Solution manual cost accounting 8th by kinney chapter 17

What are the types of quality costs, and how are those types related3. Terminology Appraisal cost: a quality control cost incurred to monitor and compensate for mistakes not eliminated

Learning Objectives

After reading and studying Chapter 17, you should be able to answer the following questions:

1 What is quality, and from whose viewpoint should it be evaluated?

2 What is benchmarking, and why do companies engage in it?

3 What constitutes the total quality management philosophy?

4 How is the Baldrige Award related to quality?

5 What are the types of quality costs, and how are those types related?

6 How is cost of quality measured?

7 How are the balanced scorecard and a cost management system used to provide information on

quality in an organization?

8 How is quality instilled as part of an organization’s culture?

9 (Appendix) What international quality standards exist?

IMPLEMENTING QUALITY CONCEPTS

CHAPTER

17

Terminology Appraisal cost: a quality control cost incurred to monitor and compensate for mistakes not eliminated

through prevention activities

Benchmarking: the process of investigating, comparing and evaluating a company’s products,

processes, and/or services against either those of competitors or companies believed to be the ―best in class‖

Control chart: a graphical presentation of the actual process results that indicates the upper and lower

control limits and those results that are out of control

Cost of compliance: the sum of prevention and appraisal costs; compliance costs are incurred to reduce

or eliminate the present and future costs of failure; thus, they are proactive expenditures

Cost of noncompliance: the sum of internal failure costs and external failure costs, resulting from

production imperfections

External failure costs:quality control costs for items such as warranty work, customer complaints, litigation, and defective product recalls that are incurred after a faulty unit of product has been shipped to the customer

Grade: the quality level that a product or service has relative to the inclusion or exclusion of

characteristics (especially price) to satisfy additional needs

Internal benchmarking: benchmarking practice that directs its focus on how and why one organizational

unit is performing better than another

Internal failure costs:quality control costs, such as scrap or rework, incurred to remedy defective units before they are shipped to customers

ISO 9000 series: a comprehensive series of international quality standards that define the various

design, material procurement, production, quality-control, and delivery requirements and procedures necessary to achieve quality assurance

Prevention cost: a quality control cost incurred to improve quality by preventing defects resulting from

dysfunctional processing

Process benchmarking: benchmarks against companies that are the best in a specific characteristic

rather than just the best in a specific industry

Quality: the summation of all the characteristics of a product or service that influences its ability to meet

the stated or implied needs of the buyer

Quality audit: a third-party review of product design activities, manufacturing processes and controls,

quality documentation and records, and management quality policy and philosophy

Quality control (QC): the implementation of practices and policies designed to reduce variability and

product defects; QC places the primary responsibility for quality at the source: the maker or provider

Results benchmarking: benchmarking practice in which an end product or service is examined using a

process called reverse engineering; the focus is on product/service specifications and performance results

Six sigma: a production view of quality that states that a process should produce no more than 3.4

defects per million ―opportunities‖ (i.e., chances for failure or not meeting required specifications)

Statistical process control (SPC): the use of techniques to analyze where fluctuations (or variations)

occur in the process

Strategic benchmarking:a practice that focuses on strategy and how companies compete, seeking to identify the winning strategies that have enabled high performing companies to be successful in their marketplaces

Total quality management (TQM):a management approach centered on quality, based on the

participation of all its members, and aiming at long-term success through customer satisfaction and benefits to all members of the organization and society

Value: the characteristic of meeting the highest number of customer needs at the lowest possible total

cost

Lecture Outline LO.1: What is quality, and from whose viewpoint should it be evaluated?

A Introduction

1 Managers recognize that the pursuit of high quality is a fundamental organizational strategy for competing in a global economy

2 Consumers desire a wide variety of product choices but companies have resource

constraints that force them to make trade-offs among price, quality, service, and promptness

of delivery

3 This chapter discusses the issues of quality, benchmarking, total quality management, quality costs and their measurement, as well as how a balanced scorecard and cost management system are used to support quality initiatives

B What is Quality?

1 General

a After the Industrial Revolution, quality was defined as conformity to designated specifications

b The American Society for Quality Control defines quality as conformity to requirements, where ―requirements‖ are measurable written or verbal specifications, product descriptions, procedures, policies, job descriptions, instructions, purchase/service orders, etc

c The late quality expert Joseph Juran, defined quality as fitness for use and, by doing so, allows the user rather than the producer to judge quality

d Currently, the following definition has general acceptance: Quality is the summation of all the

characteristics of a product or service that influence its ability to meet the stated or implied needs of the person acquiring it

e Quality should be viewed as both a production issue and a profitability and longevity issue

f All organizational processes (production, procurement, distribution, finance, and promotion) are involved in quality improvement efforts Therefore, two related perspectives of quality are

i The totality of internal processes generating a product or service; and

ii Customer satisfaction with the product or service

2 Production view of quality

a Productivity is measured by the quantity of good outputs generated during a time period and any factor that either slows or stops a production process, or causes unnecessary work reduces productivity

b Activity analysis is the process of detailing the various repetitive actions that are performed in

making a product or providing a service and classifying them as value-added and non-value-added

i A value-added activity is an activity that increases the worth of the product or service to

the customer and for which the customer is willing to pay

ii A non-value-added activity consumes time and generates costs but adds no customer

value

iii Text Exhibit 17-1 lists some non-value-added activities and how they can be reduced to

achieve the specified benefits

c Many companies focus on a six sigma production view of quality, which means that a

process should produce no more than 3.4 defects per million ―opportunities‖ (chances for failure or not meeting required specifications)

i A 2007 survey found that the average company operates at approximately three sigma

d Quality control (QC) encompasses all attempts to reduce variability and product defects

