Copyright © Houghton Mifflin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson

Copyright © Houghton Mifflin Company. All rights reserved. 1

Financial & Managerial Financial & Managerial Accounting 2002eAccounting 2002e

Belverd E. Needles, Jr.Belverd E. Needles, Jr.Marian PowersMarian PowersSusan CrossonSusan Crosson

- - - - - - - - - - -Multimedia Slides by:

Harry Hooper Santa Fe Community College


Chapter 27Chapter 27Quality Management Quality Management

and Measurementand Measurement


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 OBJECTIVESLEARNING OBJECTIVES


4. Discuss the evolving concept

of quality.

5. Identify the awards and

organizations that promote

quality.

LEARNING OBJECTIVESLEARNING OBJECTIVES


Management Information SystemsManagement Information Systems

OBJECTIVE 1

Describe a management information system

and explain how it enhances the management

cycle.


Management Information SystemsManagement 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.



• 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.



• 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.


The Management CycleThe Management Cycle

1. Planning stage: Managers use the MIS database for formulating strategic plans, making forecasts, and preparing budgets.

2. Executing stage: Managers use the MIS database for implementing decisions about personnel, resources, and activities to minimize waste and improve quality.



3. Reviewing stage: Managers track financial and nonfinancial performance measures for evaluating major business functions.



4. Reporting stage: Managers

generate customized reports to

evaluate performance and

support decision-making.


The Management Cycle and a Management Information SystemThe Management Cycle and a Management Information System


Discussion 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


Accounting for Accounting for Product and Service QualityProduct and Service Quality

OBJECTIVE 2

Define total quality management and

identify and compute the costs of quality

for products and services.


Total Quality ManagementTotal 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.


Costs of QualityCosts of Quality

• The costs of conformance

include prevention costs and

appraisal costs.

• The costs of nonconformance

include internal and external

failure costs.


Financial Measures of QualityFinancial Measures of Quality

Costs of Conformance to Customer StandardsCosts 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



Costs of Nonconformance to Customer StandardsCosts of Nonconformance to Customer StandardsInternal failure costs Scrap and rework Failure analysis Reinspection and retesting of rework Inventory 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 processing Product-liability settlements

Measures of qualityTotal costs of quality as a percentage of net salesRatio of costs of conformance to total costs of qualityRatio of costs of nonconformance to total costs of qualityCosts of nonconformance as a percentage of net sales



Measures of QualityMeasures 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


Discussion 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.


Nonfinancial Measures of QualityNonfinancial Measures of Quality

OBJECTIVE 3

Use nonfinancial measures of quality

to evaluate operating performance.



• 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.


Nonfinancial MeasuresNonfinancial 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.


Measures of Product Design QualityMeasures of Product Design Quality

• Computer-aided design (CAD) helps detect product design flaws.


Measures of Vendor PerformanceMeasures of Vendor Performance

• Companies analyze vendors to determine which are most reliable, furnish high-quality goods, deliver on time, and charge competitive prices.


• Companies adopt computer-integrated manufacturing (CIM) systems to evaluate performance of production equipment and to evaluate performance of maintenance personnel.

Measures of Production PerformanceMeasures of Production Performance


• 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 TimeMeasures of Delivery Cycle Time


• Customer follow-up helps evaluate customer satisfaction.

• Companies may develop their own customer satisfaction indexes.

Measures of Customer SatisfactionMeasures of Customer Satisfaction



Measures of Product Design QualityMeasures of Product Design Quality

Product design flaws Number and types of design defects detectedAverage time between defect detection and correctionNumber of unresolved design

defects at time of product introduction


Nonfinancial Measures of Nonfinancial Measures of QualityQuality

Measures of Vendor PerformanceMeasures of Vendor Performance

Vendor quality Defect-free materials as a percentage of total materials received; prepared for each vendor

Vendor delivery Timely deliveries of materials as a percentage of total deliveries; prepared for each vendor


Nonfinancial Measures of Nonfinancial Measures of QualityQuality

Measures of Production PerformanceMeasures 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



Measures of Delivery Cycle TimeMeasures of Delivery Cycle Time

On-time deliveries Shipments received by promised date as a percentage of total shipments

Orders filled Orders filled as a percentage of total orders received

Average process time Average time required by production to make a product available for shipment

Average setup time Average amount of time elapsed between the acceptance of an order and the beginning of production

Purchase order lead time Time it takes for materials to be ordered and received so that production can begin

Production cycle time Time it takes to make a product available for shipment

Delivery time Time between the completion of a product and its receipt by the customer

Delivery cycle time Time 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 time Production cycle time – average process time – average setup time

Production backlog Number and type of units waiting to begin processing



Measures of Customer SatisfactionMeasures of Customer Satisfaction

Customer complaints Number and types of customer complaints

Warranty claims Number and causes of claims

Returned orders Shipments returned as a percentage of total shipments


• 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 QualityMeasuring Service Quality


Discussion 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.


The Evolving Concept of QualityThe Evolving Concept of Quality

OBJECTIVE 4

Discuss the evolving concept of quality.


• 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.



• 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 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.



Full Cost Profit MarginFull Cost Profit Margin

OBJECTIVE 5

Identify the awards and organizations

that promote quality.


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 QualityRecognition of Quality


1. Describe a management information system, and explain how it enhances the 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.

OK, Let’s ReviewOK, Let’s Review


4. Discuss the evolving concept of quality.

5. Identify the awards and organizations that promote quality.

And Finally . . .And Finally . . .

Documents

Copyright © Houghton Mifflin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson