Solution manual cost accounting a managerial emphasis 13e by horngren ch19

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Quality costs (including the opportunity cost of lost sales because of poor quality) can be

as much as 10% to 20% of sales revenues of many organizations Quality-improvement

programs can result in substantial cost savings and higher revenues and market share from

increased customer satisfaction

19-2

Quality of design refers to how closely the characteristics of a product or service meet the

needs and wants of customers Conformance quality refers to the performance of a product or

service relative to its design and product specifications

19-3

Exhibit 19-1 of the text lists the following six line items in the prevention costs category:

design engineering; process engineering; supplier evaluations; preventive equipment

maintenance; quality training; and testing of new materials

19-4

An internal failure cost differs from an external failure cost on the basis of when the

nonconforming product is detected An internal failure is detectedbefore a product is shipped to

a customer, whereas an external failure is detectedafter a product is shipped to a customer.

19-5

Three methods that companies use to identify quality problems are: (a) a control chart

which is a graph of a series of successive observations of a particular step, procedure, or

operation taken at regular intervals of time; (b) a Pareto diagram, which is a chart that indicates

how frequently each type of failure (defect) occurs, ordered from the most frequent to the least

frequent; and (c) a cause-and-effect diagram, which helps identify potential causes of failure

19-6

No, companies should emphasize financial as well as nonfinancial measures of quality,

such as yield and defect rates Nonfinancial measures are not directly linked to bottom-line

performance but they indicate and direct attention to the specific areas that need improvement to

improve the bottom line Tracking nonfinancial measures over time directly reveals whether

these areas have, in fact, improved over time Nonfinancial measures are easy to quantify and

2 the number of customer complaints;

3 delivery delays (the difference between the scheduled delivery date and date requested by

customer);

4 on-time delivery rate (percentage of shipments made on or before the promised delivery

date);

5 customer satisfaction level with product features (to measure design quality);

6 market share; and

7 percentage of units that fail soon after delivery

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19-8

Examples of nonfinancial measures of internal-business-process quality:

1 the percentage of defects for each product line;

2 process yield (rates of good output to total output at a particular process;

3 manufacturing lead time (the amount of time from when an order is received by production

to when it becomes a finished good); and

4 number of product and process design changes

19-9

Customer-response time is how long it takes from the time a customer places an order for

a product or a service to the time the product or service is delivered to the customer

Manufacturing lead time is how long it takes from the time an order is received by

manufacturing to the time a finished good is produced Manufacturing lead time is only one part

of customer-response time Delays in delivering an order for a product or service can also occur

because of delays in receiving customer orders and delays in delivering a completed order to a

customer

Customerresponsetime

Orderreceipttime

Ordermanufacturinglead time

Orderdeliverytime

19-10

No There is a trade-off between customer-response time and on-time performance

Simply scheduling longer customer-response time makes achieving on-time performance easier

Companies should, however, attempt to reduce the uncertainty of the arrival of orders, manage

bottlenecks, reduce setup and processing time, and run smaller batches This would have the

effect of reducing both customer-response time and improving on-time performance

19-11

Two reasons why lines, queues, and delays occur is (1) uncertainty about when customers

will order products or services––uncertainty causes a number of orders to be received at the same

time, causing delays, and (2) limited capacity and bottlenecks––a bottleneck is an operation

where the work to be performed approaches or exceeds the available capacity

19-12

No Adding a product when capacity is constrained and the timing of customer orders is

uncertain causes delays in delivering all existing products If the revenue losses from delays in

delivering existing products and the increase in carrying costs of the existing products exceed the

positive contribution earned by the product that was added, then it is not worthwhile to make and

sell the new product, despite its positive contribution margin The chapter describes the negative

effects (negative externalities) that one product can have on others when products share common

manufacturing facilities

19-13

The three main measures used in the theory of constraints are the following:

1 throughput contribution equal to revenues minus direct material cost of the goods sold;

2 investments equal to the sum of materials costs in direct materials, work-in-process and

finished goods inventories, research and development costs, and costs of equipment and

buildings;

3 operating costs equal to all costs of operations such as salaries, rent, and utilities (other than

direct materials) incurred to earn throughput contribution

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19-14

The four key steps in managing bottleneck resources are:

Step 1: Recognize that the bottleneck operation determines throughput contribution of the

entire system

Step 2: Search for, and identify the bottleneck operation

Step 3: Keep the bottleneck operation busy, and subordinate all nonbottleneck operations to the

bottleneck operation

Step 4: Increase bottleneck efficiency and capacity

19-15

The chapter describes several ways to improve the performance of a bottleneck operation

