CHAPTER 4 Strategic Management of Costs Quality and

CHAPTER 4 Strategic Management of Costs, Quality, and Time Power. Point Presentation by Lu. Ann 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 11 E Maher/Stickney/Weil 1

☼ 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 2

LO 1 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 3

LO 1 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 4

TRADITIONAL VS. QUALITYBASED 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 View LO 1 5

LO 2 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 6

LO 2 VALUE CHAIN Research and Development Design Identify quality problems here Production Marketing Distribution Deal with unhappy customers here Customer Service EXHIBIT 4. 3 Prevent quality problems here 7

LO 3 COSTS OF QUALITY ¯Prevention ¯Procurement inspection ¯Processing control ¯Design ¯Quality training ¯Machine inspection ¯Appraisal ¯End-process sampling ¯Field testing 8

LO 3 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 9

LO 4 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 4 COST OF QUALITY REPORT: Steve’s Sushi Cost Categories Costs of Quality % of Sales Prevention Costs Quality training 10, 400 $ 16, 200 1. 62% 10, 000 14, 400 1. 44 Customer complaints 3, 000 0. 30 Cost of lost business 17, 000 1. 70 $ 60, 000 6. 06% Appraisal Costs End-of-process sampling Internal Failure Costs Scrap External Failure Costs Total costs of quality EXHIBIT 4. 4 Materials inspection $ 5, 800 What actions can Steve forego if he can’t do everything? 11

LO 4 Generally there is a long-run decline in total costs of quality EXHIBIT 4. 5 12

LO 5 TOOLS Tools to identify quality problems include ¯Control charts ¯Cause-and-effect analysis ¯Pareto charts Produce signals about quality control 13

LO 5 SIGNAL: 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 5 Control charts distinguish between random variations and variations to investigate. EXHIBIT 4. 6 15

LO 5 CAUSE and EFFECT: Definition Is analysis that first defines the effect and then identifies the cause. 16

LO 5 Pareto charts illustrate graphically the problems or defects. EXHIBIT 4. 7 17

LO 6 JUST-IN-TIME: Definition Is a philosophy that seeks to purchase/produce goods and/or services just when the company needs them. 18

LO 6 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 7 IMPORTANCE OF TIME Success in competitive markets demands shorter new-product development time and more rapid response to customers. Customer response time is: (1) new-product development time and (2) operational measures of time. 20

LO 7 NEW-PRODUCT DEVELOPMENT TIME: Definition Refers to the period between a firm’s first consideration of a product and its delivery to the customer. 21

LO 7 BREAK-EVEN TIME EQUATION Break-even time = (Investment ÷ Annual Discounted Cash Flow) + Time period from Project approval until Sales begin 22

LO 7 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 7 OPERATIONAL MEASURES ¯Indicate ¯Speed ¯Reliability ¯Customer response time ¯Delivery cycle time ¯Time from order to delivery ¯On-time performance ¯Delivered as scheduled 24

LO 8 BALANCED SCORECARD: Definition Reports an integrated group of financial and nonfinancial performance measures based on vision and strategy. 25

LO 8 Balanced scorecard can maximize profits and improve performance if used effectively. EXHIBIT 4. 9 26

TOTAL QUALITY MANAGEMENT (TQM) LO 9 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 4 28