Republic of the Philippines

BATANGAS STATE UNIVERSITY

ACC 206- STRATEGIC COST MANAGEMENT

ORGANIZATIONAL INNOVATIONS: TOTAL QUALITY MANAGEMENT;

JUST IN TIME PRODUCTION SYSTEM

LECTURE /FOCUS NOTES

Name: _________________________________________________ SR Code:__________________

Course/Year: __________________________________________ Date_____________________

LEARNING OBJECTIVES

 Describe the ultimate test of a quality product or service

 Explain the core principles of Total Quality Management

 Understand TQM Implementation Guidelines

 Explain the broad groups of costs of quality, namely; Prevention costs, Appraisal Cost, Internal Fail-
ure Cost and External Failure Cost.

 Explain the users, limitations and reporting of quality cost information

 Describe the nonfinancial measures of quality and customer satisfaction and how they are reported
 Explain the concept of JUST-IN-TIME production system
 Enumerate and describe the key features and benefits of JIT system
 Describe the performance measures and control in JIT production system

INTRODU CTION

TOTAL QUALITY MANAGEMENT

The ultimate test of a quality product or service is whether the product or service
meets or exceeds customer’s expectations. The requirement to meet or exceed customer’s
expectations then serves as specifications for operations throughout the organization. Each individual,
department or subdivision throughout an organization needs to strive for conformity to specifications
that meet and improve upon customer satisfaction.

Core Principles of TQM

As aptly described by Procter and Gamble, "Total quality (management) is the unyielding and
continually improving effort by everyone in an organization to understand, meet and exceed
the expectation of customers.’’ This description of TQM points out that the core principles of TQM
are processes that:
 Focus on satisfying the customer

 Strive for continuous improvement

 Involve fully the entire work force

 Support and involve top management actively

 Use clear and measurable objective

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  Recognize quality achievements in a timely manner

 Provide training on TQM continuously

Focus on the Customer

---TQM begins by identifying the firm's customers, external and internal; determining their needs,
requirements, and expectations: and then doing whatever it takes to satisfy them. .
 External customers are the ultimate recipients of the firm's products or services.

 Internal customers are individuals or subunits within the firm involved in manufacturing the
product or providing the services.

Strive for Continuous Improvement (Kaizen)

Quality is a moving target. Without continuous improvement, quality disappears. Firms need to
continuously update specifications for both internal customers/suppliers and external suppliers to
better serve external customers.

Full Involvement of the Entire Workforce

The requirement of the firm's external customers can only be met if each of the internal
customers/suppliers in the process satisfies the requirements of the downstream process or customer.
Any breakdown in the process no matter how insignificant can lead to a defective product or service
and unsatisfied customers. Top management must encourage everyone in the firm, from the lowest
level employees to be actively involved and to participate in the firm's efforts to continuously improve
quality. Employee involvement can range from simple information sharing, dialogue, or group problem
solving, all the way to total self-direction. One proven effective approach for employee involvement is
quality (control) circles or quality circles (QCs for short).

A quality circle is a small group of employees from the same work area that meets regularly to
identify and solve work related problems and to implement and monitor solutions to the problems.

Active Support and Involvement of Top Management

Most companies have found that successful implementation of TQM requires unwavering and
active leadership from the CEO and senior managers. However, the CEO or top management alone
cannot bring forth all the desired benefits of TQM. Only with support from all managers in the top
echelon can TQM attain the most desirable results. Also, they need to demonstrate their dedication to
total quality to employees at every level.

Use Clear and Measurable Objectives

Progress can easily be seen if objectives are clear. Measurable objectives forge efforts toward
the common goal. To ensure success off total quality management, a firm must set unambiguous and
measurable objectives. Effective measurement can help to ensure and facilitate quality improvements
and supporting systems.

Timely Recognition of Quality Achievement

Quality achievement of people and subunits when recognized timely is the best way to
emphasize the firm's continuous struggle for better quality and to ensure efforts toward total quality at
every level.
Efforts and progress will most likely be short-lived if the firm makes no change to its compensation/
appraisal / recognition system.

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Continuing Education and Training

Employee training programs serve as a communication link to convey management

commitment to total quality and provide employees with necessary skills to achieve total quality.
Mandatory continuing education and training of employees at all levels is necessary to achieve the
culture change and continuous focus required in a TQM environment.

