Test bank accounting management 11e chapter 19 QUALITY, TIME, AND THE THEORY OF CONSTRAINTS

CHAPTER 19 QUALITY, TIME, AND THE THEORY OF CONSTRAINTS LEARNING OBJECTIVES Explain the four cost categories in a cost-of-quality program Use three methods to identify quality problems Identify the relevant costs and benefits of quality improvements Provide examples of nonfinancial quality measures of customer satisfaction and internal performance Describe the benefits of financial and nonfinancial measures of quality Describe customer-response time and explain why delays happen and their costs Apply the three measures in the theory of constraints 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 Quality, Time, and the Theory of Constraints 253 CHAPTER OUTLINE I Quality as a competitive weapon A Focus on quality: reduces costs and increases customer satisfaction International quality standards developed—ISO 9000 Creates expertise about products and processes Benefits in preserving revenues, not necessarily generating higher revenues Environmentally responsible B Two basic aspects of quality Quality of design: how closely the characteristics of a product or service meet the needs and wants of customers 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 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 not conform to specifications ii Appraisal costs—costs incurred to detect which of the individual units of products 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 254 Chapter 19 Step 1: Identify the chosen product ii 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 Techniques used to analyze quality problems Do multiple choice 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 Quality, Time, and the Theory of Constraints 255 ii 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 Assign Problems 19-29 and 19-36 Learning Objective 3: Identify the relevant costs and benefits of quality improvements 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 Assign problems 19-27 and 19-28 D Costs of design quality Designing products that satisfy customer needs Significant component of these costs is opportunity cost of sales lost from not producing a product that customers want Many of these costs are very difficult to measure objectively (Most companies not measure financial costs of design quality but rely on nonfinancial measures.) E Nonfinancial measures of quality and customer satisfaction [Concepts in Action] 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 256 Chapter 19 Market research information on customer preferences and customer satisfaction with specific product features ii 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 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 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 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 Quality, Time, and the Theory of Constraints 257 c 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 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 and 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 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 and Assign Exercises 19-19, 21, 22, and 23 and Problems 19-31 and 32 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 258 Chapter 19 b Trade-off between customer-response time and on-time performance C Time drivers and costs of time 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 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 Quality, Time, and the Theory of Constraints 259 ii 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 Throughput contribution: revenues minus direct material cost of goods sold 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 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 D Objective of TOC: increase throughput contribution while decreasing investments and operating costs Uses short-run horizon Assumes operating costs to be fixed E Management of bottlenecks Learning Objective 8: Manage bottlenecks Step 1: Recognize that the bottleneck operation determines throughput contribution of the system as a whole Step 2: Search and find the bottleneck operation by identifying operations with large quantities of inventory waiting to be worked on 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 260 Chapter 19 a 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 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 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 TOC regards operating costs as difficult to change in short run so does not identify individual activities and drivers of costs 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 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 Quality, Time, and the Theory of Constraints 261 CHAPTER QUIZ The four cost categories in a cost of quality program are a b c d product design, process design, internal success, and external success prevention, appraisal, internal failure, and external failure design, conformance, control, and process design, process specification, on-time delivery, and customer satisfaction is a formal means of distinguishing between random and nonrandom variation in an operating process a b c d Statistical process control (SPC) A Pareto diagram A cause-and-effect diagram A fishbone diagram A key question in relevant cost and relevant revenue analysis is a b c d “By how much can sales be increased and costs reduced?” “What purpose is best served for cost allocation and which criterion is most appropriate?” “How will total costs and total revenues change under each solution?” “What are the amounts of incremental costs and incremental revenues under each alternative?” 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 Nonfinancial measures for internal quality performance include all but which of the following? a b c d employee empowerment process yields feedback product defect levels 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 262 Chapter 19 The amount of time between when a customer places an order for a product or requests a service to when the product or service is delivered to that customer is called a b c d customer-response time order receipt time order delivery time manufacturing lead time Delays in customer-response time occur because of the a b c d uncertainty about when customers will order products unused capacity which impedes average manufacturing time customers’ response in paying invoices on time overemphasis on measuring time drivers Which of the following is not one of the three main measurements in the theory of constraints? a b c d investments or inventory other operating costs manufacturing lead time throughput contribution 10 Which of the following is not one of the steps in managing bottlenecks under the theory of constraints? a Identify the bottleneck resource by searching for resources with large quantities of inventory waiting to be worked on b Increase the efficiency and capacity of the nonbottleneck resources c Subordinate all nonbottleneck operations to the bottleneck operation d Increase the efficiency and capacity of the bottleneck operation Quality, Time, and the Theory of Constraints 263 WRITING/DISCUSSION EXERCISES Explain the four costs categories in a cost-of-quality program How could the use of standard costing affect the costs of quality categorized as prevention, appraisal, internal failure, and external failure? One way in which standard costing would be of value in analyzing costs of quality is through variance analysis highlighting internal failure costs Spoilage, rework, and scrap would be the cause of unfavorable variances that could be investigated leading to improvements and corrections Standards are typically set to reflect efficient and effective work processes The study necessary to establish standards would also be helpful in understanding the processing system, allowing for some situations to be corrected or improved earlier Standards require planning and thinking ahead, important aspects in the evolution of a management control system Use three methods to identify quality problems Who was W Edwards Deming and why is his name associated with the subject of quality? Dr William Edwards Deming (1900–1993) was an American statistician His work in Japan created a revolution in quality in manufacturing as well as in methods of plant management Though he began his work in the United States, it was not well received He then went to Japan where his theories were fully embraced beginning in 1950 The annual Deming Prize for quality was created in his honor in Japan After Japan took the lead in quality of products, Deming’s work was adopted in the United States One of his foremost points was that “quality equals success equals profit.” [An interesting article written by Deming, “On Some Statistical Aids Toward Economic Production,” was published in INTERFACES (Vol 5, No 4) August 1975, a publication of The Institute of Management Science Control charts are explained He also points out that problems of quality are more the cause of the system in use than the performance of the workers.] Identify the relevant costs and benefits of quality improvements Discuss relevant costs and benefits of quality improvements in response to the following quote by Peter Drucker (Wall Street Journal 10/21/93): “Customers not see it as their job to insure manufacturers a profit.” Responses will vary in reaction to the quote Possible views such as the following could be mentioned: a) Companies that are serious about quality will know what the customer wants and operate accordingly with attention to the costs of providing what sells The text gives several ways in which organizations can be tuned to customer wants b) Companies try to sell what they, the company, think is quality because they have expended large amounts of resources to obtain a particular feature but the feature is not what the customer wanted R J Reynolds spent a lot of money and time to develop a smokeless cigarette in response to concerns about the harmful effects of cigarette smoke Perhaps, if the product itself would have tasted better, the company might have had a chance with it c) The companies that lead a trend are often the ones who not survive The product may have been of higher “quality” than ones to follow but possibly the market was not ready for that product, the price was too much to generate large amounts of sales, or the product could not stand on its own and needed complementary products to make it worthwhile 264 Chapter 19 Provide examples of nonfinancial quality measures of customer satisfaction and internal performance How can “nonfinancial” factors be measured? In the lists of nonfinancial factors in the text, the measures are a result of counting (number of) and of comparing (ratio of or percentage of) Counting may not be measurement though it can be a part of measuring Given a span of time, for example, counts can be turned into trends or dimensions that would be considered measurement What is the difference between counting and measuring? Measure is a relative term, a comparison between two things Typically one of those “things” is a standard or agreed-upon amount, such as inches or centimeters Thus, the counts that turn into trend numbers become measurements by their being in comparison of one year to the next The popular saying, “You get what you measure,” highlights the importance of measuring The nonfinancial measures mentioned in the text use numbers as measurement Nonfinancial measures could simply be, “this is better than that,” or “this is not as good as that one.” Relating one thing to another is a measurement Student grades are measures, and in some graded courses, numbers are never used, only letters, in the grading scheme The rubric used for a course may be a set of guidelines defined by a letter grade that has been agreed upon by those who teach the classes Students like to know how the grading will be done “How the game is scored influences how it will be played.” The same is true for the measures used in a company for internal performance or customer satisfaction Describe the benefits of financial and nonfinancial measures of quality Discuss the issue of using one set of measures to make a decision and another set of measures to evaluate the results of the decision [Refer to Chapter 