1. CHAPTER 20
USING ACCOUNTING FOR
QUALITY AND COST
MANAGEMENT
1st
1st

2. Quality and the New Production Environment
Objective – To stay competitive through:
Improving customer service and product quality
Reducing costs

3. Improving Quality How much will it cost to improve quality?
What can we do to improve quality?

4. Cost of Quality Texas Instruments Approach
Prevention costs
Inspection of materials upon delivery
Inspection of production process
Equipment inspection
Employee training
Appraisal costs
Finished goods inspection
Field testing of products .

5. Cost of Quality Texas Instruments Approach
Internal failure costs are due to defects discovered before delivery to customers.
Scrap materials
Rework
Reinspection
Lost sales resulting from late deliveries
Cost Report

6. Cost of Quality Texas Instruments Approach
External failure costs are due to defects discovered after delivery to customers.
Warranty repairs
Product liability
Marketing costs to improve product image
Lost sales due to poor product quality

7. Cost of Quality Texas Instruments Approach
Cost of prevention and appraisal
Internal and external failure costs
Objective
Zero defects while minimizing all four quality cost categories

8. Improving Quality Total Quality Management (TQM)
Managing an organization so that it excels in areas important to the customer
Organization strives for excellence
Quality is defined by the customer

9. Is Quality Worth the Investment?
Two Views
Cost vs. Benefit
Quality is free
Costs of quality programs are easily measured, but benefits of increased customer satisfaction are difficult to measure.
The long-run benefits of increased customer satisfaction far outweigh the costs of improving quality.

10. The Quality Is Free Concept
Quality products and services
Increased business and profits
Greater customer satisfaction

11. Methods to Identify Quality Problems
Control charts
Pareto diagrams
Cause and effect analysis

12. Quality & Customer Satisfaction Measures
746
Performance measure
Quality control
Number of customer complaints and defects
Delivery performance
Percentage of on-time deliveries
Materials waste
Scrap and waste as a percentage of materials used
Machine Downtime
Percentage of time machines are not working
Objective
Customer satisfaction and high quality products
Increase on-time deliveries
Decrease scrap and waste; improve product quality
Increase efficiency; increase on-time deliveries

13. Additional Quality Concepts
Motivation
Employees respond favorably to quality initiatives
Strategic advantages
Favorable reputation among competitors
Benchmarking
Continuous process of measuring performance against best of similar organizations

14. Just-In-Time (JIT) Inventory
Products are completed just in time for shipment to customers
Raw materials are received just in time for production

15. Just-In-Time (JIT) Inventory
In conventional system, materials are “pushed” through assembly process.
In JIT system, materials are “pulled” through assembly process by customers’ needs.

16. Just-In-Time (JIT) Inventory
Receive customer orders
Complete products just in time to ship to customers
Schedule production
Receive materials just in time for production
Complete parts just in time for assembly into products

17. Relationship Between JIT and Total Quality Management
Less warehouse space needed
Reduced inventory carrying costs
Reduced risk of obsolete inventory

18. Relationship Between JIT and Total Quality Management
Less warehouse space needed
Higher quality products
Reduced inventory carrying costs
More rapid response to customer orders
Greater customer satisfaction
Reduced risk of obsolete inventory

19. Relationship Between JIT and Total Quality Management
Unhappy customer
Late delivery
Quality must be stressed from the very beginning for JIT to be successful.
Raw materials
JIT factory is idle, waiting on quality raw materials
Poor quality items returned

20. Impact of Just-in-Time on Accounting Procedures
JIT goal is to minimize inventories:
Raw Materials
Work in Process
Finished Goods
Production costs are assigned directly to cost of goods sold.

21. Impact of Just-in-Time on Accounting Procedures
Any end-of-period inventory is recorded in a procedure known as backflush costing.
Cost of Goods Sold
Inventory

22. Impact of Just-in-Time on Accounting Procedures
JIT accounting entries

23. Impact of Just-in-Time on Accounting Procedures
Backflush entry if inventory remains unsold or in process

24. ROLL ‘EM ! Put on your hard hat and click the reels.
Video #1
(Approx. 8 min.)
Video #2
(Approx. 3 min.)
Put on your hard hat and click the reels.
Hey! You’re just in time for the movies.

