Chapter 1C —Strategic Cost Management 465

MULTIPLE CHOICE:
1, “Just-in-Time” (JIT) is a system that seeks improvement by
_ reducing inventories to the absolute’ minimum levels possible. It
means that
a. raw materials are purchased just in. time to go into
production.
b, sub-assemblies or component parts are completed just in
time the materials needed are purchased.
c. products are. completed just in time an-order is received
from customers.
d. None of the above.

2, In JIT, the flow of goods is controlled by a “pull” approach. It

means that
a. work is initiated only in response to customer orders.
b. customers are pulled to buy more units to reduce the
company’s inventory.
c. production supervisors see to it that there is always
something to do to keep everyone busy.
d. warehouses should always be full to be sure that customer
demands are always met.

3, JIT purchasing can be used by .

a, retailers. =~ c. manufacturers.
b. . wholesalers. d. all of the above.

4. Which of the following statements about JIT is true?

a. Under JIT, partially completed units are pushed from one
workstation to another to ensure all workstations have
enough work to keep busy.
b. A company will typically have fewer aes under JIT than
under a conventional system.
c. For JIT to operate, successfully, all similar pieces of equipment
must be grouped together.
d. JIT requires an increase in funds to finance additional
inventories.

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 466 PART 2 - MANAGEMENT ACCOUNTING

5. Under JIT
a. work-in-process inventories are maximized in order to
ensure that all workstations have enough work to stay busy.
b. the plant floor is laid out in a functional format with similar
machines grouped together.
c. focused factories are used. ; :
d. the plant floor is laid out in a single flow line through which
all products pass.

6. Companies adopt just-in-time purchasing systems to reduce carrying

costs by eliminating inventories and increasing the deliveries made by
suppliers. Hence, companies that adopt the system often experience
a. less need for linkage with the suppliers’ computerized order
entry system.
Db. fewer deliveries from suppliers.
é a decrease in the number of suppliers.
d. a greater need for inspection of goods as the goods are
received. ,

7. Which of the following is among the benefits of adopting a just-in-

time system?
Reduction in the number of deliveries of materials.
Increase in the number of suppliers.
ano

Performance of non-value added activities.

Maximization of standard delivery quality.

8. A company switched from the traditional to the just-in-time system.

The change will
a. decrease the company’s inventory as a percentage of total
assets,
b. decrease the company’s inventory turnover.
C. increase the company’s, inventory as a percentage
of total
assets.
, not. affect the company’s inventory turnover and its inventory
as a percentage of total assets.

9. The primary objective of just-in-time processing is to

a identify relevant activity cost drivers.
b. accumulate overhead in activity cost pools,
Cc, identify non-value added activities.

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 Chapter 10- Strategic Cost Management 4 67

d. eliminate or reduce inventories.

10. Ideally, the number of units that should be produced in a just-in-

time manufacturing system is equal to
a. the maximum productive capacity for the current period.
b. actual customer demand for the current period.
c. budgeted customer demand for. the current period.
d. budgeted customer demand for the following period.

11. After careful planning, Change Style, Inc. has decided to switch to a
just-in-time inventory system effective on July 1 of the current year.
As of July 1, the corporation has 70 units of product in. inventory. It
has 1,000 labor hours available for the month of July. These hours
could produce 250 units of product. Customer demand for July is
200 units. If just-in-time. principles are correctly followed, how
many units should Change Style Inc. plan to.produce.in he
@i;..200, .,. c. 180 ,
b. 130 d, .250

12. It is an approach to continuous improvement that. focuses on

serving customers and uses front-line workers to identify and solve
problems systematically. :
a. Total quantity management c. Total quality management
b. Just-in-time system d. ABC system

13. These costs are incurred on quality related processes to prevent

defects, or are incurred as a result of defects occurring.
a. Standard costs ‘c. Cost of scrap
b. Quality costs d. Wastage

14. Conformance costs, incurred to keep defective products from falling

into the hands of customers, are composed of
a. prevention and appraisal costs.
b. failure costs.
C. quality costs.
d. appraisal and inspection costs.

15. Non-conformance costs, which are incurred because defects are -

produced despite efforts to prevent them, are composed of
a. prevention and appraisal costs.

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 468 PART 2- MANAGEMENT ACCOUNTING

b. internal and external failure costs.

c. costs of technical support given to suppliers.
d. costs of testing incoming materials.

16. In the traditional quality control process in a manufacturing

concern, mass inspection of goods is done only at the end of the
process. A major deficiency of this process is that~
it is not 100% effective.
mass inspection at the end of the process is very expensive.
aooo

it does not focus on improving the entire production process.

it is too late and impossible to rework defective items
discovered during the inspection.

17. Total: quality management (TQM) is an integrated system that

identifies customers (internal and external)’ and establishes their
requirements. Accordingly, the external, or ultimate customer, is
best served when internal customers are also well served. In view
of this, the primary purpose for adopting TQM is to
a. achieve greater employee satisfaction.
b. achieve greater customer satisfaction.
c. reduce delivery time.
d. reduce delivery charges.

18. A company wants to be known as a world-class manufacturer of

quality products, hence, it is willing to spend on quality costs. To
achieve this, the company should spenr/ more heavily on
a. external failure costs. c. «appraisal costs. —
b. internal failure costs. d. prevention costs.

19. A product-quality-related cost incurred in detecting individual

products that do not conform to specifications is an example of
a. internal failure costs. C, appraisal costs.
b. external failure costs. d. prevention costs.

20. If a company decides to adopt TOM, its management accountant

should undertake some activities, among which is
a. determination of the accounts that are relevant to TQM,
; Db. ré<tructuring of the accounting system to provide ‘accurate
quality cost data. | !

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 Chapter 10 —Strategic Cost Management 469

¢. application of the ABC system to relate. quality costs to

activities,
d. All of the above.

21. In a product quality. cost system, the cost of statistical quality

control is an example of
a. non-conformance cost. c. _ internal failure cost.
b. appraisal cost. d. external failure cost.

Time management is -related to TQM. For example, product

development time is a crucial factor if a company wants tc be
competitive. If product development time is reduced, the product’s
life cycle becomes shorter, which of course is advantageous for the
firm... One-financial. measure of. product development is the break-
_ even time, which is
a. determined by calculating the time. required for the present
value. of the cumulative cash flows to equal revenues earned
from the. product.
b. the time from management approval of the project to the
_. time when. the cumulative present value of its.net cash
inflows equals the cumulative present value of the
investment.cash outflows.
c, the point where total.sales equals total costs.
d. the.point where fixed costs are constant.

Ina quality control. program, which of the following isfare categorized

as external failure costs?
1... Rework ;
2. Statistical quality control procedures
a Responding to Customer complaints.

a. 1 only | c. : Zonly +
b. 2 only d. 1,2,.and3

24, Which of the four quality costs would be. the most damaging toa
company’s ability to build. a reputation as..a world-class
manufacturer of quality products?
a.. Prevention costs c. Internal failure costs
b. Appraisal costs | d. External: failure. costs

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 470 PART 2 - MANAGEMENT ACCOUNTING

25. Non-financial performance measures, such as product quality, are

useful to engineering and operations managers for day-to-day
control purposes. Which of the following indicators may be used
to assess product quality?
1. -number and types of customer oo
2. production cycle time
3. returns and allowances

a. Land 2 only c. 2and 3 only

gus a and 3 only d. 1, 2, and3

26. Cycle time is the length of time required for a product to pass
- completely through a manufacturing process. It contains four
separate elements: processing time, storage and waiting time,
movement time, and inspection time. Of these four, value is
added to the product during
a. ‘processing time. : c. movement time.
b. storage and waiting time. d. inspection time.

27. A company that adopts TQM will achieve quality more economically
if it focuses
on
a. prevention costs. — c. internal failure costs.
b. appraisal costs. © '- d. external failure costs.

- 28. One of the tenets of TQM is customer orientation. A company that

adopts TQM should. therefore be customer-centered: For this
company, customers are defined as
a. people external to the company who buy the company’s
products/services.
b. internal customers who are members of the organization who
rely for another member's work to sii his/her task.
c. bothaandb.
d. neither anor b.

29. Total quality management (TQM) emphasizes quality as a basic

organizational function. Under this approach,
a. a large number of suppliers are used to obtain the lowest
possible prices.
b, highly trained inspectors perform quality control at the end
of the production process.

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 Chapter 10 —Strategic Cost Management 471

c. quality measurement occurs throughout ‘the process and

errors or defects are caught and corrected at source.
d. the primary responsibility for the quality of the products/
services is assumed by upper management.

