumptions about
pattern of customer order and how processed) [See text for formula]
i Numerator: Manufacturing time per order is a squared term which means the larger (or longer in time) it is, the greater the chance that the machine will be in use when
an order arrives, and the longer the delay
ii Denominator: Measures unused capacity or cushion that means the smaller the unused capacity, the greater the chance that the machine is processing an earlier order and the greater the delays
iii Formula in text is for average waiting time
iv Average manufacturing lead time = average waiting time + manufacturing time
v Formula can be extended for another product using the same production process— results in longer average waiting time
2 Relevant revenues and relevant costs of time or cost of delays [Exhibit 19-8]
a Cost of delays
i Lower revenues (Customers may be willing to pay higher price for faster delivery.)
ii Increased inventory carrying costs
Opportunity costs of investment tied up in inventory
Relevant costs, such as costs of storage, spoilage, deterioration, and materials handling
b Some unused capacity is desirable when demand is high: reduces manufacturing lead time and delays
i Becoming more efficient will increase capacity
Trang 8ii Investing in new equipment will increase capacity iii Scheduling carefully will increase capacity
c Nonfinancial measure can be used to monitor performance on delays
III Theory of constraints and throughput contribution analysis
A Products made from multiple parts and processed on many machines causes dependencies among operations
B Methods to maximize operating income when faced with some bottleneck and nonbottleneck
operations: theory of constraints (TOC)
Learning Objective 7:
Apply the three measures in the theory of constraints
C Measurements used in the theory of constraints
1 Throughput contribution: revenues minus direct material cost of goods sold
2 Investments: sum of material costs in direct materials inventory, work-in-process inventory,
and finished goods inventory; R&D cost; and costs of equipment and buildings
3 Operating costs: all costs of operations (other than direct materials costs) incurred to earn
throughput contribution (includes salaries and wages, rent, utilities, and depreciation)
Do multiple choice 9
D Objective of TOC: increase throughput contribution while decreasing investments and operating costs
1 Uses short-run horizon
2 Assumes operating costs to be fixed
E Management of bottlenecks
Learning Objective 8:
Manage bottlenecks
1 Step 1: Recognize that the bottleneck operation determines throughput contribution of the system as a whole
2 Step 2: Search and find the bottleneck operation by identifying operations with large
quantities of inventory waiting to be worked on
3 Step 3: Keep the bottleneck operation busy and subordinate all nonbottleneck operations to the bottleneck operation That is, the needs of the bottleneck operation determine the
production schedule of nonbottleneck operations
Trang 9a To maximize operating income, maximize contribution margin of the constrained or
bottleneck resource [See Chapter 11]
b To keep bottleneck operation busy, maintain small buffer inventory of jobs waiting for it
c To produce output at pace of bottleneck; producing more creates excess inventory
4 Step 4: Take actions to increase bottleneck efficiency and capacity—the objective is to increase throughput minus the incremental costs of taking such action
a Eliminate idle time (time when the machine is neither being set up to process products nor actually processing products) at the bottleneck operation
b Process only those parts or products that increase throughput contribution, not parts or products that remain in finished goods or spare parts inventories
c Shift products that do not have to be made on the bottleneck machine to nonbottleneck machines or to outside facilities
d Reduce setup time and processing time at bottleneck operation
e Improve the quality of parts or products manufactured at the bottleneck operation
i Cost of poor quality is the cost of materials wasted plus the opportunity cost of lost throughput contribution
ii Inspection should be before processing parts at the bottleneck operation iii Quality-improvement programs should place special emphasis on minimizing defects
at bottleneck machines
F Time frame consideration
1 TOC regards operating costs as difficult to change in short run so does not identify individual activities and drivers of costs
2 ABC (activity-based costing) has a longer-run perspective focused on improving processes
by eliminating nonvalue-added activities and reducing costs of performing value-added activities so more useful for long-run cost control and profit planning, and capacity
management
3 Short-run focus of TOC emphasis on maximizing throughput contribution by managing bottlenecks complements the long-run strategic cost management focus of ABC
Do multiple choice 10 Assign Exercises 19-24, 19-25, 19-26, and Problems 19-34 and 19-35.
CHAPTER QUIZ SOLUTIONS: 1.b 2.a 3.c 4.d 5.c 6.d 7.a 8.a 9.c 10.b
Trang 10CHAPTER QUIZ
1 The four cost categories in a cost of quality program are
a product design, process design, internal success, and external success
b prevention, appraisal, internal failure, and external failure
c design, conformance, control, and process
d design, process specification, on-time delivery, and customer satisfaction
2 is a formal means of distinguishing between random and nonrandom variation in an operating process
a Statistical process control (SPC)
b A Pareto diagram
c A cause-and-effect diagram
d A fishbone diagram
3 A key question in relevant cost and relevant revenue analysis is
a “By how much can sales be increased and costs reduced?”
b “What purpose is best served for cost allocation and which criterion is most appropriate?”
c “How will total costs and total revenues change under each solution?”
d “What are the amounts of incremental costs and incremental revenues under each alternative?”
4 Which of the following is not a nonfinancial performance measure for customer satisfaction?
a Number of defective units shipped to customers as a percentage of the total units of product shipped
b Number of customer complaints
c On-time delivery
d Number of defects for each product line
5 Nonfinancial measures for internal quality performance include all but which of the following?
a employee empowerment
b process yields
c feedback
d product defect levels
6 An advantage of financial cost of quality measures is that they
a are often easy to quantify and understand
b provide immediate short-run feedback on whether quality improvement efforts have, in fact, succeeded in improving quality
c direct attention to physical processes and therefore focus attentions on the precise problem areas needing improvement
d provide a single, summary measure of quality performance