11, Learning Objective 9] The set of measures used to decide upon a particular action or strategy leading to specific actions should be clearly identified Financial measures such as costs of rework, costs of design engineering or process engineering, and costs of inspection and testing in relation to revenue can be used in the decision to choose one alternative over another The information system could be designed so that those same types of costs could be tracked and compared for evaluation purposes As noted in Chapter 11, events and combinations of factors influence the action taken from a decision made In few instances does one find a clear cause-and-effect situation The same could happen with nonfinancial measures Consider the airline industry After the tragedy of September 11, 2001, involving the World Trade Center, the airline industry sought relief from the actions taken in response to the terrorists’ actions—grounding all air traffic Some airlines laid off thousands of employees following the events They focused on the tragedy and its impact on their costs and operations—a type of cause and effect At the time some analysts stated that those airlines were facing problems before the 9-11-01 events occurred and the tragedy gave excuse for the lay-offs Which set of measures should be used in evaluating the situation—tragic events of the day and thousands of people losing their jobs, or management problems from the time leading up to the tragic events? Quality, Time, and the Theory of Constraints 265 Describe customer-response time and explain why delays happen and their costs How does the concept of “statistical fluctuations” affect customer-response time or ontime performance? Statistical fluctuation is relevant to customer-response time or on-time performance Customer-response time consists of four sequenced parts—receipt time, waiting time, manufacturing time, and delivery time This is similar to a relay race with four runners Any more or less time taken by the first runner impacts the subsequent racers and so on down the line When the last runner gets the hand off, s/he has to run based upon what has happened with the three previous runners In some instances, the race could have already been lost to that relay team when the last runner gets the baton Each runner’s time will fluctuate within a range of time every time s/he runs The placement of the runners is carefully made to capture the strengths of that runner for a given position within the team Statistical fluctuation uses averaging Most are familiar with this concept in the commute to work The commute takes 35 minutes each way, depending upon the traffic Some days the trip takes over an hour (traffic accident right ahead with no avenue for detouring) and some days it takes less than 25 minutes (school holiday and no school buses in the way) As most people cannot go “as the crow flies,” the trip involves a sequence or route For any sequenced process, careful consideration must be made about the dependency of the last part upon the first and middle parts More wiggle room or capacity might be necessary for some aspects of the process while more controls should be in place for the others If any one part is defined as fixed, with little or no opportunity for variation, those activities preceding the fixed portion will directly affect the activities following the fixed portion (An example would be if, in the relay race, one leg of the race was “run” by a machine that was programmed to move at one set speed, and this was in place for each team.) Apply the three measures in the theory of constraints In earlier chapters, direct manufacturing labor was considered a variable cost with respect to units produced Direct manufacturing labor, however, is considered an operating cost and expensed in the time period incurred regardless of volume of production according to the theory of constraints Why does this difference exist? The theory of constraints is a short-run concept In the short run, nearly all costs are considered fixed because little opportunity exists to change them Given enough time, most costs can be considered variable because changes can be made to them A manager needs to understand the short run as well as the long run Knowing when to use concepts and methods appropriate for those circumstances that need short-run decisions and when it is appropriate to use long-run concepts and methods identifies the good managers An example is the special order situation A manager has to decide if a special order is indeed a one-time-only special order for which it is appropriate to use relevant or incremental revenues and costs Perhaps the special order is indicative of a series of events that are more long run in substance and the manager should use full costs to decide what action to take The accounting convention of “substance over form” is helpful in most circumstances The management accountant can assist the manager in identifying the true nature of the situation rather than what it may appear to be 266 Chapter 19 Manage bottlenecks How can a bottleneck situation exist and a manager not know about it? Defining a situation or problem can be the first step in managing it If a situation develops gradually over time, a manager might not be as apt to recognize the importance of it as would someone who had a different perspective A bottleneck situation exists as a part of a whole system in which some operations are nonbottleneck and some are bottleneck In the exercise for Learning Objective in this section, a relay race was used to illustrate a system with dependent operations If, for example, one leg of the race was considered a bottleneck because of the constraints it put on the entire race, the other sections of the race should be managed toward maximizing time during that bottleneck section A manager, or in this example a coach, who was knowledgeable about the whole system, would probably understand the role that the constraint put on the system If each leg of the race had a different coach, or manager, the constraint would not necessarily be noticed for what it was to the whole of the system Quality, Time, and