TQM Implementation Guidelines

A firm cannot implement a successful TQM program overnight. It usually takes any
organization serious about achieving TQM several years of concerted and dedicated efforts by all its
members to become a world-class quality firm.
The implementation of TQM is not an easy task and is indeed time consuming. The Institute of
Management Accountants believes that a typical organization takes three to five years to make from
traditional management to TQM. Although some specific projects can quickly yield high returns, a firm
will most likely not see many tangible benefits in the early years of implementation

Year One - Preparation and Planning

• Create quality council and staff
• Conduct executive-quality training programs
• Conduct quality audits
• Gap analysis (determine the gap between the best in class and the firm's current practice)
• Develop strategy on quality improvement

Year Two -Training and Implementation

• Conduct employee communication and training program
• Establish quality teams
• Create a measurement system and set goals

Year Three - Assessment, Review & Revise

• Revise compensation/appraisal/ recognition systems
• Launch external initiative with suppliers
• Review and revise

Types of Conformance

1. Goalpost Conformance (zero-defects conformance)

This is conformance to a quality specification expressed as a specified range around the target. The
target is the ideal or desired outcome of the operations. This is also called zero-defects conformance
with the specified range allowed for variations. Management expects all outputs to be within the
specified range of variations.

2. Absolute quality conformance (robust quality approach)

This is conformance which requires that all products or services to meet the target value exactly with
no. variation. Any variation from the target values is less than ideal and can have economic
consequences. Robustness in quality comes with meeting the exact target consistently. Any deviation
from the target is a quality failure and weakness in the overall quality of the product or service.
Generally, for firms desiring to attain long-term profitability and customer satisfaction, considered a
better approach that zero-defects conformance.

Costs of Quality

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Three factors underlie the quality of a product or service. These factors are grade, quality of design,
and quality performance. The bulk of all quality costs are associated with quality of conformance
and these costs can be broken down into four broad groups.

1. Prevention Costs

These are costs incurred to avoid poor-quality goods or services or reduce the number of defects in
products or services. These include
 Systems development

 Quality engineering

 Quality training

 Quality improvement projects

 Quality circles

 Technical support provided to suppliers

 Statistical process control activities

 Supervision of prevention activities

 Audits of the effectiveness of the quality system

2. Appraisal Costs

These costs, also called inspection costs, are incurred to identify products before the products are
shipped to customers. These include
 Test and inspection of incoming materials

 Supervision of testing and inspection activities

 Test and inspection of in-process goods

 Depreciation of test equipment

 Finished product testing and inspection

 Maintenance of test equipment

 Supplies used in testing and inspection

 Plant utilities in the inspection area

 Field testing and appraisal at customer site

3. Internal Failure Costs

These are costs that result from identification of defects during the appraisal process. Examples are

 Net cost of scrap

 Disposal of defective products

 Net cost of spoilage

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  Analysis of the cause of defects in production

 Rework labor and overhead

 Re inspection of reworked products

 Re-entering data because of keying errors

 Retesting of reworked products

 Downtime caused by quality problems

 Debugging of software errors

4. External Failure Costs

These are incurred when poor-quality goods or services are detected after delivery to customers. They
include
 Cost of field servicing and handling complaints

 Liability arising from defective products

 Warranty repairs and replacements

 Returns and allowances arising from quality problems

 Repairs and replacements beyond the warranty period

 Product Recalls

 Lost sales arising from a reputation for poor quality

Prevention and appraisal costs are costs of conformance because they are incurred to ensure that
products and services meet customers’ expectations.

Internal failure and external failure costs are costs of nonconformance because they are costs
incurred and opportunity costs because of rejection of products or services.
The cost of quality is the sum of conformance and nonconformance costs.

Uses of Quality Cost Information

The quality cost information is used by managers in several ways. These are
1. Quality cost information provides a basis for establishing budgets for quality costs as manage-
ment looks for ways to reduce the total cost involved.

2. Quality cost information helps managers see the financial significance of quality.

3. Quality cost information helps managers identify the relative importance of the quality prob-
lems faced by the firm.

4. Quality cost information helps managers see whether their quality costs are poorly distributed
and when needed, it helps them distribute the costs better.

Limitations of Quality Cost Information

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 1. Some important quality costs are typically omitted from the quality cost report. Examples are
opportunity cost of lost sales, cost of top management time in designing and administering the
quality program.

2. Simply measuring and reporting quality costs does not solve quality programs. Only manage-
ment action can solve them.

3. A log may exist between when quality improvement programs are put into effect and when the
results are seen.

Reporting Quality Costs

The purpose of reporting quality costs is to make management aware of the magnitude of quality costs
and to provide a baseline against which the impact of quality improvement activities could be
measured. Tasks for reporting quality costs include data definitions, identification of data sources,
data collection, and preparation and distribution of quality cost reports.