A characteristic of total quality management (TQM) is

a. education and self-improvement.
b. quality by final inspection.
c. management by objectives (MBO).
d. on-the-job training by other workers.

31. Which of the following statements about TQM is correct?

a. TQM is characterized by a hierarchical organizational structure.
b.. In TQM, the organizational structure involves teams of
people from different specialties.
-¢. In TQM, the organizational structure involves teams of
people from the same specialty.
d. In TQM, it is advisable that specialists in. the organization
work individually: rather than as a team:

32. An innovative manufacturing company does not

a. respond to the changing business environment.
b. emphasize on continuous improvement.
c. strive to improve customer satisfaction. Suovan product Quality.
d. :emphasize on existing products.

33; The primary component of the quality control function isé to

satisfy upper management.
determine the appropriate timing of inspection.
aos

be able to deliver the product at the earliest possible time.

ensure that goods and services conform to the design
specifications.

The cost of scrap, rework, tooling changes, and downtime are

a. prevention costs. C. appraisal costs.
b. internal failure costs. — d.. external failure costs.

35. A cost-of-quality report includes most costs related to quality, such

as the costs of prevention, appraisal, internal failure, and external
failure. Examples of these costs are as follows, except
~

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 (472 3 PART 2- MANAGEMENT ACCOUNTING

a. cost of supplier evaluation. ¢. product testing cost.

b. training costs.. d. opportunity costs.

36. Following are some items: included in the cost-of-quality report

prepared for Kalidad Company for the previous month:
Employee training costs P10,000
Product testing 4,000
Equipment maintenance | 16,000
Rework 5,000

Based on the above data,

a. prevention cost is P26,000.
b. appraisal cost is P5,000.
-¢,. external failure cost is P4,000.
d. internal failure cost is P21, 000.

37. Which of the following does not measure

t product quality?
a. The percentage of products passing quality tests the first time.
b. The percentage of defective products returned by customers.
c. The number of defective parts discovered. during Mepection
in relation to total production.
d. The quantity of products delivered to customers per period,

38. Some companies under TQM use quality cost indices to measure
and analyze the cost of maintaining a given level of quality. For
example, a quality cost index with direct labor as the base may be
computed as follows:
i : _ _lotal quality cost
Quality cost index Direct labor cost = 100

Assume that a company has the following data for the first quarter
of the year:
Conformance costs: Prevention P 20,000
: Appraisal 30,000
Non-conformarice costs: Internal failure 60,000
External failure 10,000
'».: Manufacturing costs: Materials | 500,000
Atabbrs Direct labor 300,000
Factory overhead 200,000

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 473
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Chapter 10 -Strategic Cost Manage

Based on the given data, the company’s quality cost index for the
first quarter of the year was
a 24%. C. 23.33%.
b. 60%. d. 40%,

39. The company’s management accountant prepared the following

Cost of Quality Report for the years 200A and 200B:
2004. 200B
Prevention costs P- 125,000 P187,500
Appraisal costs : 131,250 196,875
Internal failure costs = 118,750 71,250
External failure costs 750,000 388,125
Total : P1,125,000 P843,750

Based on the report, which of the following statements is most

likely correct?
a. _ Quality costs, such as@ repair or replacement of returned units,
increased by 40%.
b. Quality costs, such as cost of downtime on machinery while
rework is being done, increased by 48%.
c. An increase in prevention cost was solely responsibie for the
decrease in quality costs.
d. .An increase in conformance costs resulted in a decrease in
failure costs and a higher quality product.

40. Business Process Re-engineering (BPR), or Process Re-engineering, or

simply Re-engineering, is a more radical approach to improvement
_than Total Quality Management (TQM).

Which of the following statements about BPR is correct?

a. It involves completely redesigning business processes and it
is.often implemented by outside consultants,
b. It involves redesigning business processes. and eliminating
value-added activities,
c, It requires a change in the company’s products.
d. It empowers front-line workers to solve problems and it
focuses attention on solving problems rather than on finger-
pointing.

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 474 PART 2 - MANAGEMENT ACCOUNTING

41. Process re-engineering

a. is less likely to result in employee resistance than total quality
management.
b. is more likely to.result in employee resistance than total
quality management.
c. does not affect employees, hence, no resistance from
employees is expected when it is applied. sor
d. affects employees in a way that boosts their morale.

