Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 4 Strategic Management of Costs, Quality, and Time Maher, Stickney and Weil

Learning Objectives (Slide 1 of 2) Distinguish between the traditional view of quality and the quality-based view. Define quality according to the customer. Compare the costs of quality control to the costs of failing to control quality. Explain why firms make trade-offs in quality control costs and failure costs. Describe the tools firms use to identify quality control problems.

Learning Objectives (Slide 2 of 2) Explain why just-in-time requires total quality management. Explain why time is important in a competitive environment. Explain how activity-based management can reduce customer response time. Explain how traditional managerial accounting systems require modifications to support total quality management.

Traditional Versus Quality-Based View Traditional view assumes that improving quality is a trade-off against lowering costs Quality-based view - always attempts to improve quality Establish quality goals and aim for zero defects High quality pays the costs to get it

Quality According to the Customer Critical success factors Service - relates to customer expectations Refers to all of the product’s features, both tangible and intangible Quality - keeping promises made to customers: product conforms to specs. Increases as customer satisfaction increases Cost - achieving goals while lowering costs increases efficiency

Quality Control Improving quality may be costly, but failing to improve quality may be equally costly Costs of controlling and improving quality include: Prevention costs Appraisal costs

Prevention Costs Cost to prevent defects in products and services include: Procurement inspection Processing control Design Quality training Machine inspection

Appraisal Costs Costs to detect individual units of products that do not conform to specifications include: End-process sampling Field testing

Costs of Failing to Control & Improve Quality (Slide 1 of 2) Internal failure costs - costs of detecting nonconforming products and services before delivery to customers Scrap Rework to correct defects Reinspection/retesting after completing rework

Costs of Failing to Control & Improve Quality (Slide 2 of 2) External failure costs - costs of detecting nonconforming products and services after delivery to customers Warranty repairs Product liability resulting from product failure Marketing costs to improve tarnished company image Lost sales from customer dissatisfaction

Identifying Quality Problems Managers use several tools to signal quality problems including: Control charts Cause-and effect analysis Pareto charts Signals provided by these tools may be: Warnings - indicate that something is wrong Diagnostic- suggest cause of problem and possible solutions

Control Charts Provide warning signals that something is wrong Help managers distinguish between random or routine variations in quality and variations that should be investigated Show results of statistical process-control measures Deviations beyond some specified level require investigation

Pareto Charts Provide warning signals helping managers prioritize efforts to improve the most out-of-control processes Display the number of problems or defects as bars of varying lengths Identify important problems requiring management action

Cause-and-Effect Analysis Provides diagnostic signals identifying potential causes of defects To use, must first define the effect and then identify causes of the problem Potential causes include: Human factors Methods and design factors Machine-related factors Materials/components factors

JIT and Total Quality Management Just-In-Time philosophy requires high quality standards System must immediately correct problems resulting in defective units JIT helps prevent production problems from going undetected Also requires a smooth production flow without downtime to correct problems

Importance of Time in a Competitive Environment Competitive markets demand shorter new-product development and more rapid response to customers Customer response time falls into two categories: New-product development time Operational measures of time

New-Product Development Time Refers to period between first consideration of a product and delivery to customer Quick new-product development time may provide a competitive advantage Management also wants to know break-even time Time required to recover investment in new-product development

Break-Even Time To determine break-even time, must identify future cash inflows and outflows Overhead costs may be irrelevant if new product changes only the way overhead is allocated without changing cash flows Break-even time begins when project is approved and considers time value of money by discounting cash flows

Operational Measures of Time Indicate speed and reliability firms supply products and services to customers Customer response time - period between moment customer places an order and delivery to customer On-time performance - refers to situations in which firm delivers at scheduled time of delivery

Activity-Based Management to Improve Customer Response Time ABM helps improve customer response time by identifying : Activities that consume the most resources, both in dollars and time Non-value-added activities

Balanced Scorecard Reports an integrated group of financial and nonfinancial performance measures, including the following: Financial Internal business processes Learning and Growth Customer

Total Quality Management Implementation of TQM requires the following changes to a traditional managerial accounting system System should provide info to help solve problems Workers should collect the info themselves, use it to get feedback and solve problems Info should be available quickly Info should be more detailed Firms should base rewards on quality and customer satisfaction measures

Dr. Donald R. Trippeer, CPA Colorado State University-Pueblo If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact: Dr. Donald R. Trippeer, CPA donald.trippeer@colostate-pueblo.edu Colorado State University-Pueblo