1. Copyright © Houghton Mifflin Company. All rights reserved.1 Managerial Accounting 2002e Belverd E. Needles, Jr. Susan Crosson - - - - - - - - - - - Multimedia Slides by: Harry Hooper Santa Fe Community College

2. Copyright © Houghton Mifflin Company. All rights reserved.2 Chapter 13 Quality Management and Measurement

3. Copyright © Houghton Mifflin Company. All rights reserved.3 1.Define cost management, describe a management information system, and explain how it enhances the management cycle. 2.Define total quality management and identify and compute the costs of quality for products and services. 3.Use nonfinancial measures of quality to evaluate operating performance. LEARNING OBJECTIVES

4. Copyright © Houghton Mifflin Company. All rights reserved.4 4.Discuss the evolving concept of quality. 5.Identify the awards and organizations that promote quality. LEARNING OBJECTIVES

5. Copyright © Houghton Mifflin Company. All rights reserved.5 Management Information Systems OBJECTIVE 1 Describe a management information system and explain how it enhances the management cycle.

6. Copyright © Houghton Mifflin Company. All rights reserved.6 Management Information Systems A management information system (MIS) is a management reporting system that identifies monitors maintains continuous, detailed analyses of a company’s activities and provides managers with timely measures of operating results.

7. Copyright © Houghton Mifflin Company. All rights reserved.7 Management Information Systems Primary focus of an MIS is on the management of activities (not costs). Nonvalue-adding activities are highlighted. Individual customer profitability is analyzed. Resource usage and each activity cost is identified. Managerial decision making is fostered, leading to continuous improvement.

8. Copyright © Houghton Mifflin Company. All rights reserved.8 Management Information Systems An MIS may consist of separate or linked systems. An MIS may be a fully integrated data-base system: an enterprise resource planning (ERP) system. An ERP system combines the management of all major business functions: purchasing, manufacturing, marketing, sales, logistics, order fulfillment, accounting, human resources, etc. Managerial decision making is fostered, leading to continuous improvement.

9. Copyright © Houghton Mifflin Company. All rights reserved.9 The Management Cycle 1. 1.Planning stage: Managers use the MIS database for formulating strategic plans, making forecasts, and preparing budgets. 2. 2.Executing stage: Managers use the MIS database for implementing decisions about personnel, resources, and activities to minimize waste and improve quality.

10. Copyright © Houghton Mifflin Company. All rights reserved.10 The Management Cycle 3. 3.Reviewing stage: Managers track financial and nonfinancial performance measures for evaluating major business functions.

11. Copyright © Houghton Mifflin Company. All rights reserved.11 The Management Cycle 4. 4.Reporting stage: Managers generate customized reports to evaluate performance and support decision-making.

12. Copyright © Houghton Mifflin Company. All rights reserved.12 The Management Cycle and a Management Information System

13. Copyright © Houghton Mifflin Company. All rights reserved.13 Discussion Q. What are some of the activities included in a cost management system? A. 1. Purchasing 2. Manufacturing 3. Marketing 4. Sales 5. Logistics 6. Order fulfillment 7. Accounting 8. Human resources

14. Copyright © Houghton Mifflin Company. All rights reserved.14 Accounting for Product and Service Quality OBJECTIVE 2 Define total quality management and identify and compute the costs of quality for products and services.

15. Copyright © Houghton Mifflin Company. All rights reserved.15 Total Quality Management Total quality management (TQM) exists when all business functions work together to achieve quality. Quality means satisfying the customer the first time. Costs of quality exist when quality is achieved and when it is not achieved.

16. Copyright © Houghton Mifflin Company. All rights reserved.16 Costs of Quality The costs of conformance include prevention costs and appraisal costs. The costs of nonconformance include internal and external failure costs.

