1. MANAGING COSTS AND REVENUES-2011 8-1 Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2011

2. MANAGING COSTS AND REVENUES-2011 8-2 Session 8 n Total Quality n Environmental Cost n Allied Case n Bridgewater Case

3. MANAGING COSTS AND REVENUES-2011 8-3 ISO 9000 n International Organization for Standardization n Internationally accepted guidelines for quality management and standards n Cost of quality = 20 - 25 percent of sales

4. MANAGING COSTS AND REVENUES-2011 8-4 Quality and Strategic Cost Management n Quality and profitability are related n Premium on quality leads to larger market share n Premium on quality leads to higher ROI

5. MANAGING COSTS AND REVENUES-2011 8-5 Elements of TQM n Continuous improvement n Customer focus n Employee involvement

6. MANAGING COSTS AND REVENUES-2011 8-6 IMA’s TQM Process n Year One n Quality council and staff n Executive quality training n Quality audits n Gap analysis n Strategic quality improvement plans n Year Two n Employee quality training n Quality teams n Establish measurement system and goals n Year Three n Revise compensation system n Launch external initiatives (value chain) n Review and revise

7. MANAGING COSTS AND REVENUES-2011 8-7 Other Quality Thoughts n Poor quality is disastrous for service industries n Increased quality = increased productivity n Management accountants increase the focus…see page 282/290.

8. MANAGING COSTS AND REVENUES-2011 8-8 Ansari: MMQC n Quality costs: costs incurred to ensure products/services meet customers’ expectations n Features n Performance

9. MANAGING COSTS AND REVENUES-2011 8-9 MMQC n Strategic Implications of Quality Cost System n Supports quality as a strategic adv. n Provides the total cost of quality to a product n Assists in avoiding non-productive time

10. MANAGING COSTS AND REVENUES-2011 8-10 MMQC n Types of quality costs n Prevention n Appraisal n Internal failure n External failure

11. MANAGING COSTS AND REVENUES-2011 8-11 MMQC n Quality Management System n Understand customer requirements n Establish quality goals n Set work processes (P) n Perform work & monitor output (A & I) n Deliver product & monitor cust. satisf.(E) n Perform root cause analysis

12. MANAGING COSTS AND REVENUES-2011 8-12 MMQC n Quality Cost and Customer Satisfaction n Total firm spending n Spending by category n Amount of financial benefits n Focus on customer quality concerns n Elimination of root causes

13. MANAGING COSTS AND REVENUES-2011 8-13 MMQC n Value Index n Develop customer perf. rankings n Estimate quality costs for each element n Compute the value index n Cust. Pref. % / Cost % n Root cause analysis and “fish bones”

14. MANAGING COSTS AND REVENUES-2011 8-14 MMQC n Attribute Implications n Technical n Improved decision relevance n Process understanding n Behavioral n Focus on Customer Requirements n Improved quality attitudes n Better mgt. Visibility…but watch out for “padding” n Cultural n Quality as a way of life n Quality as an ethical value

15. MANAGING COSTS AND REVENUES-2011 8-15 Environmental Activities n Prevention activities n Assessment activities n Control activities n Failure activities

16. MANAGING COSTS AND REVENUES-2011 8-16 Measuring and Reporting Environmental Costs n Traditional systems must be augmented by interviews n Schedule costs into hazardous & non- hazardous categories n Classify the costs by activities n Report and analyze routinely

17. MANAGING COSTS AND REVENUES-2011 8-17 Managing Environmental Costs n Accidents vs. collisions n Product design n Process design n PP&E acquisition n Operational venue n Encourage value chain participation n Routinely integrate MMEC into the decision making process n Checklists n EC Summaries n Post-mortem reviews

18. MANAGING COSTS AND REVENUES-2011 8-18 MMEC--TBC Impact n Technical n Improved decision relevance n Insight contrary to common beliefs n Better process identification n Environmental cost insight n Behavioral n EC visibility: what gets measured; gets done

19. MANAGING COSTS AND REVENUES-2011 8-19 MMEC--TBC, continued n Cultural n See the “Why Care” section n Societal value sharing n Changing environmental mindsets n Compliance and control vs. avoidance n Role of finance as “facilitator”