1 Eliminate idle time at the bottleneck operation

2 Process only those parts or products at the bottleneck operation that increase throughput

contribution, not parts or products that will remain in finished goods or spare parts

inventories

3 Shift products that do not have to be made on the bottleneck machine to nonbottleneck

machines or to outside processing facilities

4 Reduce setup time and processing time at bottleneck operations

5 Improve the quality of parts or products manufactured at the bottleneck operation

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Internal failure costs

External failure costs

Total quality costs $2,040 24.7% 100.0% $2,159 23.8% 100.0% $1,605 17.2% 100.0% $1,271 14.1% 100.0%

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2 From an analysis of the Cost of Quality Report, it would appear that Costen, Inc.’sprogram has been successful because:

 Total quality costs as a percentage of total revenues have declined from 24.7% to14.1%

 External failure costs, those costs signaling customer dissatisfaction, have declinedfrom 8.9% of total revenues to 2.8% of total revenues and from 36% of all qualitycosts to 20.1% of all quality costs These declines in warranty repairs and customerreturns should translate into increased revenues in the future

 Internal failure costs as a percentage of revenues have been halved from 4.3% to 2%

 Appraisal costs have decreased from 5.3% to 3% of revenues Preventing defectsfrom occurring in the first place is reducing the demand for final testing

 Quality costs have shifted to the area of prevention where problems are solved beforeproduction starts: total prevention costs (maintenance, supplier training, and designreviews) have risen from 25% to 44.9% of total quality costs The $60,000 increase inthese costs is more than offset by decreases in other quality costs

 Because of improved designs, quality training, and additional pre-productioninspections, scrap and rework costs have almost been halved while increasing sales

by 9.5%

 Production does not have to spend an inordinate amount of time with customerservice since they are now making the product right the first time and warrantyrepairs and customer returns have decreased

3 To estimate the opportunity cost of not implementing the quality program and to help hermake her case, Jessica Tolmy could have assumed that:

 Sales and market share would continue to decline if the quality program was notimplemented and then calculated the loss in revenue and contribution margin

 The company would have to compete on price rather than quality and calculated theimpact of having to lower product prices

Opportunity costs are not recorded in accounting systems because they represent the results ofwhat might have happened if the company had not improved quality Nevertheless, opportunitycosts of poor quality can be significant It is important for Costen to take these costs into accountwhen making decisions about quality

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Internal failure cost = 2.5% × 100,000 × $1 = $2,500

Out of pocket external failure cost = 4.5% × 100,000 × ($10 + 1)

= 4,500 × $11 = $49,500Opportunity cost of external failure = 4,500 car seats × 20% × $500

= 900 car seats × $500 = $450,000Total cost of quality control = $150,000 + 2,500 + 49,500 + 450,000

= $652,000

7 In addition to the lower costs under the alternative inspection plan, Safe Rider should consider

a number of other factors:

a There could easily be serious reputation effects if the percentage of external failures

increases by 225% (from 2% to 4.5%) This rise in external failures may lead to costs

greater than $500 per failure due to lost sales

b Higher external failure rates may increase the probability of lawsuits

c Government intervention is a concern, with the chances of government regulation

increasing with the number of external failures

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1 Cost of improving quality of plastic = $25 × 100,000 = $2,500,000

2 Total cost of lawsuits = 2 × $750,000 = $1,500,000

3 While economically this may seem like a good decision, qualitative factors should be more

important than quantitative factors when it comes to protecting customers from harm and

injury If a product can cause a customer serious harm and injury, an ethical and moral

company should take steps to prevent that harm and injury The company’s code of ethics

should guide this decision

4 In addition to ethical considerations, the company should consider the societal cost of this

decision, reputation effects if word of these problems leaks out at a later date, and

governmental intervention and regulation

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2 Quality has by and large improved The percentage of defects has decreased by 1% and

the number of customer complaints has decreased by 5% The former indicates an increase in the

quality of the cell phones being produced The latter has positive implications for future sales

