CHAPTER 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 not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Managerial Accounting 11E Maher/Stickney/Weil ☼ 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 LO 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 LO 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 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 LO 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 LO 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 LO COSTS OF QUALITY Prevention Procurement inspection Processing control Design Quality training Machine inspection Appraisal End-process sampling Field testing LO 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 LO 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 10 LO 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 14 LO Control Controlcharts charts distinguish distinguish between betweenrandom random variations variationsand and variations variationstoto investigate investigate EXHIBIT 4.6 15 LO CAUSE CAUSE and and EFFECT: EFFECT: Definition Definition Is analysis that first defines the effect and then identifies the cause 16 LO Pareto Paretocharts charts illustrate illustrate graphically graphicallythe the problems problemsor or defects defects EXHIBIT 4.7 17 LO 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 18 LO 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 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 20 LO 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 21 LO BREAK-EVEN TIME EQUATION Break-even time = (Investment ÷ Annual Discounted Cash Flow) + Time period from Project approval until Sales begin 22 LO 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 OPERATIONAL MEASURES Indicate Speed Reliability Customer response time Delivery cycle time Time from order to delivery On-time performance Delivered as scheduled 24 LO BALANCED BALANCED SCORECARD: SCORECARD: Definition Definition Reports an integrated group of financial and nonfinancial performance measures based on vision and strategy 25 LO Balanced Balanced scorecard scorecardcan can maximize maximizeprofits profits and andimprove improve performance performanceifif used usedeffectively effectively EXHIBIT 4.9 26 TOTAL QUALITY MANAGEMENT (TQM) LO 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 27 End of CHAPTER 28 ... distinguish distinguish between betweenrandom random variations variationsand and variations variationstoto investigate investigate EXHIBIT 4.6 15 LO CAUSE CAUSE and and EFFECT: EFFECT: Definition Definition... 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... long-rundecline decline inintotal totalcosts costsof of quality quality EXHIBIT 4.5 12 LO TOOLS Tools to identify quality problems include Control charts Cause -and- effect analysis Pareto charts Produce