Solution manual cost and managerial accounting by barfield 3rd implementing quality concepts

When viewed from the perspective of the production process, quality is often measured in terms of product life, failure rate, and durability.. The two types of costs are costs of quality

Implementing Quality Concepts

Questions

1 In the global economy, consumers have more choices than ever

in buying products To successfully position its products in this market, a company must maintain a reputation for

delivering products of high quality and high perceived value Accordingly, quality and value have emerged as important

competitive dimensions in many markets Competition based on these dimensions causes all competitors to strive to

constantly deliver more value and higher quality at a lower price to maintain their share of the market

2 It is unlikely that the quality movement will fade There is

too much competition among firms that are individually

stressing quality as a primary product or service feature To remain competitive, a company will have to meet the quality standards set by others, standards that are constantly being raised because of the increased recognition of the need for continuous improvement

3 Quality refers to the dimensions or characteristics of a

product or service that make it able to meet the stated or implied needs of the person acquiring it

Quality can be viewed from the perspective of the production process or through the eyes of the consumer When viewed from the perspective of the production process, quality

is often measured in terms of product life, failure rate, and durability The consumer's view of quality reflects how well the product or service meets specified needs

Both views of quality are valuable The internal view ofquality leads to greater process efficiency and better productdesign The external view of quality keeps the company

focused on the needs of its customers and the relationship between internal processes and external value

4 Such activities include reworking defective units, handling

waste materials, repairing broken production machinery,

replacing broken product components, and scrapping defective products or product components

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5 Managers can hold suppliers responsible for controlling the

quality of their products Demanding high quality inputs willreduce the number of defective outputs Managers can also increase employee and managerial training, so that each

employee monitors the quality of his/her efforts This

action will reduce the need for rework, make employees more conscious of how their job tasks relate to quality output, andencourage employee teamwork A company can also upgrade

production machinery to utilize new technology that can

monitor output and reduce or eliminate mechanical mistakes

6 Statistical process control techniques can be used to identify

abnormal variations in a production process Every productionprocess has normal and tolerable variation Statistical

process controls can be used to identify when the variation inthe process becomes abnormal, signaling that some aspect of the process needs to be corrected

7 The eight characteristics are detailed in Exhibit 8-2, page

307 They are performance, features, reliability,

conformance, durability, serviceability, aesthetics, and

perceived quality

The five characteristics of service quality are provided

in Exhibit 8-3, page 307 They are reliability, assurance, tangibles, empathy, and responsiveness

The majority of the product quality characteristics are objective, whereas the service quality characteristics are subjective Thus, a company’s product could be reliable but its customer service department might not be Product

reliability can be tested against constant company

specifications; service reliability is judged by individual customers As noted in the chapter, however, it is possible for services to be measured against characteristics, if the service is in fact defined as the “product” the company sells

8 Each student will have a different answer No solution

provided

9 False Consumers will purchase only those goods and services

that are perceived to be of value to them Regardless of how well a product is manufactured or how well it functions, it will only be in demand if it satisfies the needs of the

market

10 Each of you would probably have a different view of “high

quality,” although both you and your parents may accept

Gates’s definition In making a residence choice, each of youwill assess residence characteristics based on the

characteristics that each of you deems necessary, desirable, and affordable Thus, the “grade” level of your choice may reflect the need to be close to school because you have no car, the need for two bedrooms because you have a roommate, the desire to have a washer and dryer, and the price Your parents may put more weight on neighborhood, swimming pool, ease of commute, and price Bill Gates may emphasize size, technological gadgets, and privacy

11 Benchmarking refers to a process of investigating, comparing,

and evaluating one company’s products or services against those of another Results benchmarking looks at the end

product or service and its design, components, costs, and features Process benchmarking looks at how something is produced or delivered, focusing on effectiveness and

efficiency

12 Each student will have a different answer No solution

provided

13 In benchmarking, management identifies a firm or set of firms

that is perceived as being the best in some business aspect (e.g., eliminating unneeded inventory) Management then

identifies ways to improve its own operations by embracing thepractices of the benchmark firm, adapting those practices to fit the adopting firm’s characteristics, and may evaluate its progress in that business aspect using the benchmark firm’s practice outcomes as measurement standards

14 The steps are detailed in Exhibit 8-4, page 310 They are

summarized below

1 Determine the area in which improvements are needed

2 Select the quality characteristics which will measure

quality performance

3 Identify the benchmark companies

4 Ask for cooperation from the benchmark companies

5 Collect information

6 Analyze the performance gap - differences between the

firm undergoing self-examination and the benchmark firms

7 Identify and implement improvements

8 Strive for continuous improvement

15 Total quality management is an organization wide effort to

seek continuous improvement in all aspects of operations Thethree tenets are:

1 TQM necessitates an internal managerial system of

planning, controlling, and decision making

2 It requires participation by everyone in the

organization

3 It focuses on improving goods and services from the

customer's point of view

16 TQM is significant because it is a valuable managerial tool

that can influence business longevity and profitability A company that invests in TQM will produce goods or provide services that meet customers’ expectations Making TQM work requires participation of everyone in the organization TQM requires investments in both training and technology as well

as a culture adjustment toward “doing the right things right.”