Illustration of a Cost of Quality Report

Figure 6-1 illustrates a cost of quality report. Bean Company is a small Metro Manila manufacturing
company with annual sales of around P9 million. The firm operates in a highly competitive
environment and has been experiencing increasing pressures to raise quality and lower cost from new
and existing competitors. The
report shows that the external failure costs for such items as warranty claims, customer
dissatisfaction, and market share loss accounted for 75 percent of the total cost of quality in year 0
(P1,770,000 /P2,360,000 or 22.13%/29.5%).
To be more competitive and to increase market shares, Bean began a corporate wide three-year TQM
process. The firm started with substantial increases in prevention and appraisal expenditures. The
investment started to pay off in year 2. The internal failure, external failure, and total quality costs
have all decreased.

Figure 6-1 Cost of Quality Report for Bean Company

Prevention Costs Year 2 Percent of Year 0 Percent of Percent
Total Sales Total Sales Change
Prevention Costs

Training P 90,000 20,000 350

Quality Planning 86,000 20,000 330
Other Quality 60,000 30,000 50
Improvement
Supplier Evaluation 40,000 40,000 33
Total P 276,000 3.07% 110,000 1.38 151
Appraisal Costs
Testing P 120,000 100,000 20
Quality Performance 100,000 80,000 25
Measurement
Supplier Monitoring 60,000 10,000 500
Customer Service 30,000 10,000 200
Total P 310,000 3.44% 200,000 2.5 55

Internal Failure Costs

Rework and reject 55,000 150,000 (63)
Reinspection and 35,000 30,000 16
testing
Equipment failure 30,000 50,000 (40)
Downtime 20,000 50,000 (60)
Total 140,000 1.56% 280,000 3.5 (50)

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 External Failure Costs
Product Liability 70,000 250,000 (72)
insurance
Warranty Repairs 100,000 120,000 (17)
Customers losses 600,000 1,400,000 (57)
(estimated)
Total 770,000 8.58% 1,770,000 22.13 (56)

Total Quality Costs 1,496,000 16.62% 2,360,000 29.50% (37)

Total Sales 9,000,000 100% 8,000,000 100%

Nonfinancial Measures of Quality and Customer Satisfaction

Nonfinancial measures indicate the future needs and preferences of customers, as well as specific
areas that need improvement. In this sense, nonfinancial measures of quality are leading indicators of
future long-run performance, unlike financial measures of quality that focus on the short run.
Management accountants usually maintain and present these nonfinancial measures.

Nonfinancial Measures of Customer Satisfaction

To evaluate how well they are doing, companies measure customer satisfaction over time. Some
measures are:
1. On-time delivery rate (the percentage of shipments made on or before the scheduled delivery
date)

2. Delivery delays (the difference between the scheduled delivery date and the date requested by
the customer)

3. Percentage of products that fail soon or often

4. Number of customer complaints (Companies estimate that for every customer who actually
complains, there are 10 to 20 others who have had bad experiences with the product or service
but did not complain.

5. Number of defective units shipped to customers as a percentage of total units shipped

6. Market research information on customer preferences and customer satisfaction with specific
product features.

Nonfinancial Measures of Internal Performance

To satisfy their customers, managers must constantly improve the quality of work done inside their
company. Most companies use nonfinancial measures of internal quality to supplement financial
measures, such as prevention, appraisal, and internal failure costs. Examples of trends to gauge
quality are:

1. Number of defects for each product line

2. .Employee turnover (ratio of number of employees who leave the company to the average total
number of employees)

3. Process yield (ratio of good output to total output)

Time as a Competitive Tool

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Many companies consider "time" as a driver of strategy. They need to measure time to manage it
property. Two common operational measures of time are customer-response time and on-time
performance
Managing customer-response time and on-time performance requires understanding the causes and
costs of delays. Delays can occur, for example, at a machine in manufacturing or at a check-out
counter in a store.

Customer-Response Time
Customer-response time is the duration from the time a customer places an order for a product or
service to the time the product or service is delivered to the customer. Fast responses to customers are
of strategic importance in industries such as construction, banking, car rental, and fast food.

Figure 6-2 describes the components of Costumer- Response Time

 Manufacturing lead time (also called manufacturing cycle time) is the duration between the
time and order is received by Manufacturing to the time it becomes a finished good. Manufac-
turing lead time is the sum of waiting time and manufacturing time for and order.

 Delivery time is how long it takes to deliver a complicated order to the customer.

Figure 6-2
COMPONENTS OF CUSTOMER RESPONSE

Customer Order Received by Order is Set up Order Order

places order manufacturing manufactured delivered to
for product product becomes customer
finished good

Waiting Manufacturing
Time Time

Receipt Manufacturing Delivery

Time Lead time Time

Customer Response Time

On-Time Performance

On-time performance refers to situations in which the product or service is actually delivered
by the time it was scheduled to be delivered. On-time performance increases customer satisfaction,
Commercial airlines gain loyal passengers as a result of consistent on-time service. But there is a
trade-off between customer-response time and on-time performance. Deliberately scheduling longer
customer response times, such as airlines lengthening scheduled arrival times, makes achieving on-
time performance easier- but it could displease customers!