17. Copyright © Houghton Mifflin Company. All rights reserved.17 Financial Measures of Quality Costs of Conformance to Customer Standards Costs of Conformance to Customer Standards Prevention costs Technical support for vendors Quality-certified suppliers Integrated system development Quality circles Quality improvement projects Preventive maintenance Quality training of employees Statistical process control Design review of products and Process Engineering processes Appraisal costs Inspection of materials, processes, Maintenance of test equipment and machines Quality audits of products and End of process sampling and processes testing Vendor audits and sample testing Field testing

18. Copyright © Houghton Mifflin Company. All rights reserved.18 Financial Measures of Quality Costs of Nonconformance to Customer Standards Costs of Nonconformance to Customer Standards Internal failure costs Scrap and rework Failure analysis Reinspection and retesting of reworkInventory control and scheduling Quality-related downtime Downgrading because of defects Scrap disposal losses External failure costs Lost sales Returned goods and replacements Restoration of reputation Investigation of defects Warranty claims and adjustments Product recalls Customer complaint processingProduct-liability settlements Measures of quality Total costs of quality as a percentage of net sales Ratio of costs of conformance to total costs of quality Ratio of costs of nonconformance to total costs of quality Costs of nonconformance as a percentage of net sales

19. Copyright © Houghton Mifflin Company. All rights reserved.19 Financial Measures of Quality Measures of Quality Measures of Quality Total costs of quality as a percentage of net sales Ratio of costs of conformance to total costs of quality Ratio of costs of nonconformance to total costs of quality Costs of nonconformance as a percentage of new sales

20. Copyright © Houghton Mifflin Company. All rights reserved.20 Discussion Q. What are the four cost categories in total quality management? A. 1. Prevention costs. 2. Appraisal costs. 3. Internal failure costs. 4. External failure costs.

21. Copyright © Houghton Mifflin Company. All rights reserved.21 Nonfinancial Measures of Quality OBJECTIVE 3 Use nonfinancial measures of quality to evaluate operating performance.

22. Copyright © Houghton Mifflin Company. All rights reserved.22 Nonfinancial Measures of Quality A business should establish a system to detect poor quality early. Nonfinancial measures help determine the degree of quality achieved. A commitment to ongoing improvement enhances quality and ultimately maximizes the financial return from operations.

23. Copyright © Houghton Mifflin Company. All rights reserved.23 Nonfinancial Measures Nonfinancial measures of quality include: Measures of product design quality. Measures of vendor performance. Measures of production performance. Measures of delivery cycle time. Measures of customer satisfaction.

24. Copyright © Houghton Mifflin Company. All rights reserved.24 Measures of Product Design Quality Computer-aided design (CAD) helps detect product design flaws.

25. Copyright © Houghton Mifflin Company. All rights reserved.25 Measures of Vendor Performance Companies analyze vendors to determine which are most reliable, furnish high-quality goods, deliver on time, and charge competitive prices.

26. Copyright © Houghton Mifflin Company. All rights reserved.26 Companies adopt computer- integrated manufacturing (CIM) systems to evaluate performance of production equipment and to evaluate performance of maintenance personnel. Measures of Production Performance

27. Copyright © Houghton Mifflin Company. All rights reserved.27 Delivery cycle time (time between accepting an order and final delivery of the product or service) consists of: Purchase order lead time (time to order and receive materials). Production cycle time (time to make the product). Delivery time (time between completion of product and its receipt by the customer). Measures of Delivery Cycle Time

28. Copyright © Houghton Mifflin Company. All rights reserved.28 Customer follow-up helps evaluate customer satisfaction. Companies may develop their own customer satisfaction indexes. Measures of Customer Satisfaction

29. Copyright © Houghton Mifflin Company. All rights reserved.29 Nonfinancial Measures of Quality Measures of Product Design Quality Measures of Product Design Quality Product design flawsNumber and types of design defects detected Average time between defect detection and correction Number of unresolved design defects at time of product introduction

30. Copyright © Houghton Mifflin Company. All rights reserved.30 Nonfinancial Measures of Quality Measures of Vendor Performance Vendor qualityDefect-free materials as a percentage of total materials received; prepared for each vendor Vendor deliveryTimely deliveries of materials as a percentage of total deliveries; prepared for each vendor

31. Copyright © Houghton Mifflin Company. All rights reserved.31 Nonfinancial Measures of Quality Measures of Production Performance Production quality Parts scrapped Equipment utilization rate Machine downtime Machine maintenance time Number of defective products per million produced Number and type of materials spoiled during production Productive machine time as a percentage of total time available for production Amount of time each machine is idle Amount of time each machine is idle for maintenance and upgrades

