Managerial Accounting

Chapter 4

Strategic Management of Cost, Quality, and Time

Learning Objectives (Slide 1 of 2)

Distinguish between the traditional view of quality and the quality-based view.
Define quality according to the customer.
Compare the costs of quality control to the costs of failing to control quality.
Explain why firms make trade-offs in quality control costs and failure costs.
Describe the tools firms use to identify quality control problems.

Learning Objectives (Slide 2 of 2)

Explain why just-in-time requires total quality management.
Explain why time is important in a competitive environment.
Explain how activity-based management can reduce customer response time.
Explain how traditional managerial accounting systems require modifications to support total quality management.

Traditional Versus
Quality-Based View
Traditional view assumes that improving quality is a trade-off against lowering costs
Quality-based view - always attempts to improve quality
Establish quality goals and aim for zero defects
High quality pays the costs to get it

Quality According
to the Customer
Critical success factors
Service - relates to customer expectations
Refers to all of the products features, both tangible and intangible
Quality - keeping promises made to customers: product conforms to specs.
Increases as customer satisfaction increases
Cost - achieving goals while lowering costs increases efficiency

Quality Control
Improving quality may be costly, but failing to improve quality may be equally costly
Costs of controlling and improving quality include:
Prevention costs
Appraisal costs

Prevention Costs
Cost to prevent defects in products and services include:
Procurement inspection
Processing control
Design
Quality training
Machine inspection
Appraisal Costs
Costs to detect individual units of products that do not conform to specifications include:
End-process sampling
Field testing
Costs of Failing to Control
& Improve Quality (Slide 1 of 2)
Internal failure costs - costs of detecting nonconforming products and services before delivery to customers
 Scrap
Rework to correct defects
Reinspection/retesting after completing rework

Costs of Failing to Control

& Improve Quality (Slide 2 of 2)
External failure costs - costs of detecting nonconforming products and services after delivery to customers
Warranty repairs
Product liability resulting from product failure
Marketing costs to improve tarnished company image
Lost sales from customer dissatisfaction

Identifying Quality Problems

Managers use several tools to signal quality problems including:
Control charts
Cause-and effect analysis
Pareto charts
Signals provided by these tools may be:
Warnings - indicate that something is wrong
Diagnostic- suggest cause of problem and possible solutions

Control Charts
Provide warning signals that something is wrong
Help managers distinguish between random or routine variations in quality and variations that should be
investigated
Show results of statistical process-control measures
Deviations beyond some specified level require investigation
Pareto Charts
Provide warning signals helping managers prioritize efforts to improve the most out-of-control processes
Display the number of problems or defects as bars of varying lengths
Identify important problems requiring management action
Cause-and-Effect Analysis
Provides diagnostic signals identifying potential causes of defects
To use, must first define the effect and then identify causes of the problem
Potential causes include:
Human factors
Methods and design factors
Machine-related factors
Materials/components factors
JIT and Total
Quality Management
Just-In-Time philosophy requires high quality standards
System must immediately correct problems resulting in defective units
JIT helps prevent production problems from going undetected
Also requires a smooth production flow without downtime to correct problems

Importance of Time in a Competitive Environment

Competitive markets demand shorter new-product development and more rapid response to customers
Customer response time falls into two categories:
New-product development time
Operational measures of time

New-Product
Development Time
Refers to period between first consideration of a product and delivery to customer
Quick new-product development time may provide a competitive advantage
Management also wants to know break-even time
Time required to recover investment in new-product development

Break-Even Time
To determine break-even time, must identify future cash inflows and outflows
Overhead costs may be irrelevant if new product changes only the way overhead is allocated without changing
cash flows
 Break-even time begins when project is approved and considers time value of money by discounting cash flows

Operational Measures of Time

Indicate speed and reliability firms supply products and services to customers
Customer response time - period between moment customer places an order and delivery to customer
On-time performance - refers to situations in which firm delivers at scheduled time of delivery

Activity-Based Management to Improve Customer Response Time

ABM helps improve customer response time by identifying :
Activities that consume the most resources, both in dollars and time
Non-value-added activities

Balanced Scorecard
Reports an integrated group of financial and nonfinancial performance measures, including the following:
Financial
Internal business processes
Learning and Growth
Customer

Total Quality Management

Implementation of TQM requires the following changes to a traditional managerial accounting system
System should provide info to help solve problems
Workers should collect the info themselves, use it to get feedback and solve problems
Info should be available quickly
Info should be more detailed
Firms should base rewards on quality and customer satisfaction measures
Dranrey Gaon
BSBA-FM3A
ACC311