Illustrative Problem 6-1 Measurement of Quality Service

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 The Sterling Moving Corporation transports household goods from one city to another within
the Luzon Area. It measures quality of service in terms of (a) time required to transport goods, (b) on-
time delivery (within two days of agreed-upon delivery date), and (c) number of lost or damaged
shipments. Sterling considering investing in a new scheduling and tracking system costing P l60,000
per year, which should help it improve performance with respect to items (b) and (c). The following
information describes Sterling's current performance and the performance if the new system is
implemented:

Current Performance Expected Future

Performance
On-time delivery performance 85 % 95 %
Variable cost per carton lost or damage P 60 P 60

Fixed cost per cartons lost or damaged P 40 P 40

Number of cartoons lost or damaged per year 3,000 cartons 1,000 cartons

Sterling expects each percentage point increase on-time performance will result in revenue increases
of P20,000 per year. Sterling’s contribution margin percentage is 45%.

REQUIRED
 Should sterling acquire new system? Show your calculations.

 Calculate the minimum amount of revenue increase needed for the benefits from the new sys-
tem to equal the cost.

Solutions
- Additional costs of the new scheduling and tracking system are P160,000 per year. Additional
annual benefits of the new scheduling and tracking system are

Additional annual revenue from a 10%

improvement in on-time performance , 200,000
from 85% to 95%, P20,000 per 1% x 10
percentage points

45% contribution margin from additional 90,000

Annual revenues (0.45 x P200,000)

Decrease in cost per year from fewer 120,000

cartons lost or damaged (only variable cost
are relevant)
[P60 per carton x(3,000-1000)cartons]

Total additional benefits

P 210,000

Because the expected benefits of P210,000 exceed the cost of P160,000. Sterling should invest in the
new system.

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 - As long as sterling earns contribution margin of P40, 000 (to cover incremental cost of P
160,000 minus relevant variable cost savings of P 120,000) from annual sales, investing in the
new system is beneficial. This contribution margin corresponds to additional sales of
P40,000 /0.45= P88,899.

JUST-IN-TIME PRODUCTION SYSTEM

Just-in-time (JIT) production, also called lean production, is a demand-pull manufacturing system
because each component in a production line is produced as soon as and only when needed by the
next step in the production line. In a JIT production line, manufacturing activity at any particular
workstation is prompted by the need for that workstation's output at the following workstation.
Demand triggers each step of the production process, starting with customer demand for a finished
product at the end of the process and working all the way back to the demand for direct materials at
the beginning of the process. In this way, demand pulls an order through the production line. The
demand-pull feature of JIT production systems achieves close coordination among workstations. It
smoothens the flow of goods, despite low quantities of inventory. JIT production systems aim to
simultaneously (1) meet customer demand in a timely way, (2) with high-quality products and (3) at
the lowest possible total cost.

The key features of a JIT production system are

1. Maintaining a limited number of supplies

2. Improving plant layout

3. Reducing Setup Time

4. Improving Production Scheduling

5. Targeting Zero Defects

6. Maintaining Flexible Workforce

Financial Benefits of JIT

1. Greater transparency of production process

2. Heightened emphasis on eliminating the specific causes of rework, scraps and waste

3. Lower manufacturing lead times

Illustrative Problem 6-2 Implementing a JIT Production System

Nelson Corporation, a manufacturer of copper fittings is considering implementing a JIT production

system. The following data are gathered. To implement JIT production:
(a) P100, 000 annual tooling costs to reduce setup times must be incurred.
(b) Average inventory will be reduced by P500, 000.
(c) Relevant costs of insurance, storage, materials handling, and setup will decline by P30, 000 per
year.

(d) Required rate of return on inventory investments is 10% per year.

(e) Quality will be improved and rework will be reduced on 500 units per year, resulting in savings of
P50 per unit.

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(f) Better quality and faster delivery will enable the company to charge P2 more per unit on the 20,000
unit’s sells each year.

REQUIRED:

Should Nelson implement the JIT production system?

Total annual relevant benefits and cost savings
Carrying costs [(10%x P500,000)+ 30,000] P 80, 000
Rework savings (500x P50) 25, 000

P 105, 000

Incremental contribution margin (20,000 x P2) 40, 000

Total benefits P 145, 000

Less: Additional annual tooling costs 100, 000

Net benefit P 45, 000

Answer:

On the basis of the information provided, the following computations may be made:

Since the total annual benefits and cost savings exceed the annual JIT implementation costs by P45,
000, Nelson should implement a JIT production System. Furthermore, better quality of the product
and faster delivery would surely result to more customer satisfaction which will provide long-term
benefits to the company.