Primary responsibility for the quality of a product or service is placed at the source—the maker or provider

e Statistical process control (SPC) includes techniques to identify fluctuations or variations

that occur in a process; SPC is based on the theory that a process has natural (common cause) variations over time and that these variables can cause ―errors,‖ resulting in defective goods or poor service

i These errors are typically produced at points of uncommon (nonrandom or special-cause) variations Fortunately, these variations are often eliminated after the installation

of computer-integrated manufacturing systems

ii A control chart can be used to analyze process variations A control chart is a graphical

presentation of the results of a specified activity that indicates the upper and lower control

limits and when those results are out of control (See text Exhibit 17-2.)

3 Consumer view of quality

a Every customer who acquires a product or service receives a set of characteristics and a set

of organizational characteristics:

i Product/service characteristics include features, warranty, packaging, and price

(purchase and after-purchase)

ii Organizational characteristics include convenience of access, timeliness of delivery and service, reputation, and credit availability

b From a customer’s perspective, quality relates to both performance and value

i This perspective derives from increased competition, public interest in product safety, and litigation relative to products and product safety

ii Text Exhibit 17-3 lists eight basic characteristics that are commonly included in a

customer’s definition of product quality

c In addition to the quality characteristics listed in Exhibit 17–3, the following additional quality characteristics apply to service organizations:

i assurance, in that customers expect employees to be knowledgeable, courteous, and

trustworthy;

ii tangibles, in that customers expect quality physical facilities, equipment, and appearance

of personnel; and

iii empathy, in that customers expect a high degree of caring and attention from employees

d Grade (of a product or service) refers to the addition or removal of product or service

characteristics or features in order to satisfy additional customer needs such as price

e Value is the characteristic of meeting the highest number of customer needs at the lowest

possible price

f Customers often make quality determinations by comparing a product or service to an ideal rather than to an actual product or service of the same type or in the same industry

LO.2: What is benchmarking, and why do companies engage in it?

C Benchmarking

1 Benchmarking is the process of investigating, comparing, and evaluating a company’s products,

processes, and/or services against those of companies believed to be best-in-class

a Text Exhibit 17-4 lists eleven reasons to benchmark

b The end result is that an understanding of another company’s production and performance methods is gained which allows the benchmarking company to identify its own strengths and weaknesses

2 As indicated in text Exhibit 17-5, four basic types of benchmarking exist: internal, results,

process, and strategic

a Internal benchmarking directs its focus on how and why one organizational unit is

performing better than another

i The primary difficulty with internal benchmarking is that none of the organizational units may be performing on a quality level attained by external parties

b Results benchmarking involves examining an end product or service using a process called

reverse engineering in which the focus is on product/service specifications and performance results

i However, if benchmarking leads to making an exact replica of another’s product, serious ethical and legal considerations exist

ii Because of the potential for stagnation, comparisons should also be made against companies that are the best in a specific characteristic rather than just the best in a specific industry

c Process benchmarking focuses on best practices and how the best-in-class companies

achieved distinction

d Strategic benchmarking is non-industry specific and focuses on how companies compete

and on the winning strategies that have enabled high performing companies to be successful

in their marketplaces

3 Benchmarking steps are detailed in text Exhibit 17-6

LO.3: What constitutes the total quality management philosophy?

D Total Quality Management

1 General

a Total quality management (TQM) is a management approach centered on quality, based on

the participation of all its members, and aimed at long-term success through customer

satisfaction and benefits to all members of the organization and to society

b TQM embodies four important tenets:

i To dictate continuous improvement for an internal managerial system of planning,

controlling, and decision making for continuous improvement;

ii To require participation by everyone in the organization;

iii To focus on improving goods and services from the customer’s point of view; and

iv To value long-term partnerships with suppliers

2 Quality System

a Effective quality management requires the implementation of a system that provides

information on the organization’s quality processes so management can plan, control,

evaluate performance, and make decisions for continuous improvement

b Quality consideration has not traditionally been part of the planning process and has usually involved an after-the-fact measurement of errors due to a certain level of defects being tolerated as part of the ―natural‖ business process in the United States

c A total quality system needs to be designed to reorient thinking

i The old way: Ignore defects prior to occurrence, inspect quality in, and accept a

reasonable number of defects

ii The new way: Design quality in, prevent defects from occurring, and strive for continuous improvement

d The new way of viewing quality produces these end results:

i Ability to set goals and identify methods for quality improvements;

ii A system capable of measuring quality and providing feedback on quality enhancements; and

iii Increased teamwork and movement of organizational attitude from product inspection and defect correction to proactive quality assurance