42. Business process re-engineering (BPR) is a method of examining

business processes that identify, and then eliminate, reduce, or
replace non-value added activities. The major business trends that
promote the increased use of BPR are the following, except.
a. pursuit of increased quality.
b. advancement of technology.
c. increase in price competition caused by globalization:: -
d. the management accountant’s desire to introduce change.

43. Process re-engineering should result in

a. an entirely new company.
b. a well-organized engineering department.
c. a streamlined process that uses fewer resources, takes less
time, and generates fewer errors. .
d. a shift from job order to process costing system.

44. The Theory of Constraints (TOC) is a management approach that

emphasizes the importance of managing COPIES! In_ this
context, a constraint is,
a. anything that prevents an organization or individual from
getting more of what it wants.
b. any activity that does not add value to the product or service
being sold by the company.
c. a series of steps that are followed to. carry out some task in
a business.
d. the time required to make a completed unit of product
starting with raw materials.

45. The Theory of Constraints (TOC) is based on the idea that every
organization has at least one constraint that prevents it from
obtaining more of its objective. Under TOC,

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 Chapter 10 - Strategic Cost Management 475

a. efforts that are designed to improve the rate of output of a

workstation should generally be focused on the constraint.
b, a company that wants to improve its operations should focus
its improvement efforts on the workstation with the highest
productive capacity.
c. improvement efforts should be focused on non-constraints.
d. no company has constraints.

A company produces and sells bottled fruit juices. The processes

involved in producing the product are done in the following
departments:,
Department apacity per week
Juice extraction 8,000 bottles
Mixing —- .._ 5,000 bottles .
Bottling _ 10,000 bottles

Demand for the company’s product is about 6,000 bottles per week.

If the company wants to improve its contribution margin and applies

the Theory of Constraints, improvement efforts should be focused on
a. juice extraction department.c. bottling department.
~b. mixing department. _ “d. sales department.

47. Which of the following statements about Theory. of Constraints

_ (TOC) is correct?
a. TOC is based on the idea that every organization has at least
one constraint that prevents it from getting more of its
objectives.
b. TOC maintains that effectively managing the. constraint is a
key to success.
c. Under TOC, improvement efforts should be focused on the
constraints.
d. All of the above.

48. Following are the steps in Process Re-engineering, except

a. elimination of all constraints.
b. constructing a diagram flowchart of the current process.
C. elimination of non-value-added activities.
d. redesigning the process.

fi

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 476 PART 2 = MANAGEMENT ACCOUNTING

49. Per the Theory of Constraints, improvement efforts should be

focused on the
. a. non-constraint work centers.
b. work center that incurs the highest costs.
c. cost center where most workers are senior citizens.
d. work center that is the constraint.

50. Siomitos makes bite-size siomai. Which of the following could be a

constraint at Siomitos?
a. The siomai steamer
b. The workers who mix the ingredients
c. ‘The workers who prepare the siomai for steaming
d. Any of the above could be the constraint

51. It refers to the difference between what the customer receives and
what the customer gives up when buying a product or service.
a. margin c. customer value
b. profit d. benefit

52. It refers to the set of activities required to design, develop,

produce, market, and deliver products and services to customers.
a. manufacturing process c.. value added activities
b. value chain =, Woe d. activity based management

53. Value engineering >

- a. is a systematic approach to reaching targeted cost levels
during value chain analysis.
b. isa basis for cost planning and product costing.
c. iS a way of understanding how a company generates its
output.
d. determines what is done, by whom, at what cost in time and
other resources, and the value added by each activity.

54. It refers to the efforts of a company to employ sustainable

business practices with regard to its employees and environment.
a. ~Corporate social responsibility
b. Total quality management
~—¢c. Value chain’
d. Environmental accounting

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 Chapter 10 - Strategic Cost Management 477

55. A. Padilla Company is planning ‘to produce a product that is

expected to have a two-year life cycle. The estimated whole-life
cost for a budgeted production of 160,000 units is as follows:
Life-cycle costs:
Upstream costs (research and ,
development, design) P1,600,000
Production costs - 2,400,000
. Downstream costs (marketing,
distribution, customer service) 900,000
Total life-cycle costs P4,900,000
After-purchases costs (operating,
support; repair, and disposal)
incurred by customers ___ 700,000
Total whole-life costs P5,600,000

If the product i is to be priced at 130% of the whole-life unit cost,

the budgeted unit selling price is.
a. P39.81. c. P45.50.
b. P2692. — d. P35.00.