Performance Measures and Control in JIT Production

The following list describes measures that managers use to evaluate and control JIT production and
how these measures are expected to be affected:

1. Financial performance measures such as inventory turnover ratio which is expected to increase.

2. Nonfinancial performance measures of time, inventory and quality, such as

• Manufacturing lead time  expected to decrease

• Units produced per hour  expected to increase

• Number of days of inventory on hand  expected to decrease

• Total setup time for machines  expected to decrease

Total manufacturing time

• Number of units requiring rework or scrap  expected to decrease

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 Total number of units started and completed

JIT Effects on Costing System

JIT systems reduce overhead costs through the reduction of materials handling warehousing und
inspection costs. It also facilitates direct tracing of some costs usually classified as indirect. For
instance, the use of manufacturing cells makes it cost effective to trace materials handling and
machine operating costs to specific products or product families made in these cells. These costs then
become direct costs of those products.
Exercises

Exercise 1 (Quality Cost Classification)

Classify these following items into types of cost of quality:

a) Warranty repairs
b) Scrap
c) Allowance granted due to blemish
d) Contribution margins of lost sales
e) Tuition for quality courses
f) Raw materials inspections
g) Work-in-process inspection
h) Shipping cost for replacements
i) Recalls
j) Attorney's fee for unsuccessful defense of complaints about quality
k) lnspection of reworks
l) Overtime caused by reworking
m) Machine maintenance
n) Tuning of testing equipment

Exercise 2 (Cost Quality Report)

The Bali Company manufactures custom-designed milling machines and incurred the following cost of
quality in 20X3 and 20X4:

20X4 20X3
Rework P200,000 P250,000
Quality manual 40,000 50,000
Product design 300,000 270,000
Testing 80,000 60,000
Retesting 50,000 90,000
Product recalls 360,000 500,000
Field service 230,000 350,000
Disposal of defective units 90,000 85, 000

The total sales in each of the two years were P6, 000,000. The firm's cost of goods sold is typically
one-third of the net sales.

Required:
1. Prepare a cost-of-quality report that classifies the firm’s costs under the proper cost-of-quality
category.
2. Calculate the ratio of each cost-of-quality category to sales in each of the two years. Comment
on the trends in cost of quality between 20X3 and 20X4.
3. Give three examples of nonfinancial measures that Bali might want to monitor as part of a total
quality management effort.

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Exercise 3 (Cost of Quality Category)

The management of Boogie Company thinks that its total costs of quality can be reduced by increasing
expenditures in certain key costs of quality categories. The following costs of quality have been
identified by management:
Cost of Quality Costs
Rework P 6,000
Recalls 15,000
Reengineering efforts 9,000

Repair 12,000
Replacements 12,000
Retesting 5,000
Supervision 18,000
Scrap 9,000
Training 15,000
Testing of incoming materials 7,000
Inspection of work in process 18,000
Downtime 10,000
Product liability insurance 9,000
Quality audits 5,000
Continuous improvement 1,000
Warranty repair s 15,000

Required:
1. Classify these costs into the four costs of quality categories.
2. Determine the total pesos being spent on each of the categories.
3. Based on the company's expenditures by cost of quality categories, on which cost category should
the company concentrate its efforts to decrease its overall costs of quality?

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Exercise 4 (Cost of Quality Analysis, Non Financial Quality Measures)
The Gabriel Corporation manufactures and sells industrial grinders. The following table presents
financial information pertaining to quality in 20X3 and 20X4 (in thousands):
20X4 20X3
Revenues P12,500 P10,000
Line inspection 85 110
Scrap 200 250
Design engineering 240 100
Cost of returned goods 145 60
Product-testing equipment 50 50
Customer support 30 40
Rework costs 135 160
Preventive equipment maintenance 90 35
Product liability claims 100 200
Incoming materials inspection 40 20
Breakdown maintenance 40 90
Product-testing labor 75 220
Training 120 45
Warranty repair 200 300
Supplier evaluation 50 20

Required
1. Classify the cost items in the table into prevention, appraisal, internal failure, or external failure
categories.
2. Calculate the ratio of each COQ category to revenues in 20X3 and 20X4.
Comment on the trends in costs of quality between 20X3 and 20X4.
4. Give two examples of nonfinancial quality measures that Gabriel Corporation could monitor as
part of a total quality-control effort.