17 No answer provided However, most of the costs that the

students should discuss will be external failure costs

(because these will probably be the readily obtainable)

18 The Malcolm Baldrige National Quality Award is a competition

for U.S businesses The award is based on an evaluation of management systems, processes, and customer satisfaction

There are five categories of entrants for the Baldrige Award: manufacturing, service, small business, education, andhealth care

The award criteria categories are (see Exhibit 8-5, page 314): leadership, strategic planning, customer and market focus, information and analysis, human resource focus, processmanagement, and business results

19 The two types of costs are costs of quality compliance and

costs of quality failure or noncompliance Costs of

compliance include prevention and appraisal costs Costs of failure or noncompliance include internal failure costs and external failure costs

Quality is never free Significant costs are going to beincurred to prevent, assess, or respond to product failure Alow failure rate may be obtained with high levels of spending

on compliance costs, and a high failure rate will result in high spending levels on noncompliance costs See Exhibit 8-7,page 316, for a graphical display of these relationships However, the financial benefits generated by high quality often offset the actual costs of having that level of quality,thereby, making high quality more profitable than low quality

20 Management can use the information generated from internal and

external failures to reevaluate company processes and make decisions about future courses of action Management may decide to invest in new technology, additional training, or a higher level of research and development Employees may also

be more empowered so that, should they see a defect occur or away to improve a process, they may use their own judgment and skills to handle the problem or help redesign the process

21 Information on quality can be obtained from quality inspection

reports, statistical control charts, customer returns and allowances, customer complaints, and accounting records (e.g.,warranty expense)

22 The four time phases of quality in the production-sales cycle

are before production, during production, after production, and after sale There are interdependencies in which the costs of each phase are inversely related to costs incurred inthe subsequent and prior phases For example, higher

spending on quality considerations before production will lead

to a decrease in spending in the later stages Similarly, higher spending during production will reduce quality-related expenditures after production and after sale

23 Pareto analysis helps identify the areas in which managers

should focus their quality enhancement/cost reduction efforts

so as to have the greatest impact Managers can then allocatetheir time such that the amount of time invested in improving operations can be proportional to the benefits achieved

24 Exhibit 8-9, page 319, displays four accounts that can be used

to capture the effects of quality control efforts Those accounts would fall under prevention costs (e.g., training, market research), appraisal costs (e.g., quality inspections, verifying procedures), internal failure costs (e.g., scrap andwaste, reprocessing), and external failure costs (e.g.,

complaints handling, warranty handling)

25 Strategic cost management links information to corporate

strategies by allowing managers to set and communicate

organizational goals and objectives throughout the company; establish, implement, and monitor techniques and processes; accumulate and process measurement activities in a variety of ways based on the needs of users; and assess activities on a cost – benefit basis for both short-term and long-term

decision models

26 No solution provided

27 The continuum is depicted in Exhibit 8-12, page 324 At the

low end of the continuum, a company merely meets internal inspection standards At the next level is ISO 9000, followed

by the Malcolm Baldrige award At the high end of the

continuum is TQM

28 Standards are issued for a variety of reasons Two primary

reasons are to ensure compatibility across systems (e.g., electrical plugs will be compatible with electrical outlets) and to protect consumers In the global marketplace, quality may vary among the competitors in a specific market A given country's standards ensure a minimal level of quality for all firms serving markets in that country

A common set of global standards levels the playing fieldfor all companies and should result in lower costs to all consumers Companies will no longer have to incur the costs associated with complying with a variety of country-specific standards The cost savings resulting from the lower

compliance costs can be passed along to consumers

29 The role of this organization is to develop a set of global

quality standards The best known of these standards are the ISO 9000 series which are detailed in Exhibit 8-13, page 327

30 A quality audit involves a review of product design

activities, manufacturing processes and controls, quality documentation and records, and management quality policy and philosophy It is often performed in connection with the ISO

32 a False This definition fails to include appraisal costs

b False Traditional accounts have quality costs imbedded

in a variety of accounts They are generally not separately identifiable

c True

d False As the number of defective products produced

rises, both internal and external failure costs can be expected to rise

e False Higher quality typically leads to lower costs and

greater profits in the long run

f False Total quality management requires quality to be

viewed from the perspective of the customer

g False Benchmarking can utilize comparisons to firms in

any industry

h False SPC charts are used to plot the variation in a

process so that out-of-control conditions can be recognized

i True

j False Spending on quality is unavoidable and is never

free Firms simply have a choice to either spend on quality compliance or quality noncompliance