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 478 PART 2—- MANAGEMENT ACCOUNTING

KEY ANSWERS:

1D 17%. B 33D 49D

2. A 18. D 34.8 . +50. D
$6 ° 19 € 38.°D =~ St..¢c
4. B 20. D 36. A §2. B
5. C-. 21.B 37. OD 53 A
6. C . 2B 3% D’?. 54° A
7B ~.23-e--. 38°"D 55. C
GA. 8a DSA
9 D 2. B 41. 8B
10-B BS AL OD
Re aA eee
12: (Co Y BBC ea P44 A
13. B 29. C 45. A

14. A 30. A 46. 8B.

15. B 31. B 47. D
16. C 32D 48 A

EXPLANATIONS:

1. D_ Just-in-time means that raw materials are received just in time to

go into production; sub-assemblies or component parts are
completed just in time to be assembled into products, and
products are completed just in time to be shipped to customers.

2. A Pull or demand pull approach means that work is initiated

only in response to needs or customer orders. For example, a
signal is sent to preceding workstations as to the exact amount
of parts or materials that will be needed over the next few
hours to assemble products ordered by customers.

" This is different from the Push or supply push approach

where, for example, materials and parts are “pushed” forward
to the next workstation regardless of need.

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Chapter 10 — Strategic Cost Manage

Making everybody busy and maintaining full stock of inventory

will defeat the purpose of JIT, ie., keeping inventory to the
minimum (if not zero) level.

3. D JIT purchasing can be used by any company that has

inventories.

4. B Under JIT, a company uses only a few suppliers who deliver

materials and parts on a frequent basis.

JIT Bpeisies under a “pull” approach wherein partially completed

units are passed to the next workstation only as needed.

Typically, under JIT, all of the different pieces of equipment —

needed to produce a product are placed on a singje flow line,
thus breaking up groupings of similar equipment.

JIT: reduces inventories and the need for funds to finance them.
5. C Under JIT, the plant floor is: laid out with many product flow
lines— one for each family of products.

‘6. © Companies under the JIT system often experience a reduction

in. the number of suppliers. Suppliers are limited to those who
guarantee prompt delivery of quality goods. This, however,
results into an increase ii the number of deliveries. As more
orders’ are placed, there is a greater need for linkage with the
. suppliers’ computerized order system. Moreover, in JIT,
quality control is shifted to suppliers. JIT companies typically
do not inspect incoming goods: the assumption is that goods
delivered are of perfect quality.

1. D Under JIT, it is assumed that goods delivered are of perfect

quality.

JIT reduces the number of suppliers and increases the number

of deliveries

In JIT, non-value added activities, such as storage, handling.

etc. are eliminated,

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 480 PART 2— MANAGEMENT ACCOUNTING

8. A Under the JIT system, inventory

-is minimized. Thus, the
system increases the company's inventory turnover and
decreases inventory as a percentage of total assets.
senior TEmover.e Cost of Sales
yf - Average Inventory
-se in the average inventory increases the turnover

“us inventory _ Inventory

torria s3i Total assets
> adecrease in inventory decreases the ratio of inventory to
total assets

~ Reduction or, if possible, elimination of inventories is. the

primary objective of a just-in-time system.

11. B Customer demand : 200

Less beginning inventory _70
Planned production 130

12. C The “statement is actually the definition. of Total Quality |

Management (TQM).

13. B Quality costs are costs incurred on quality related processes.

These are costs incurred to prevent defects, or incurred as. a
result of defects occurring.

14. A Conformance Costs are composed of:

1. PREVENTION CosTS — costs relating to any activity that
reduces the number of defectsi in products and services.
2. APPRAISAL OR INSPECTIONS CosTS — incurred. in activities
relating to inspection to make’ sure that the ‘products!
services meet quality standards. —

~ > Failure costs are non-conformance costs.

» Conformance costs and non-conformance costs are the
types of quality costs.
» Appraisal costs are inspection costs.

15. B Non-Conformance Costs (or Failure Costs) are composed of:

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 481
Chapter 10 -Strategic Cost Management

1. INTERNAL FAILURE Costs — result from discovery of defects

during the approval/inspection process.
2. EXTERNAL, FAILURE CosTs — result. when a defective
product is delivered to a customer.

>. Prevention and appraisal costs are conformance costs.