However, the percentage of units reworked has also increased WCP should look into the reason

for the increase One possible explanation is the five-fold increase in production that may have

resulted in a higher percentage of errors WCP should do a root-cause analysis to identify

reasons for the additional rework Finally, the average time from order placement to order

delivery has decreased So customers are receiving their orders on a timelier basis But

manufacturing lead time is a higher fraction of customer lead time WCP should seek ways to

reduce manufacturing lead time For example, process improvements could reduce both rework

and manufacturing lead time Any reduction in manufacturing lead time would help to further

reduce customer response time

3 Manufacturing lead time = wait time + manufacturing time Producing 10,000 cell

phones in 2010 may have required more waiting time for each order than the waiting time from

producing 2,000 cell phones in 2009 Manufacturing lead time may have increased as more time

was spent on making products with fewer defects and reducing rework activities

Customer response time = receipt time + manufacturing lead time + delivery time

Manufacturing lead time is a subset of customer response time Lower customer response time

times is due to order processing efficiency and/or delivery efficiency and not manufacturing lead

percentage of units shipped

percentage of total time from

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Because the expected relevant benefits of $3,568,000 exceed the expected relevant costs of the

new lens of $1,100,000, Photon should introduce the new lens Note that the opportunity cost

benefits in the form of higher contribution margin from increased sales is an important

component for justifying the investment in the new lens

2 The incremental cost of the new lens of $1,100,000 is less than the incremental savings in

rework and repair costs of $1,768,000 ($1,030,000 + $36,000 + $72,000 + $630,000) Thus, it is

beneficial for TechnoPrint to invest in the new lens even without making any additional sales

Costs of quality items

Savings in rework costs

$80  12,875 rework hoursSavings in customer-support costs

$40  900 customer-support-hoursSavings in transportation costs for parts

$360  200 fewer loadsSavings in warranty repair costs

$90  7,000 repair-hours

Opportunity costs

Contribution margin from increased sales

Cost savings and additional contribution margin

$1,030,00036,00072,000630,000

1,800,000

$3,568,000

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1 The data seem to support the concerns expressed by Checker’s headquarters Store 2 has the

lowest percentage of late deliveries and the highest customer satisfaction scores On the other

hand, Store 4 has the highest percentage of late deliveries and the lowest customer satisfaction

score Both Stores 1 and 3 fall between the two extremes and have similar customer satisfaction

scores

2

3 Checkers must estimate the profit implications of lost customer satisfaction due to failure to

meet guaranteed delivery times In addition, the company needs information about the value

customers place on the delivery guarantee Customers may choose to order from Checkers

because of the guarantee Because failure to meet the guarantee represents a cost, Checkers needs

to compare this expected cost to the additional sales and profits attributable to the guarantee

Moreover, the delivery guarantee should motivate employees to strive for on-time delivery

After all, store profits on which store managers bonuses are based will be lower because of the

$5 discount if pizzas are not delivered on time Store managers who view the guarantee as a

“win-win” situation should also be educated on the long-term effects that late deliveries have on

the company if overall customer satisfaction declines One possibility is to modify the bonus

scheme so that on-time delivery is explicitly weighted in the bonus calculation

Highest observation of late delivery percentage 25 2

Average overall satisfaction =a + b × Percentage of late deliveries

2Slope coefficient ( ) = 0.10

20

Using high observation, Constant (a) = 2 + 0.10 × 25 = 4.5

Using low observation, Constant (a) = 4 + 0.10 ×5 = 4.5

Average overall satisfaction = 4.5 – 0.10 × Percentage of late deliveries

If the percentage of late deliveries increases from 5% to 7%,

Average overall satisfaction = 4.5 – 0.10 × 7 = 3.8

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1 If SMU’s advisors expect to see 300 students each day and it takes an average of 12 minutes to

advise each student, then the average time that a student will wait can be calculated using the

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ii) If SMU has its current employees work 6 days a week and has them advise 350 students

a day then the average wait time will be:

of time available of students per day advise a student

2 i) Cost if SMU hires 2 extra advisors for the registration period:

Advisor salary cost = 12 advisors ×10 days × $100 = $12,000

ii) Cost if SMU has its 10 advisors work 6 days a week for the registration period:

Advisor salary cost = 10 advisors × 10 days × $100 + 10 advisors × 2 days × $150 = $13,000

Alternative (i) is less costly for SMU

3 Hiring two extra advisors has a shorter waiting time and a lower cost than extending the

workweek to 6 days during the registration period However, the quality of the advising may not

be as high The temporary advisors may not be as familiar with the requirements of the

university They may also be unaware of how to work within the system (i.e., they may not be

aware of alternatives that may be available to help students)

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1 Manufacturing cycle efficiency (MCE) is defined as follows:

MCE = Value-added manufacturing time ÷ Total manufacturing time

So MCE in Torrance Manufacturing is:

MCE = 4 days of processing time ÷ 22 days total manufacturing time = 0.18

2 Manufacturing cycle time = Total time from receipt of an order by production until its completion

Manufacturing cycle time = (8 + 6 + 2 + 4 + 2) days = 22 days

1 Finishing is a bottleneck operation Therefore, producing 1,000 more units will generate

additional throughput contribution and operating income

Increase in throughput contribution ($72 – $32)  1,000 $40,000

Mayfield should invest in the modern jigs and tools because the benefit of higher throughput

contribution of $40,000 exceeds the cost of $30,000

2 The Machining Department has excess capacity and is not a bottleneck operation

Increasing its capacity further will not increase throughput contribution There is, therefore, no

benefit from spending $5,000 to increase the Machining Department's capacity by 10,000 units

Mayfield should not implement the change to do setups faster

3 Finishing is a bottleneck operation Therefore, getting an outside contractor to produce

12,000 units will increase throughput contribution

Increase in throughput contribution ($72 – $32)  12,000 $480,000

Net benefit of contracting 12,000 units of finishing $360,000

Mayfield should contract with an outside contractor to do 12,000 units of finishing at $10 per

unit because the benefit of higher throughput contribution of $480,000 exceeds the cost of

$120,000 The fact that the cost of $10 per unit is double Mayfield's finishing cost of $5 per unit

is irrelevant

4 Operating costs in the Machining Department of $640,000, or $8 per unit, are fixed costs

Mayfield will not save any of these costs by subcontracting machining of 4,000 units to Hunt

Corporation Total costs will be greater by $16,000 ($4 per unit  4,000 units) under the

subcontracting alternative Machining more filing cabinets will not increase throughput

contribution, which is constrained by the finishing capacity Mayfield should not accept Hunt's

offer The fact that Hunt's costs of machining per unit are half of what it costs Mayfield in-house

is irrelevant

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1 Cost of defective unit at machining operation which is not a bottleneck operation is the

loss in direct materials (variable costs) of $32 per unit Producing 2,000 units of defectives does

not result in loss of throughput contribution Despite the defective production, machining can

produce and transfer 80,000 units to finishing Therefore, cost of 2,000 defective units at the

machining operation is $32  2,000 = $64,000

2 A defective unit produced at the bottleneck finishing operation costs Mayfield materials

costs plus the opportunity cost of lost throughput contribution Bottleneck capacity not wasted in

producing defective units could be used to generate additional sales and throughput contribution

Cost of 2,000 defective units at the finishing operation is:

Forgone throughput contribution ($72 – $32)  2,000 80,000

Alternatively, the cost of 2,000 defective units at the finishing operation can be calculated as the

lost revenue of $72  2,000 = $144,000 This line of reasoning takes the position that direct

materials costs of $32  2,000 = $64,000 and all fixed operating costs in the machining and

finishing operations would be incurred anyway whether a defective or good unit is produced

The cost of producing a defective unit is the revenue lost of $144,000

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One way to present the alternatives is via a decision tree, as shown below.

The idea is to first evaluate the best action that Thomas should take if it implements the

new design (that is, make or not make T971) Thomas can then compare the best mix of products

to produce if it implements the new design against the status quo of not implementing the new

design

1 Thomas has capacity constraints Demand for V262 valves (370,000 valves) exceeds

production capacity of 330,000 valves (3 valves per hour  110,000 machine-hours) Since

capacity is constrained, Thomas will choose to sell the product that maximizes contribution

margin per machine-hour (the constrained resource)

$8 per valve 3 valves per hour = $24Contribution margin per

=

machine-hour for V262

$10 per valve 2 valves per hour = $20

Contribution margin per

Do not implement new design

Make T971

Do not make T971

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2 Now compare the alternatives of (a) not implementing the new design versus

(b) implementing the new design By implementing the new design, Thomas will save 10,000machine-hours of rework time This time can then be used to make and sell 30,000 (3 valves perhour  10,000 hours) additional V262 valves The relevant costs and benefits of implementingthe new design follow:

The relevant costs of implementing the new design $(315,000)Relevant benefits:

(a) Savings in rework costs ($3aper V262 valve 30,000 valves) 90,000(b) Additional contribution margin from selling another

30,000 V262 valves (3 valves per hour 10,000 hours)

because capacity previously used for rework is freed up

a Note that the fixed rework costs of equipment rent and allocated overhead are irrelevant, because these costs will be incurred whether Thomas implements or does not implement the new design

Thomas should implement the new design since the relevant benefits exceed the relevantcosts by $15,000

3 Thomas Corporation should also consider other benefits of improving quality Forexample, the process of quality improvement will help Thomas's managers and workers gainexpertise about the product and the manufacturing process that may lead to further costreductions in the future Improving quality within the plant is also likely to translate intodelivering better quality products to customers The increased reputation and customer goodwillmay well lead to higher future revenues through greater unit sales and higher sales prices

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1 By implementing the new method, Tan would incur additional direct materials costs on all

the 200,000 units started at the molding operation

The relevant benefits of adding the new material are:

Increased revenue from selling 30,000 more lamps

Note that Tan Corporation continues to incur the same total variable costs of direct

materials, direct manufacturing labor, setup labor and materials handling labor, and the same

fixed costs of equipment, rent, and allocated overhead that it is currently incurring, even when it

improves quality Since these costs do not differ among the alternatives of adding the new

material or not adding the new material, they are excluded from the analysis The relevant

benefit of adding the new material is the extra revenue that Tan would get from producing

30,000 good lamps

An alternative approach to analyzing the problem is to focus on scrap costs and the

benefits of reducing scrap

The relevant benefits of adding the new material are:

a Cost savings from eliminating scrap:

b Additional contribution margin from selling

another 30,000 lamps because 30,000 lamps

will no longer be scrapped:

a Note that only the variable scrap costs of $19 per lamp (direct materials, $16 per lamp; direct manufacturing labor, setup

labor, and materials handling labor, $3 per lamp) are relevant because improving quality will save these costs Fixed

scrap costs of equipment, rent, and other allocated overhead are irrelevant because these costs will be incurred whether

Tan Corporation adds or does not add the new material.

b Contribution margin per unit

Variable costs:

Molding department variable manufacturing costs

per lamp (direct manufacturing labor, setup labor, and

On the basis of quantitative considerations alone, Tan should use the new material

Relevant benefits of $1,200,000 exceed the relevant costs of $800,000 by $400,000

2 Other nonfinancial and qualitative factors that Tan should consider in making a decision

include the effects of quality improvement on:

a gaining manufacturing expertise that could lead to further cost reductions in the future;

b enhanced reputation and increased customer goodwill which could lead to higher

future revenues through greater unit sales and higher sales prices; and

19-29 Statistical quality control, airline operations.

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1 The + 2 rule will trigger a decision to investigate when the round-trip fuel usage isoutside the control limit:

Mean + 2 = 200 + 2 = 200 + (2  20) or 160 to 240 gallon-unitsAny fuel usage less than 160 gallon-units or greater than 240 gallon-units will trigger a decision

to investigate

The only plane to be outside the specified  + 2 fuel usage control limit is the Spirit ofSacramento on flights #5 (242 gallon-units), #7 (249 gallon-units), and #10 (244 gallon-units)

2 Solution Exhibit 19-29 presents the SQC charts for each of the three 747s

The Spirit of Atlanta has no observation outside the  + 2 control limits However, therewas an increase in fuel use in each of the last nine round-trip flights The probability of nineconsecutive increases from an in-control process is very low, and this is a trend that should beinvestigated

The Spirit of Boston appears in control regarding fuel usage

The Spirit of Sacramento has three observations outside the  + 2 control limits.Moreover, the mean of the fuel usage for the last six flights is 238 gallon-units compared to amean of 208 gallon-units for the first four flights There is a rising trend, and some observationsare already greater than the acceptable upper limits for fuel consumption This should beinvestigated

3 The advantage of using dollar fuel costs as the unit of analysis in an SQC chart is that itfocuses on a variable of overriding concern to top managers (operating costs)

However, the disadvantages of using dollar fuel costs are:

a Split responsibilities Operations managers may not control the purchase of fuel, andmay want to exclude from their performance measures any variation stemming fromfactors outside their control

b Offsetting factors may mask important underlying trends when the quantity used andthe price paid are combined in a single observation For example, decreasing gallonusage may be offset by increasing fuel costs Both of these individual patterns areimportant in budgeting for an airline

c The distribution of fuel usage in gallons may be different from the distribution of fuelprices per gallon More reliable estimates of the  and  parameters might beobtained by focusing separately on the individual usage and price distributions

Note: The above disadvantages are most marked if actual fuel prices are used The use of

standard fuel prices can reduce many of these disadvantages

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