33 a

46 44 42 40 38 36 34 32 30 28

N u m b e r o f s l i c e

s 0 4 8 12Observation number16 20 24 28 32 36 40

Control Chart

b The control chart demonstrates that there is substantial

variation in the number of pepperoni slices per pizza

Although the number of slices per pizza is concentrated around the mid-thirties area, many of the pizzas have more than 40 slices If the objective is to stay in the range of 34 to 38 slices per pizza, this objective is not being achieved It is also evident thatthe tendency is to err in the direction of putting more than the specified number of slices on the pizzas

Serviceability X Aesthetics X X X

senses, having a rigorous production process, and being defined from the user’s point of view

35 a Each party would value different characteristics of the

automobiles The valued characteristics would depend on the unique circumstances of each buyer Each buyer wouldplace different weights on the various features

associated with alternative vehicles and the various dimensions of quality such as size, economy, safety, and reliability

b All of the buyers would be interested in initial cost,

safety, reliability, and operating costs The young college student is probably also interested in style, performance, and sound systems The young married couplewould be interested in seating capacity (possibly a

built-in baby seat), trunk storage, safety (including features like air bags), and warranty The elderly couple is probably more interested in how easy the vehicles are to get into and out of, comfort (including features like air conditioning), ease of maintenance, andservice and warranty provisions

b The pattern of change in quality costs appears to be very

favorable Total expenditures for quality costs declinedfrom 2002 to 2003 Perhaps most importantly, the

internal quality compliance costs rose and the noncompliance costs declined This pattern of change should allow the perception of quality by customers in the firm’s products to rise Customers will detect fewerdefective products and require fewer repair and

replacement services

37

a b.

1 Fitting machines for mistake-proof operations $ 9,400 $13,800 +47%

c A 20% increase in compliance cost was accompanied by a 21%

decrease in noncompliance cost and an overall reduction in thecosts of quality Management seems to be effectively managingcosts of quality The pattern of change is consistent with quality-conscious management The costs incurred for

compliance have increased from 2002 to 2003 creating a

favorable effect: a decrease in the costs of noncompliance Thus, the company is spending more to prevent quality problemsand spending less to treat quality problems

38 a Profits lost by selling defective units

(3,000 - 600) × ($30 - $20) = 2,400 × $10 = $24,000

b Profits lost by selling defective units $24,000

Rework costs (600 × $6) 3,600Cost of warranty work 2,500Cost of customer returns (200 × $5) 1,000

Total costs of failure $31,100

c Total costs of failure $31,100

Prevention costs 25,000 Appraisal costs 6,800

Total quality costs $62,900

40 a The prevention costs would increase because that category

would reflect the depreciation and operating costs of theequipment However, both the internal and external

failure costs would decline because of a lower level of defective output Appraisal costs might also decline if the company can place greater confidence in output

quality because of the new machine and thereby conduct fewer quality inspections Additionally, the machine may

be capable of conducting some tests of output quality

b There are several reasons why the company might

rationally elect to spend $40,000 on prevention rather than $25,000 on appraisal One reason is that the impact

on external failure costs (60% reduction) may be a period benefit, but only if the cost is for prevention rather than appraisal There could also be benefits from spending on prevention that are felt in the appraisal andinternal failure cost categories An expenditure on appraisal activities is unlikely to generate such benefits in the other categories Spending on appraisal activities will only have the effect of decreasing the level of external failure costs as the level of internal failure costs rises

multi-41 a Compliance costs are generally more susceptible to

control than the costs of noncompliance Particularly difficult to control are the costs of external failure Further, the perception of quality may be more tightly linked to this category than the other three

b There is a directional effect: Increasing prevention

costs and appraisal costs should drive spending down in the other two categories, or, decreasing spending on prevention and appraisal should result in an increase in spending in the other two categories Conversely, simplyspending more on internal and external failure costs willnot necessarily have an effect on prevention and

appraisal costs

c Prevention cost is the most likely target category The

rationale is simple: By spending more on prevention, allthree of the other categories should be favorably

affected Such benefits cannot be achieved by increasingspending in any other single category Also, the

benefits of spending in the prevention cost category could carry over for many periods A final point: Only

by increasing spending on prevention can cuts be achieved

in the largest noncompliance category, internal failure costs

d TQM would focus efforts on prevention and appraisal cost

components that are within the purview of management with

an objective of continuous improvement in reducing the costs of product failure Much more effort would be concentrated on prevention than appraisal