25. Let’s change the subject!

26. Activity-Based Costing (ABC)
A costing method that first assigns indirect costs to activities, then to products based on their consumption of the activities.
Products
Consume
Activities
Activities
Consume
Resources
People
Manage
Activities

27. Activity-Based Costing Benefits
More detailed measures of costs
More accurate product costs for...
Pricing decisions
Product elimination decisions
Better information for use in managing activities that cause costs
Benefits should always be compared to costs of implementation

28. Methods Used for Activity-Based Costing
Activity-based costing involves these steps:
Identify the activities that consume resources, and assign costs to those activities.
Identify the cost driver(s) associated with each activity.
A cost driver is a factor
that causes, or “drives,” an
activity’s cost.

29. Methods Used for Activity-Based Costing
Activity-based costing involves these steps:
Identify the activities that consume resources, and assign costs to those activities.
Identify the cost driver(s) associated with each activity.
Compute a cost rate per cost driver unit or transaction.
Assign costs to products as follows:
Cost driver rate × Cost driver units consumed

30. Activity-Based Costing Identifying Cost Drivers
Cost drivers are related to volume or complexity of production.
Examples: machine time, machine setups, purchase orders, production orders
Cost driver factors (in order of preference):
Causal relationship
Benefits received
Reasonableness

31. Activity-Based Costing Cost Rate Per Cost Driver Unit
For a period of time, estimate total . . .
indirect costs for the activity
cost driver units of activity
Predetermined
indirect cost rate
Estimated indirect costs
Estimated cost driver
units of activity =
This formula applies to any indirect cost. (e.g., manufacturing overhead, administrative, distribution, marketing, etc.

32. Activity-Based Costing Cost Rate Per Cost Driver Unit
For a period of time, estimate total . . .
indirect costs for the activity
cost driver units of activity
Predetermined
indirect cost rate
Estimated indirect costs
Estimated cost driver
units of activity =
Note that this concept is identical to that used to calculate the predetermined
overhead rate in Chapter 18.

33. Activity-Based Costing Example
At this point, we need to look at an example to illustrate the concepts. .

34. Activity-Based Costing Example
Ritz Company manufactures a product in regular and deluxe models. Overhead is assigned on the basis of direct labor hours. Estimated overhead for the current year is $2,000,000. Other information:
First, determine the unit cost of each model using traditional costing methods.

35. Activity-Based Costing Example (Overhead Allocation)

36. Activity-Based Costing Example (Overhead Allocation)

37. Activity-Based Costing Example

38. Activity-Based Costing Example

39. Activity-Based Costing Example
Ritz Company plans to adopt activity-based costing. Using the following activity center data, determine the unit cost of the two products if activity-based costing is implemented. A B C

40. Activity-Based Costing Example

41. Activity-Based Costing Example
Original budgeted overhead total for the period

42. Activity-Based Costing Example
= = = = A B C

43. Activity-Based Costing Example

44. Activity-Based Costing Example

45. Activity-Based Costing Example

46. Activity-Based Costing Example

47. Activity-Based Costing Example

48. Activity-Based Costing Example

49. Activity-Based Costing Example
These amounts did not
change as a result of
using ABC.

50. Activity-Based Costing Example
Comparison
Remember, we originally used a plant-wide rate, based on direct labor hours, to allocate overhead. A B C

51. Activity-Based Costing Example
Comparison
Many companies have found that low-volume, specialized products have greater costs than previously realized.

52. Activity-Based Costing Example
Comparison
Can you see how different allocation
methods might lead management to make different decisions?

53. Activity-Based Costing Final Observations
As companies become more automated...
Overhead tends to become a larger portion of product cost.
Direct labor becomes a smaller portion of product cost and consequently a less reliable cost driver.
Direct Material
Product Cost
Dollar Amount
Mfg. OH
Direct Labor

54. Activity-Based Costing Final Observations
ABC is likely to result in cost reductions.
Focus is on activity analysis.
Cost reduction usually requires a change in activities.
Costs

55. Activity-Based Costing Final Observations
ABC is likely to result in cost reductions.
Focus is on activity analysis.
Cost reduction usually requires a change in activities.
Activity-based costing concepts and methods are also applicable to marketing and administrative activities.

56. Activity-Based Costing Final Observations
ABC is likely to result in cost reductions.
Focus is on activity analysis.
Cost reduction usually requires a change in activities.
Activity-based costing concepts and methods are also applicable to marketing and administrative activities.
Accountants implementing activity-based costing may experience opposition to change.

57. We finished just in time!
THE END
We finished just in time!