> Cost of technical support given to suppliers is an example
of prevention cost, a conformance cost.
‘> Cost of testing incoming materials is. an example of
appraisal cost, a conformance cost.

16. Cc When mass inspection of goods is done only at the end of the
process, the company: fails to review and evaluate, for
efficiency ‘and effectiveness, the different processes used in
producing the goods. :
> No quality control system is perfect, i.e., 100% effective.
> Not only mass inspection at the end of the process, but
also other quality control processes, can be expensive.
>» Reworking defective items ney be possible, although
costly.

Ls The primary reason for adopting TOM is to achieve greater

customer satisfaction.
> Greater employee participation is necessary in TQM, but it
is not the primary reason for adopting the system.
>» Delivery time and charges should really be reduced, but
delivery is just one of the many nevis that are improved
in TQM.

18 D If the company would adopt TQM to attain the goal of being a

producer of quality products, it should spend the majority of its
funds on prevention costs. Expenditures on.prevention (for
example, employee training, review of equipment design,
preventive maintenance, evaluation of suppliers) reduce total
quality costs.

19,, Inspection of the products should be done to detect those that

do not conform to specifications. Inspection cost is an
example of appraisal cost .
4

he’

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 ARE: PART 2 — MANAGEMENT ACCOUNTING

20. All the given choices are among the activities that must be
undertaken by the management accountant if TQM is to be
adopted. The other activity not given in the choices is the
~ “standardization of costs of quality reports.

21. Statistical quality control is designed to detect quality problems

before extemal problems can occur. It is a means ‘of finding
defective output after it has occurred. Detecting or finding
defects is done by inspecting, which is one of the activities in
~- appraisal.

22. Choice Bis actually the definition of break-even time.

> Break-even time is determined by calculating the. time
required for the present value of the cumulative:cash flows
to equal zero.
>» Choice C refers to the conventional break-even point.

23. Responding to customer complaints results into external failure

costs.

> Rework reetilts into teal ‘tars costs.

> Statistical quality control Pipeaalies result ne appraisal
costs.

24. External failuré costs are incurred after the product has been
shipped. Therefore, it is the customers who find out about the
defect. As a result; customers would perceive. the company’s
products to be. of, low quality... This, of course, is most
damaging to a company's reputation. Ai

25. Following are some of the Indicators used to Measure

PRODUCT QUALITY:
1 . Number and types of customer complaints
2 . returns and allowances
- 3. competitive rank
4 on-time delivery

Production cycle time is not an indicator/measure of product

Vv

quality: It refers to the length of time required for a product

to pass completely through a manufacturing process.

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 chapter 10 — Strategic Cost Management
483
26, A Only during processing time is val
Storage and waiting, movem a added to the product.
Spe
adding activities. ent, and in ction are non-value-

97. A Prevention is less costly than i ¢

defective output. uy than detection and correction of

28. C Customer-centered companies should serve:b O th i

: customers:
external ) | th internal and

29. C TQM is.a continuous pursuit of quality in all aspects of the

"organizational activities.. Thus, quality measurement should
be
done throughout the process and‘errors should be caught and
corrected at source.
>» TQM philosophy recommends. limiting. the number_ of
suppliers to create a strong relationship with them.
> In TQM, errors are discovered throughout the process.
> .In TQM, all members. of. the organization assume
responsibility for the quality of products and services.

30. A In TQM, continuous improvement should be the primary career

objective of everyone. Hence, education and self-improvement
are essential. , :
"> In TQM, a basic tenet is doing it right the first time. Hence,
quality by final inspection is unnecessary if quality is built
infromthe start. . |
> TQM recommends elimination of numerical quotas, the
caused
aggressive pursuit of which (numerical quotas) is
by Management by Objectives (MBO).
On-the-job training by co-workers may entr nch
entre bad work
>
habits. In TQM, everybody should receiv e the “proper”
training.

31. °B In TQM, itit isi adv ised th atf people

the traditional hierarchical shestructure
from different specialties.
be replaced with teams o
ng business
D i ies are responsive to the changi
82.
na
envir onmen a
t. These comp an ies give much emphasis on
ce
nuous impro vemen t and customer satisfaction through
conti therefore, do not
quality. Innovative companies,
product

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 484 ; nt PART 2 — MANAGEMENT ACCOUNTING

simply emphasize. existing products without considering

changes or improvement on a continuous basis.