32. Copyright © Houghton Mifflin Company. All rights reserved.32 Nonfinancial Measures of Quality Measures of Delivery Cycle Time On-time deliveriesShipments received by promised date as a percentage of total shipments Orders filledOrders filled as a percentage of total orders received Average process timeAverage time required by production to make a product available for shipment Average setup timeAverage amount of time elapsed between the acceptance of an order and the beginning of production Purchase order lead timeTime it takes for materials to be ordered and received so that production can begin Production cycle timeTime it takes to make a product available for shipment Delivery timeTime between the completion of a product and its receipt by the customer Delivery cycle timeTime between the acceptance of an order and the final delivery of the product or service (purchase order lead time + production cycle time + delivery time) Waste timeProduction cycle time – average process time – average setup time Production backlogNumber and type of units waiting to begin processing

33. Copyright © Houghton Mifflin Company. All rights reserved.33 Nonfinancial Measures of Quality Measures of Customer Satisfaction Customer complaintsNumber and types of customer complaints Warranty claimsNumber and causes of claims Returned ordersShipments returned as a percentage of total shipments

34. Copyright © Houghton Mifflin Company. All rights reserved.34 Many of the quality cost categories and nonfinancial measures can be applied to service organizations. Flaws in service design lead to poor-quality services. Poor service development leads to internal and external failure costs. Measuring Service Quality

35. Copyright © Houghton Mifflin Company. All rights reserved.35 Discussion Q. What five areas of nonfinancial measures can help determine the degree of quality achieved? A. 1. Product design quality. 2. Vendor performance. 3. Production performance. 4. Delivery cycle time. 5. Customer satisfaction.

36. Copyright © Houghton Mifflin Company. All rights reserved.36 The Evolving Concept of Quality OBJECTIVE 4 Discuss the evolving concept of quality.

37. Copyright © Houghton Mifflin Company. All rights reserved.37 In the past, the benefits of quality were weighed against the costs of improving quality. A “return on quality” was required. In the 1980s, Deming and others promoted Total Quality Management (TQM). Companies came to believe that quality gave companies a competitive edge. Quality control methods were implemented to eliminate defects in product design and manufacture. The Evolving Concept of Quality

38. Copyright © Houghton Mifflin Company. All rights reserved.38 Companies expanded quality management to include nonmanufacturing processes. Benchmarking compares the quality of a process with a parallel process at the best- in-class company (from any industry). Process mapping diagrams process inputs, outputs, constraints, and flows to identify unnecessary efforts and inefficiencies. Service businesses also seek to maximize customer satisfaction. The Evolving Concept of Quality

39. Copyright © Houghton Mifflin Company. All rights reserved.39 The concept of quality evolves to fulfill customer needs and expectations as the business environment changes. Quality dimensions include freedom from defects, dependability, prestige, good taste, customer expectations, innovation. The goal is customer satisfaction and customer retention. The Evolving Concept of Quality

40. Copyright © Houghton Mifflin Company. All rights reserved.40 Full Cost Profit Margin OBJECTIVE 5 Identify the awards and organizations that promote quality.

41. Copyright © Houghton Mifflin Company. All rights reserved.41 Awards to recognize and promote the importance of quality include: The Deming Application Prize—awarded by the Japanese Union of Scientists and Engineers. The Malcolm Baldrige Quality Award— awarded to U.S. organizations for achievements in quality and business performance excellence. The International Standards Organization (ISO) has developed ISO 9000, setting quality management and quality assurance standards. Recognition of Quality

42. Copyright © Houghton Mifflin Company. All rights reserved.42 1. 1.Describe a management information system, and explain how it enhances the cycle. 2. 2.Define total quality management and identify and compute the costs of quality for products and services. 3. 3.Use nonfinancial measures of quality to evaluate operating performance. OK, Let’s Review

43. Copyright © Houghton Mifflin Company. All rights reserved.43 4. 4.Discuss the evolving concept of quality. 5. 5.Identify the awards and organizations that promote quality. And Finally...