the Theory of Constraints 267 SUGGESTED READINGS Anderson, S and Sedatole, K., “Designing Quality into Products: The Use of Accounting Data in New Product Development,” Accounting Horizons (September 1998) p.213 [21p] Chua, W and Petty, R., “Mimicry, Director Interlocks, and the Interorganizational Diffusion of a Quality Strategy: A Note,” Journal of Management Accounting Research (Vol 11-1999) p 93 [12p] Cooper, R and Chew, W.B., “Control Tomorrow’s Costs Through Today’s Designs,” Harvard Business Review (January-February 1996) p.88 [10p] Deming, W Edwards, “On Some Statistical Aids Toward Economic Production,” Interfaces (August 1975) p.1 [16p] Garvin, D., “Competing on the Eight Dimensions of Quality,” Harvard Business Review (JanuaryFebruary 1987) p.101 [10p] Goldratt, E and Cox, J., The Goal, 2nd Ed., (1992) North River Press, Inc Hayzen, A and Reeve, J., “Examining the Relationships in Productivity Accounting,” Management Accounting Quarterly (Summer 2000) p.32 [8p] Kershaw, R., “Using TOC to ‘Cure’ Healthcare Problems,” Management Accounting Quarterly (Summer 2000) p.22 [7p] Lucier, G and Seshadri, S., “GE Takes Six Sigma Beyond the Bottom Line,” Strategic Finance (May 2001) p.40 [6p] Nagar, V and Rajah, M., “The Revenue Implications of Financial and Operational Measures of Product Quality,” The Accounting Review (October 2001) p.495 [19p] Rao, M., “A Simple Method to Link Productivity to Profitability,” Management Accounting Quarterly (Summer 2000) p.12 [6p] Roehm, H and Castellano, J., “The Danger of Relying on Accounting Numbers Alone,” Management Accounting Quarterly (Fall 1999) p.4 [6p] Roehn, H., Weinstein, L and Castellano, J., “Management Control Systems: How SPC Enhances Budgeting and Standard Costing,” Management Accounting Quarterly (Fall 2000) p.34 [7p] Taguchi, G and Clausing, D., “Robust Quality,” Harvard Business Review (January-February 1990) p.65 [11p] Tatikonda, L., O’Brien, D and Tatikonka, R., “Succeeding with 80/20,” Management Accounting (February 1999) p.40 [5p] 268 Chapter 19 [...]... Increase the efficiency and capacity of the nonbottleneck resources c Subordinate all nonbottleneck operations to the bottleneck operation d Increase the efficiency and capacity of the bottleneck operation Quality, Time, and the Theory of Constraints 263 WRITING/DISCUSSION EXERCISES 1 Explain the four costs categories in a cost -of- quality program How could the use of standard costing affect the costs of. .. manager, the constraint would not necessarily be noticed for what it was to the whole of the system Quality, Time, and the Theory of Constraints 267 SUGGESTED READINGS Anderson, S and Sedatole, K., “Designing Quality into Products: The Use of Accounting Data in New Product Development,” Accounting Horizons (September 199 8) p.213 [21p] Chua, W and Petty, R., “Mimicry, Director Interlocks, and the Interorganizational... impact on their costs and operations—a type of cause and effect At the time some analysts stated that those airlines were facing problems before the 9-11-01 events occurred and the tragedy gave excuse for the lay-offs Which set of measures should be used in evaluating the situation—tragic events of the day and thousands of people losing their jobs, or management problems from the time leading up to the tragic... drivers 9 Which of the following is not one of the three main measurements in the theory of constraints? a b c d investments or inventory other operating costs manufacturing lead time throughput contribution 10 Which of the following is not one of the steps in managing bottlenecks under the theory of constraints? a Identify the bottleneck resource by searching for resources with large quantities of inventory... three measures in the theory of constraints In earlier chapters, direct manufacturing labor was considered a variable cost with respect to units produced Direct manufacturing labor, however, is considered an operating cost and expensed in the time period incurred regardless of volume of production according to the theory of constraints Why does this difference exist? The theory of constraints is a short-run... Nagar, V and Rajah, M., The Revenue Implications of Financial and Operational Measures of Product Quality, The Accounting Review (October 2001) p.495 [19p] Rao, M., “A Simple Method to Link Productivity to Profitability,” Management Accounting Quarterly (Summer 2000) p.12 [6p] Roehm, H and Castellano, J., The Danger of Relying on Accounting Numbers Alone,” Management Accounting Quarterly (Fall 199 9)... played.” The same is true for the measures used in a company for internal performance or customer satisfaction 5 Describe the benefits of financial and nonfinancial measures of quality Discuss the issue of using one set of measures to make a decision and another set of measures to evaluate the results of the decision [Refer to Chapter 11, Learning Objective 9] The set of measures used to decide upon... example, one leg of the race was considered a bottleneck because of the constraints it put on the entire race, the other sections of the race should be managed toward maximizing time during that bottleneck section A manager, or in this example a coach, who was knowledgeable about the whole system, would probably understand the role that the constraint put on the system If each leg of the race had a different... events? Quality, Time, and the Theory of Constraints 265 6 Describe customer-response time and explain why delays happen and their costs How does the concept of “statistical fluctuations” affect customer-response time or ontime performance? Statistical fluctuation is relevant to customer-response time or on-time performance Customer-response time consists of four sequenced parts—receipt time, waiting time,. .. cause -and- effect situation The same could happen with nonfinancial measures Consider the airline industry After the tragedy of September 11, 2001, involving the World Trade Center, the airline industry sought relief from the actions taken in response to the terrorists’ actions—grounding all air traffic Some airlines laid off thousands of employees following the events They focused on the tragedy and