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Ch15 Quality Cost and Productivity To train & motivate segment managers,
Studies suggest that cost of quality production might be as much as 20% – 30% of sales To enhance competition & expose segments to market forces
Dimensions of Quality: Major types of responsibility centers are:
Performance: how consistently a product functions Cost centers
Aesthetics : appearance of tangible products, facilities, communication materials Manager responsible for cost only
Serviceability: ease of maintaining, repairing product
Revenue center
Features of quality design: characteristics that differentiate between similar products
Manager responsible for
Reliability: probability that product, service will perform intended function for specified length of time
Durability: length of time a product functions sales only
Quality of conformance : measure of how a product meets its specifications Profit center
Fitness for use: suitability of product for advertised functions Manager responsible for
Defective Product is one that doesnt confom to specifications. Zero defect is the goal sales & costs
Cost of Quality exist Categories Classifying QC Investment center
because poor quality 1. Prevention costs: incurred to prevent poor Observable Manager responsible for
does or may exist: quality Costs available in accounting sales, costs, & capital
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1. Control activities 2. Appraisal costs : incurred to determine whether records investment
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(to prevent, detect products, services conform to requirements, Hidden Abstorption vs Variabel:
poor quality) customer needs Significant If more is sold than produced, variable costing income > absorption‐costing income, opposite of Fairchild situation.
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2. Failure Activities ( 3. Internal failure costs: incurred when non‐ Not directly available in Equal production & sales means equal income. The difference between variable costing & absorption costing year to
responses to poor conformance is discovered & product, service accounting records
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year is equal to the change in fixed overhead. Under absorption costing, fixed overhead is assigned to inventory
quality) re‐worked, scrapped, etc. Estimated
produced. Under variable costing, fixed overhead is a period expense .
4. External failure costs: incurred when products Multiplier method
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Variable costing ensures that direct relationship between sales & income holds whereas absorption costing does not.
fail to conform after delivery and recalled Market research
Taguchi quality loss Segment Reporting
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function Segment Is a subunit of a company of sufficient importance to warrant performance reports.
Acceptable Quality Level (AQL) is the optimal balance between control costs and failure costs. Direct Fixed Expense Are fixed expenses directly traceable to a segment & therefore, avoidable. If segment eliminated,
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Zero defects model understates quality costs & the potential for savings from efforts to improve quality. so are expenses.
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Reducing QC:
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Take direct attack on failure costs to drive them to zero
Invest in “right” prevention activities to bring about improvement
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Reduce appraisal costs according to results achieved
Continuously evaluate, redirect prevention efforts to gain further improvement
Productive Efficiency When concerned with productive efficiency 2 conditions must be satisfied:
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Technical efficiency: For any mix of inputs that will Input trade‐off efficiency: Given the mixes that satisfy
produce a given output, no more of any 1 input is the first condition, the least costly mix is chosen.
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used than necessary to produce the output
Profit‐Linked Productivity Measurement: Is measuring the amount of profit change attributable to productivity change.
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ROI relates operating profits to assets employed.
Margin is the ratio of operating to sales.
Turnover tells how many dollars of sales results from every dollar of invested assets.
Advantages of ROI: Disadvantage of ROI:
Encourages managers to focus on Can product a narrow focus on divisional profitability
Relationship among sales, expenses (& possibility at expense of profitability for overall firm
investment if this is investment center) Encourages managers to focus on short run at
Cost efficiency expense of long run
Ch10 Segment reporting, decentralization, and BSC, include transfer pricing service department charge Operating asset efficiency
Decentralization Residual income is the difference between operating income and minimum dollar return on sales.
A responsibility accounting system measures the results of responsibility centers according to information managers
need to operate their centers.
Firms decide to decentralize:
For ease of gathering, using local information
Residual Income: Limitation of JIT:
Advantage: Gives another view of project profitability Time is required to build sound relations with suppliers
Disadvantages Workers experience stress in changing over to JIT
Can encourage short run orientation Production may be interrupted because of absence of inventory supply buffer
Direct comparisons are difficult May place current sales at risk to achieve assurance of future sales
EVA is net income minus total annual cost of capital. Projects with Theory of constraints (TOC) focuses on 3 measures of Having lower prices
organizational performance: Being responsive
positive EVA are acceptable.
Throughput: rate of generating money through On‐time delivery
Transfer Pricing: Is the price charged for a
sales Shorter lead time
component by the selling division to the buying Inventory: money spent turning materials into TOC Concept:
division of the same company. throughput 1. Identify constraints
Operating expenses: money spent turning 2. Exploit binding constraints
inventory into throughput 3. Subordinate everything to decision made in #2 above
TOC suggests that constraints (and thereby inventory) 4. Elevate binding constraints
are best managed through 5. Repeat process
Ch12 Tactical Decision Making Having better, higher quality products
Tactical Decision Making: Consists of choosing among alternatives with an immediate or limited end in view.
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Strategical Decision Making: Is selecting among alternative strategies so that long term competitive advantage is Ch16 Lean Accounting, Target Costing, and BSC
established. Lean Manufacturing Is an approach designed to eliminate waste & maximize customer value.
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Tactical Model Delivering the right product
A general approach to tactical decision making includes: 2. Predatory pricing Right quantity
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1. Recognize, define the problem a. A means of setting price to eliminate Right quality (zero defect)
2. Identify alternatives, eliminating those that are competition At time needed
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unfeasible b. Dumping on international market At lowest possible cost
3. Identify costs & benefits 3. Price discrimination A cost reduction strategy that redefines activities performed
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4. Total relevant costs, benefits of each alternative a. Charging different prices to different 5 Principles of Lean Thinking
5. Assess qualitative factors customers 1. Precisely specify value by each particular product
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6. Select alternative with greatest overall benefit 4. Price gouging 2. Identify the “value stream” for each
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Constrain of Tactical Decision Making a. Using market power to set prices too high 3. Make value flow without interruption
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1. Pricing 4. Let customer pull value from producer
5. Pursue perfection
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Ch14 Inventory Management Value Stream: Is all activities, both value‐added & non‐value‐added, required to bring product group or service from
Managing inventory for competitive advantage includes: starting point to finished product in hands of customer.
1. Quality product engineering 5. Ability to respond to customers Manufacturing Cell: Contains all operations in close proximity that are needed to produce a family of products.
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2. Prices 6. Lead times Lean Manufacturing uses a demand pull system to reduce waste.
3. Overtime 7. Overall profitability ah JIT inventory Suppliers benefit from
4. Excess capacity Reduces inventory levels Long term relations
Inventory Cost = Cost to Acquire (ordering+Setup) + Carrying Cost + Stockout Cost Requires close relations with suppliers Better competitive position
Economic Order Quantity: Is a model that calculates the best quantity to order or produce. (Economic Order Quantity)
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Traditional cost management systems may not be compatible with Lean Accounting. Lean Accounting makes product
TC = Ordering Cost + Carrying Cost costs more simple & direct. More labor and overhead costs are assigned to products through direct tracing rather than
Reorder Point (ROP) = Rate of Usage x Lead Time
= PD/Q + CQ/2 allocation.
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Safety Stock = Lead Time (maximum‐Average Usage)
EOQ =√2 ∶ Target Cost: Is the difference between sales price needed to capture a predetermined market share & desired per‐unit
ROP menjadi = Rate of Usage x Lead Time + Safety Stock
profit.
= 2 /
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Uses 1 of 3 methods
Just in Time : Is a demand‐pull manufacturing system that requires goods to be pulled through the system by present Reverse engineering
demand. Tearing down a competitors product to discover design features that create cost reductions
Objective: BY Value analysis
Increase profits Controlling costs Attempting to assess the value placed on product functions by customers
Improve competitive position Improving delivery performance Process improvement
Improving quality Life cycle costing includes development costs unlike conventional cost systems. Inclusion of more cost information can
Basic inventory features of JIT address how manufacturing facilities can be designed to promote employee be useful for assessing effects on costs and benefit future design.
empowerment & product quality.
Shutdowns are caused by: JIT response Ch17 Environmental Cost Management
Machine failure Total preventive maintenance Awareness of environmental costs is important because environmental regulations & fines have increased.
Defective material or sub‐assembly Total quality control (TQC) Quality Cost Model
Unavailability of material or sub‐ Using the Kanban system Looks at costs and their impact for damage done to the environment. In addition to direct costs, there are costs to
assembly preventing environmental degradation.
1. Prevention Cost
2. Detection Cost 5. Productivity
Are costs to determine compliance with appropriate environmental standards including: • The value added by the process divided by the value of the labor and capital consumed
Regulatory government laws 6. Safety
Voluntary standards (ISO 14001) • Measures the overall health of the organization and the working environment of its employees
Management’s environmental policies PM: General Process
3. Internal Failure Cost
4. External Failure Cost: Environmental external failure costs are costs of activities performed after discharging
contaminants & waste into the environment.
Environmental cost reports reveal 1) the impact of environmental costs on firm profitability & 2) relative amounts
expended in each category.
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3 formal Assesment stages Objective: to reduce environmental impacts
Inventory analysis 5 objectives for environmental perspective
Types, quantities inputs needed Minimize use of raw or virgin materials
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Environmental releases Minimize use of hazardous materials
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Impact analysis Minimize energy requirements for production, use of
Effects of competing designs product
Relative ranking of effects Minimize release of solid, liquid, gaseous residues
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Improvement analysis Maximize opportunities to recycle
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Because environmental pollution is equivalent to economic inefficiency, all failure activities are non‐value‐added.
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Performance Measurement Process
Performance measurement is primarily managing outcome, and one of its main purposes is to reduce or eliminate
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overall variation in the work product or process. The goal is to arrive at sound decisions about actions affecting the
product or process and its output.
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Benefit of PM:
• how well we are doing
• if we are meeting our goals
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• if our customers are satisfied
• if our processes are in statistical control
• if and where improvements are necessary.
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We need to Measure for
1. Control
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• Measurements help to reduce variation.
2. Self Assesment
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• Measurements can be used to assess how well a process is doing, including improvements that have been
made.
3. Continous Improvement
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• Measurements can be used to identify defect sources, process trends, and defect prevention, and to
determine process efficiency and effectiveness, as well as opportunities for improvement.
4. Management Assesment
• Without measurements there is no way to be certain we are meeting value‐added objectives or that we are
being effective and efficient
General Category of PM:
1. Effectiveness
• A process characteristic indicating the degree to which the process output conforms to requirements
2. Efficiency
• A process characteristic indicating the degree to which the process produces the required output at
minimum resource
3. Quality
• The degree to which a product or service meets customer requirements and expectations
4. Timeliness
• Measures whether a unit of work was done correctly and on time
PM Systematic Process: BSC
• Balance Scorecard adalah salah satu cara untuk mengukur current performance financial suatu entitas.
• Balanced scorecard digunakan karena tidak ada satu ukuran pun yang dapat memberikan gambaran atas
performa maupun focus atas area‐area kritis pada suatu bisnis. Manajemen ingin mendapatkan suatu proposi
yang seimbang atas pengukuran financial dan operasional
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1. Decide the outcomes wanted.
First Law of Performance: If you try to be the best at everything, you’ll be the best at nothing.
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If you can pick something you are sure you would succeed at, that choice probably should be your number one
objective.
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2. Describe the major work processes involved.
Second Law of Performance: People are more important than the process, but a good process is important to
people.
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To improve the chances of meeting objectives, be sure to understand the system, that is, the operational structure
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3. Identify the key results needed.
Third Law of Performance: If you can’t describe it, you can’t improve it.
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Ultimately, the final products of the system are those that meet the strategic results–the objective–desired by the
company.
4. Establish performance goals for the results.
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• Fourth Law of Performance: If you don’t have a goal, you can’t score.
• The PAIN is worth it if the goals are:
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• Profitable (Is it worthwhile to improve this? Favorable Benefit/Cost?)
• Achievable (Can it be improved? How? Who will do it?)
• Important (Does it matter to anyone?)
• Numerical (Without a number, you won’t know when you get there.)
• The GAIN is in reaching the goals, because: Goals Are Improvement Numbers.
5. Define measures for the goals.
• Fifth Law of Performance: Measuring the • are based on measurable data
activity usually improves the activity, but not • contain normalized metrics for benchmarking
the result • are practical and easily understood by all
• reflect results, not the activities used to produce • provide a continual self assessment
results • provide a benefit that exceeds the cost
• relate directly to a performance goal • are accepted and have owners
6. Select appropriate metrics.
Sixth Law of Performance: If you know the score, you should be able to predict the outcome