3 Employee involvement

a Top management must develop an atmosphere that is conducive to quality improvements and set an example of commitment to TQM

b Workers should be encouraged to provide feedback and made to feel they are an important part of the process of success

c Encouraging employees to make quality suggestions and training them to perform multiple job functions will help improve efficiency and quality

4 Product/service improvement

a TQM focuses management’s attention on the relationship between the internal

production/service process and the external customer whose satisfaction is the ultimate evidence of success

b Companies must recognize that they may need to stop serving some groups of customers based on the results of cost-benefit analyses First, however, attempts should be made to make ―non-performing‖ customers profitable

c Customer service programs often produce valuable information about customer

recency/frequency of use, preferences, spending patterns, etc

d A company must first determine who its value-adding customers are and then understand what they want: typically, quality, value, and good service

e ―Good‖ service is an intangible but most customers agree that good service reflects the interaction between themselves and organizational employees

i Good service also means quick response time in the event of problems or questions

ii Frequently, only service quality separates one product from its competition

5 Long-term supplier relationships

a Adopting a TQM philosophy encourages companies to review their entire supply chain and establish long-term relationships with preferred suppliers

b Given the substantial amount of outsourcing that is now being used, companies need to be certain that they are ―linking up‖ with suppliers that will enhance product quality and customer satisfaction

i Many of these relationships will result in single sourcing or certification of suppliers

ii To ensure compliance with preferred supplier requirements, companies often perform quality audits of their vendors

c Some critics of TQM have called it nothing more than a management fad that does not work when practical attempts are made to implement its concepts

i A rebuttal is that poor management, not poor ideas, may be responsible for the

inconsistencies of TQM or other managerial interventions

ii Companies using TQM have cited many positive outcomes and benefits (see text Exhibit 17-7)

LO.4: How is the Baldrige Award related to quality?

E The Baldrige Award

1 The Malcolm Baldrige Quality Award is the embodiment of TQM in the United States

a The Baldrige Award focuses attention on management systems, processes, and consumer satisfaction as the tools required to achieve product and service excellence

b There are three versions of Baldrige criteria: business and not-for-profit, education, and health care

c To win the Baldrige Award, applicants must demonstrate excellence in seven categories: leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; workforce focus; process management; and results

i Text Exhibit 17-8 illustrates the relationships among the criteria performance categories

ii To achieve at least 70 percent of the points allocated within a category, the National Institute of Standards and Technology which manages the award must determine that the organization is effective and systematic in deploying and achieving the multiple

requirements within each category and is innovative in continuously seeking improvement

d Putting TQM into practice in an organization can be very costly given the length of time needed to introduce and teach the philosophy and concepts throughout the company

i One survey found that it takes about five years for a company to implement TQM and another five years before its benefits are fully realized

e The Deming Prize, named for the late management guru, W Edwards Deming, is Japan’s equivalent of the Baldrige Award and has even more rigorous requirements

i Three years or more after a company receives the Deming Application Prize it may qualify for the Japan Quality Medal if its implementation of TQM has improved substantially beyond the level that existed at the time when the Deming Application Prize was won

ii Although the Baldrige Award and the Deming Prize are both designed to recognize quality achievements and increase awareness of TQM, the Baldrige Award is more focused on results and the importance of sharing information

LO.5: What are the types of quality costs, and how are those types related?

F Types of Quality Costs

1 There are four types of quality costs

a Prevention costs are costs whose purpose is to improve quality by preventing product

defects resulting from dysfunctional processing

i Prevention activities include improved production equipment, worker training, and

engineering and product modeling

b Appraisal costs are costs incurred to monitor and compensate for mistakes not eliminated

through prevention activities

c Internal failure costs are expenditures, such as scrap or rework, incurred to remedy

defective units before they are shipped to customers

d External failure costs are expenditures for items such as warranty work, customer

complaints, litigation, and defective product recalls incurred after a faulty unit of product has been shipped to the customer

i Although both types of failure costs are expensive, an organization would prefer to incur internal, rather than external failure costs

2 The TQM process will result in a cycle of benefits as shown in text Exhibit 17-9

a The TQM philosophy stipulates that total costs will decrease as quality improvements are made in an enterprise

b This cycle of benefit will continue in a company that is profitable and secure in its market share—two principal goals of an organization

3 Quality costs can be summarized into two categories: (1) cost of quality compliance or assurance

and (2) cost of noncompliance or quality failure (See text Exhibit 17-10)

a Costs of compliance equal the sum of prevention costs and appraisal costs

b Costs of noncompliance are the results of production imperfections and are equal to the sum

of internal and external failure costs

4 Information relating to production quality, or the lack thereof, is included in inspection reports, SPC control charts, and customer returns or complaints

5 Information concerning quality costs is partially included in the accounting records and supporting documentation

a Quality costs historically have not been accorded separate recognition in the accounting system

b Actual or estimated costs may be used in measuring the cost of quality