33. D The primary intent of quality control is to ensure that goods

and services conform to the design specifications. :
> Quality control is geared toward satisfying the customer,
not upper management.
> Determining the appropriate timing of inspection is a step
towards approaching quality control, but it is not the
primary component >f the quality control function:
> Products/services should be delivered at-the earliest
possible time; however, the company must be sure that
such products/services are quality products/ services.
34. B_ Internal failure costs are incurred when detection of defects
occurs before shipment. Examples are the cost of rework,
scrap, tooling changes, and downtime.

35. D Opportunity costs are income or benefit forgone when another

alternative is chosen. These are not recorded by the
accounting system. Hence, they should not be included in the
cost-of-quality report.

Examples of such quality related opportunity costs are’ lost

contribution margin from reduced ‘sales, sales prices, and
market share.

36. A Prevention cost: Employee training P10,000

Equipment.maintenance 16,000
Total P26,000
> Appraisal cost (product testing) is P4,000.
> Internal failure cost (rework) is P5,000.

37. .D The quantity. of products delivered may be a measure of

efficiency and effectiveness of the delivery procedures, but
not necessarily a measure of the quality of such products.

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 Chapter 10 —Strategic Cost Management 485

38. D Quality costs: Prevention P 20,000

Appraisal 30,000
Internal failure 60,000
External'failure — 10,000
Total quality costs P120,000

: . | _ _ Total quality cost

Quality cost index = Direet labor Gost 7 <= 100

= —p300,000* 10°
= 40%

39. D An increase in conformance costs (prevention and appraisal)

- fesulted in’ a higher quality product and a decrease in non-
conformance costs or failure costs.
200A 200B_ __ Peso Change % Change
Prevention P 425,000 187,500 P 62,500 50%
Appraisal 131,250 196,875 65,625 50%
Internal failure 118,750 71,250 — (47,500) ~ (40%)
External failure 750,000 388,125 (361,875) (48%)
P1,125.000 P843,.750 (P281,250) (25%)
> Cost of repairs or replacement of returned units are
external failure costs, which decreased by 48%.
> Costs of downtime on machinery while rework is being
done are internal.failure costs, which decreased by 40%.
> The increase in prevention cost was not solely responsible
for the decrease in quality costs. The other conformance
costs, i.e., the appraisal costs, likewise increased, which
also contributed to the decrease in total quality costs.

40. A BPR involves completely redesigning business processes. It

‘js often implemented by outside consultants.
>. In redesigning the business processes, non-value-added
activities are eliminated.
> In BPR, the business processes, not the company's
nrnducts, are changed.

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 “88 PART 2— MANAGEMENT ACCOUNTING

> Choice D refers to Total Quality Management (TQM).

41. Process re-engineering results in laying off workers who are no

longer needed. Thus; employees’ morale suffer and they
(employees) resist any process re-engineering efforts.

42. The three major business trends that promote the use of BPR
are: (1) pursuit of increased quality, (2) technological
advancement, and (3) increase in price competition caused by
globalization.
> The accountant’s desire to introduce change is not among
the business trends that promote the use of BPR.

43. Process re-engineering involves redesigning of business

processes, eliminating non-value-added activities. The result,
therefore, is a streamlined process that uses fewer resources,
takes less time, and generates fewer errors.

A Constraint is anything that prevents you from getting more of

what-you want.
> Choice B pertains to non-value-added activities.
> Choice Cis the definition of business process.
> Choice Dis the definition of throughput time or cycle time.

45. Under TOC; improvement efforts should be focused on the

constraints. Such efforts. would be largely wasted if focused
on non-constraints.
> Aworkstation with the highest productive capacity may not
be a constraint workstation.
‘> TOC states that every organization has at least one
constraint:

The mixing department, which has a productive capacity of only

5,000 ‘bottles, is the constraint, as. it is the bottleneck in the
production process. Improvement efforts should be focused on
_.this department to increase its productive capacity so that the
company may produce enough bottles to meet the average
weekly demand.

“a7 All the given statements about TOC are correct.

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 Chapter 10 ~Strategic Cost Management ‘487

53. A
Choice B refers to Life Cycle Costing
Choice C refers to Process Value Analysis
Choice D refers to Activity Analysis

55. C Total whole-life cost per unit or

(P5,600,000 + 160,000 units) P35.00
. . x 130%
Units selling price P45.50

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