Exercise 5 (Cost of Quality Analysis, Non Financial Quality Measures)

Canada Industries manufactures two types of refrigerators. Victoria and Vancouver. Information on
each refrigerator is as follows:

Victoria Vancouver
Units manufactured and sold 10,000 units 5,000 units
Selling price P2,000 P1,500
Variable costs per unit P1,200 P800
Hours spent on design 6,000 1,000
Testing and inspection hours per unit 1 0.5
Percentage of units reworked in plant 5% 10%
Rework costs per refrigerator P500 P400
Percentage of unit repaired at 4% 8%
customer site
Repair costs per refrigerator P600 P450
Estimated lost sales from poor quality - 300 units

The labor rates per hour for various activities are as follows:
Design P75 per hour
Testing and inspection P40 per hour

Required
1. Calculate the cost of quality for Victoria and Vancouver, classified into prevention, appraisal,
internal failure, and external failure categories.

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2. For each type of refrigerator, calculate the ratio of each COQ category as a percentage of revenues.
Compare and comment on the costs of quality for Victoria and Vancouver.

3. Give two examples of nonfinancial quality measures that Canada Industries could monitor as part
of a total quality-control effort.

Exercise 6 (Quality Improvement, Relevant Cost Analysis)

The Jimmy Corporation manufactures and sells 3,000 premium quality multimelia projectors at
P12,000 per unit each year. At the current production level, the firm's manufacturing costs include
variable costs of P2,500 per unit and annual fixed cost of P6,000,000. Additional selling,
administrative, and other expenses, not including 15 percent sales commissions, are P10,000,000 per
year.
The new model, introduced a year ago, has experienced a flickering problem. On average the firm has
to rework 40 percent of the completed units. The firm still has to repair under warranty 15 percent of
the units shipped. The additional work required for rework and repair makes it necessary for the firm
to add additional capacity with annual fixed costs of P1,800,000: The variable costs per unit are
P2,000 for rework and P2,500, including transportation cost, for repair.
The chief engineer, Ayen Anicete, has proposed a modified manufacturing process that will almost
entirely eliminate the flickering problem. The new process will require P12,000,000 for new equipment
and installation, and P3,000,000 for training. Anicete believes that current appraisal costs of P600,
000 per year and PS0 per unit can be eliminated within one year after the installation of the new
process. The firm currently inspects all the units before shipment. Furthermore, warranty repair cost
will be only P1, 000 for no more than 5 percent of the units shipped.
Jimmy believes that none of the fixed costs of rework or repair can be saved and that a new model will
be introduced in three years. The new technology will most likely render the current equipment
obsolete.
The accountant estimates that repairs cost the firm 20 percent of its business.

Required:

1. What are the additional costs of choosing the new process?

2What are the benefits of choosing the new process?
3. Should Jimmy use the new process?
4. What factor should be considered before making the final decision?
5. A member of the board is very concerned about the substantial amount of additional funds needed
for the new process. Because the current model will be replaced in the about three years, the board
member suggests that the firm should take no action and the problem will go away in three years.
Do you agree?

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Problems

Problem 1
Anthony Foods manufactures food seasonings and packaged dry sauce mixes tor sales in grocery
stores. Anthony started a quality improvement program in 20X3. It expanded its training and quality
assurance programs and began monitoring employee’s satisfaction and estimating lost sales due to
quality problems. The data in the table below summarize the quarterly results of operating its TQM
program over the last two years.
Anthony Foods
Quality Costs
20X3-20X4
(Millions)
20X3 20X4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Customer Complaint Dept. P3.90 P3.45 P3.03 P2.7 P2.50 P2.2 P2.1 2.01
6 7 4
Inspection 1.40 1.56 1.75 1.95 2.39 2.96 3.63 4.46
Lost sales 49.20 40.31 33.11 28.4 24.45 21.0 19.2 17.44
2 8 0
Process engineering 2.20 2.46 2.76 3.11 3.87 4.86 6.13 7.58
Quality assurance 6.20 6.52 6.86 7.19 7.93 8.74 9.61 10.53
Administration
Returns 26.90 21.09 16.35 13.5 1132 9.50 8.43 7.52
3
Rework 15.80 12.65 10.03 8.49 7.25 6.16 5.56 5.00
Scrap 17.60 14.48 11.92 10.3 8.92 7.72 7.00 6.34
2
Testing 1.60 1.72 1.85 1.99 2.29 2.62 3.01 3.45
Training 13.10 14.39 15.90 17.4 21.12 25.5 30.3 3635
6 0 7

Required:
a. Prepare a cost-of-quality report that classifies each expense as being in one of four categories;
appraisal, prevention, internal failure, or external failure.
b. What conclusions can you draw from the data presented about Anthony Foods 'TQM program?

Problem 2 (Applying TQM in Manufacturing versus Administration)

One large company that has been successful in applying Total Quality Management (TQM) principles
in manufacturing reports that it has had less success in applying the same techniques in improving
administrative functions such as order taking, distribution, and human resources. This company
(which has won several quality awards and has significantly improved its product quality) used state-
of-the-art TQM methods to train all of its employees in how to apply TQM. However, the company has
not been able to achieve the same cost reductions and service quality enhancements in administrative
areas as it has in the manufacturing area. Assuming that this phenomenon extends to other
companies, why do you think that TQM works better in manufacturing than in nonmanufacturing
services areas?

Multiple Choice

1. Implementation of total quality management (TQM) in a firm:

a. must follow a rigid, predetermined process to be successful
b. involves some lower-level managers and all senior executives
c. takes from 3-5 years
d. is a bottoms up process, with senior management involved only in the final phase

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2. Goalpost quality conformance differs from absolute quality conformance like:
a. “generally” differs from “always”
b. “range” differs from “point”
c. “probable” differs from “certain”
d. “many” differs from “one”
3. The quality cost of prevention is:
a. exampled by the cost of servicing warranties
b. refers only to zero-defect programs
c. an upstream cost
d. a downstream cost

4. Typically, as prevention costs increase, other costs of quality:

a. are not affected
b. change, but the direction cannot be predicted
c. increase, but a slower pace
d. decrease
5. Examples of the quality cost of prevention include all of the following except:
a. tuition for external training
b. additional tolerance controls for machinery
c. depreciation of a training room
d. an annual award for lowest rework rate
6. Appraisal costs are incurred to measure and analyze data to test product or service in conformity to
specifications, but not to:
a. reduce error or prevent recurrence of error
b. change procedures
c. change policy
d. check on quality standards
7. The key difference(s) between internal failure cost and external failure cost is (are):
a. when the cost happens
b. where the cost happens
c. both when and where the cost happens
d. whether the cost happens
8. Which one of the following is not listed as a practice that successful TQM firms use to ensure
having quality suppliers?
a. forming long-term relationships with suppliers as working partners
b. setting measures that truly reflect the needs and expectations of suppliers
c. reducing the supplier base
d. selecting suppliers based on price and their capability and willingness to improve quality, cost,
delivery, flexibility and for their dedication to continuous improvement
9. Conformance to a quality specification expressed as a specified range around a target is
a. end zone conformance
b. target conformance
c. goalpost conformance
d. absolute quality conformance

10. Conformance that requires all products or services to meet exactly the target value with no
variation allowed is
a. end zone conformance
b. target conformance
c. goalpost conformance
d. absolute quality conformance
11. Just-in-time purchasing requires
a. larger and less frequent purchase orders
b. smaller and less frequent purchase orders
c. smaller and more frequent purchase orders

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 d. larger and more frequent purchase orders
12. A demand-pull system in which each component in a production line is produced immediately as
needed by the next step in the production line is referred to as
a. Just-in-time purchasing
b. materials requirements planning
c. relevant total costs
d. economic order quantity
13. All of the following are potential financial benefits of just in time except
a. lower investments in inventories
b. lower investments in plant space for inventories
c. reducing the risk of obsolescence
d. reducing manufacturing lead time

14. Cost quality reports usually do not consider

a. external failure costs
b. opportunity costs
c. internal failure costs
d. appraisal costs
15. Changing to an activity-based costing/management system will not
a. change the way that resources are allocated
b. change the way that costs are allocated
c. change all the people' s jobs
d. change the way that performance is evaluated
16. Resistance to changing a management accounting and control system (MACS) can occur for the
reasons listed below, except
a. employees are set in their ways and will act defensively
b. an employee's compensation and rewards may be altered
c. the balance of power may shift unfavourably for the employee
d. employees have to wait for a vote of shareholders before a MACS can be changed
17. One common mistake that managers make when changing to a new cost management system is
a. they involve too many in making the change
b. they take too long to implement the change
c. they over-budget for the cost of the change
d. they try to change too many things simultaneously
18. The just-in-time manufacturing (JIT) system is also called the
a. job in training system
b. job in transit system
c. zero cost system
d. zero inventories system
19.The traditional focus in management accounting has been to develop
a. only quantitative performance measures
b. only qualitative performance measures
c. both quantitative and qualitative performance measures
d. neither quantitative nor qualitative measures
20. A well-designed MACS develops and uses
a. both quantitative and qualitative information for control, motivation and performance
evaluation
b. only quantitative information for control, motivation and performance evaluation
c. only qualitative information for control, motivation and performance evaluation
d. neither quantitative nor qualitative information for control, motivation, and performance
evaluation
21. Product quality and profitability are
a. closely related
b. inversely related
c. loosely related
d. indirectly linked
22. A product that meets or exceeds customer expectation is:

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 a. the norm in today's marketplace
b. a quality product
c. a result of planning for quality
d. All of the above answers arc correct.
23. Core principles of total quality management include:
a. focusing on customer satisfaction
b. striving on continuous improvement
c. involvement of the entire work force
d. Answer a, b and c are all core principles

24. Continuous improvement (Kaizen) in today' s global economy:

a. Is desirable if a firm promotes quality
b. Is necessary if a firm is to remain competitive
c. Speaks only to the control of defects
d. Is practically impossible
25. Implementation of total quality management (TQM) in a firm:
a. must follow a rigid, predetermined process to be successful
b. takes from 5-0 years
c. involves all lower-level managers and as well as senior executives
d. is a bottoms up process, with senior management involved only in the final phase
26. Goalpost quality conformance differs from absolute quality conformance like:
a. “generally” differs from "always”
b. "range" differs from “point”
c. “probable” differs from "certain"
d. “many” differs from “one”

27. The Taguchi Quality Loss Function demonstrates that as the quality measure of a product
declines, the loss due to quality defects:
a. increases as a quadratic function
b. Increases in direct proportion
c. increases in an inverse proportion
d. Decrease as a quadratic function.
28. The quality cost of prevention is:
a. exampled by the cost of servicing warranties
b. refers only to zero-defect programs
c. an upstream cost
d. a downstream cost
29. Typically, as prevention costs increase, other costs or quality:
a. are not affected.
b. Change, but the direction cannot be predicted.
c. increase, but at a slower pace
d. decrease
30. Examples of the quality cost of prevention include all of the folowing except:
a. Tuition for external training.
b. Additional tolerance controls for machinery.
c. Depreciation of a training room.
d. An annual award for lowest rework rate.
31. Appraisal costs are incured to measure and analyze data to test product or service conformity to
specifications, but not to:
a. Reduce error or prevent recurrence of error.
b. Change procedures.
c. Change policy.
d. Check on quality standards.
32. The key difference(s) between internal failure cost and external failure cost is (are):
a. When the cost happens.
b. Where the cost happens.
c. Both when and where the cost happens.

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 d. whether the cost happens
33. If quality costs are viewed as conformance versus non-conformance, quality expert Philip Crosby
would argue that there is no such thing as a quality problem, but only a problem of:
a. Design
b. Materials
c. Labor
d. All of the above
34. If one were to classify quality costs as prevention, appraisal, failure and external failure, the lowest
and highest costs would tend to be respectively:
a. appraisal and external failure.
b. appraisal and internal failure
c. prevention and internal failure
d. prevention and external failure
35. Regardless of the differences in form and control, a common feature that should be present in any
Cost of Quality is that the report:
a. promotes total quality management (TQM)
b. Stratifies costs by product line.
c. Stratifies costs by department.
d. Stratifies costs by plant.

36. Whichever of the many helpful tools a firm chooses for identifying significant quality problems, the
tool(s) will be most effective if:
a. Management accountants are not involved in their selection.
b. Management accountants take a pro-active role throughout the process.
c. The firm hires technical experts to choose the tool(s).
d. The firm leaves selection of the tool(s) to the supervisors.
37. Which one of the following is not a category of costs of quality?
a. Promotion
b. external failure
c. internal failure
d. Appraisal
38. Costs incurred to keep quality defects from occurring are
a. External failure costs.
b. Appraisal costs.
c. Internal failure costs.
d. Prevention costs.
39. Costs incurred in measurement and analysis of data to ascertain conformity of products and
services to the specifications are
a. External failure costs.
b. Appraisal costs.
c. Internal failure costs.
d. Prevention costs.
40. Costs incurred as a result of poor quality found through appraisal prior to delivery to customers
are
a. external failure costs
b. Appraisal costs.
c. Internal failure costs.
d. Prevention costs.
41. Warranty costs would be classified as
a. Prevention costs.
b. Retention costs.
c. Appraisal costs.
d. External failure costs.
42. Rework costs would be classified as
a. Prevention costs.
b. Retention costs.

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 c. Appraisal costs.
d. Internal failure costs.
43. Test acquisition costs would be classified as
a. Prevention costs.
b. Retention costs.
c. Appraisal costs.
d. Internal failure costs.
44. Reinspection costs would be classified as
a. Prevention costs.
b. Retention costs.
c. Appraisal costs.
d. Internal failure costs.
45. Costs of meetings would be classified as
a. Prevention costs.
b. Retention costs.
c. Appraisal costs.
d. Internal failure costs.
46. Finished goods inspection costs would be classified as
a. prevention costs
b. Retention costs.
c. Appraisal costs.
d. Internal failure costs.
47. Cost conformance includes
a. prevention costs and appraisal costs
b. Internal failure costs and external failure costs.
c. Prevention costs and internal failure costs.
d. Appraisal costs and external failure costs.

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