managerial accounting, chapter 13 by crosson, needles

Chapter 13

Quality Managementand Measurement

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The Role of Management Information Systems in Quality Management

• Learning Objective 1– Describe a management information system,

and explain how it enhances management decision making.



• Determine accurate product, service, and customer costs

• Improve processes

• Provide timely feedback to stakeholders about their organization

To compete successfully, managers need information so that they are able to…

Need management information system that captures both financial and nonfinancial data


Management Information System (MIS)

• Provides managers with timely measures of operating results

• Is designed to support:

– Just-in-time (JIT) operations

– Activity-based costing (ABC) and activity-based management (ABM)

– Total quality management (TQM)

A reporting system that identifies, monitors, and maintains continuous, detailed analyses of a

company’s activities


Primary Focus of MIS

• Provides managers with improved knowledge of the processes for which they are responsible

• Identifies resource usage and cost for each activity

• Fosters managerial decisions that lead to continuous improvement throughout the organization



• Activity-related information is readily available– Needed to speed responsiveness to customers and reduce

processing time

• Provides more accurate product and service costs– Leads to improved pricing decisions

• Nonvalue-adding activities are highlighted– Can then be reduced or eliminated

• Analyzes profitability of individual customers


Designs of an MIS

A customized, informally linked series of systems for specific purposes

– Such as financial reporting, product costing, and business process measurement

An enterprise resource planning (ERP) system

– A fully integrated database system

– Sometimes called enterprise resource management (ERM)

or


Enterprise Resource Planning Systems

• ERP system– Combines the management of all major business activities

with support activities to form one, easy-to-access, centralized data warehouse capable of communicating not only inside the organization but with other business’ databases

• Major business activities– Purchasing

– Manufacturing

– Marketing

– Sales

– Logistics

– Order fulfillment

• Support activities– Accounting

– Human resources


Managers Use of MIS

• Without the flexibility and power of database management systems like ERP, managers would be at a disadvantage in today’s rapidly changing and highly competitive business environment


Use of a Management Information System by Managers


Planning

Managers use the MIS database to obtain relevant and reliable information for• Formulating strategic plans• Making forecasts• Preparing budgets


Performing• Managers use the financial and nonfinancial

information in the MIS database to implement decisions about– Personnel– Resources– Activities

• MIS minimizes waste and improves the quality of the organization’s products or services


Evaluating

• Managers identify and track financial and nonfinancial performance measures to evaluate all the major business functions

• Allows managers to– Reward performance promptly– Take speedy corrective action– Analyze and revise performance

measurement plans


Communicating

Managers generate custom reports that evaluate performance and provide useful information in decision making


Stop & Review

Q. What is a management information system (MIS)?

A. A management information system is a reporting system that identifies, monitors, and maintains continuous, detailed analyses of a company’s activities and provides managers with timely measures of operating results


Financial andNonfinancial Measures of Quality

• Learning Objective 2– Define total quality management (TQM), and

identify financial and nonfinancial measures of quality.


Total Quality Management (TQM)

An organizational environment in which all business functions work together to build quality into the firm’s products or services

Steps toward creating a TQM environment

1. Identify and manage the financial measures of quality, or the costs of quality

2. Analyze operating performance using nonfinancial measures and require that all business processes and products or services be improved continuously


Financial Measures of Quality

• Quality– The result of an operating environment in which a

product or service meets or conforms to a customer’s specifications the first time it is produced or delivered


Financial Measures of Quality (cont’d)

• Costs of quality– The costs specifically associated with the

achievement or nonachievement of product or service quality

– Includes• Costs of good quality incurred to ensure the

successful development of a product or service• Costs of poor quality incurred to transform a faulty

product or service into one that is acceptable to the customer

The costs of quality may make up a significant portion of a product’s total cost, so, controlling the costs of quality strongly affects profitability


Componentsof the Costs of Quality

Costs of conformance

Costs of nonconformance

Costs incurred to produce a quality product or service

Costs incurred to correct defects in a product or service


Costs of Conformance

• Prevention costs– Costs associated with the prevention of defects

and failures in products or services

• Appraisal costs– Costs of activities that measure, evaluate, or

audit products, processes, or services to ensure conformance to quality standards and performance requirements


Costs of Nonconformance

• Internal failure costs– Costs incurred when defects are discovered before

a product or service is delivered to a customer

• External failure costs– Costs incurred after a product or service is

delivered to a customer



• An inverse relationship exists between costs of conformance and costs of nonconformance– Spending money on the costs of conformance

reduces the costs of nonconformance– If little is spent on the costs of conformance, the

costs of nonconformance will be high


Goals of Organization in Regardto Financial Measures of Quality

• Internal and external failures affect customer satisfaction and the organization’s profitability

Avoid the costs of nonconformance


Nonfinancial Measures of Quality

• Management needs a measurement and evaluation system that signals poor quality early enough to correct problems before the product or service reaches the customer

• Accomplished by implementing a policy of continuous improvement– Use nonfinancial measures of performance


Product Design

• Quality problems are often the result of poor design– Can automatically identify poorly designed

parts or manufacturing processes by using computer-aided design (CAD), a computer-based engineering system


Product Design (cont’d)

• Managers monitor the CAD reports on design flaws

• Ensures that products are properly designed and free of defects

Measures to consider:• Number and types of design defects detected

• Average time between detection and correction

• Number of unresolved design defects at the time of product introduction


Vendor Performance

Companies dealt with dozens of suppliers in the quest for the lowest price

In the Past

Companies analyze their vendors to determine which ones – Are most reliable– Furnish high-quality

goods– Have a record of timely

deliveries– Charge competitive

prices

Now


Vendor Performance (cont’d)

• Once identified, these vendors become an integral part of the production team– Ensures a continuing supply of high-quality

materials– Vendors may even contribute to product design

to ensure that correct materials are being used


Vendor Performance (cont’d)

• Managers monitor each vendor’s performance using– Measures of quality

• Such as defect-free materials as a percentage of total materials received

– Measures of delivery• Such as timely deliveries as a percentage of total

deliveriesSuch measures enable managers to identify and monitor reliable vendors so that high-quality, reasonably priced

materials are available when they are needed


Production Performance

– A fully computerized, plantwide manufacturing facility in which all parts of the manufacturing process are programmed and performed automatically

– Minimizes concerns about wasted money that can be traced to

• Defective products

• Scrapped parts

• Machine maintenance

• Downtime

Computer Integrated Manufacturing (CIM) Systems


Production Performance (cont’d)

• In CIM systems– Most direct labor hours are replaced by

machine hours– A significant part of variable product cost is

replaced by the cost of expensive machinery, a fixed cost

• The largest item on the company’s balance sheet is often automated machinery and equipment



• Each piece of equipment has a specific capacity, above which continuous operation is threatened

• The measures managers use to evaluate these machines have two objectives

1. Evaluate the performance of each piece of equipment in relation to its capacity

2. Evaluate the performance of maintenance personnel in following a prescribed maintenance program



• Measures that help managers monitor production performance– Production quality– Parts scrapped– Equipment utilization– Machine downtime– Machine maintenance


Delivery Cycle Time

• Companies evaluate their responsiveness to customers by examining delivery cycle time– The time period between acceptance of an order

and the final delivery of the product or service– Company’s goal

• Fill its orders 100 percent of the time

• Deliver its products 100 percent on time


Delivery Cycle Time (cont’d)

How do companies meet their delivery cycle time goals?

– Establish and maintain consistency and reliability within its manufacturing process

– Be highly aware of its delivery cycle time• Important to customers

• Decrease in delivery cycle time can lead to an increase in income from operations



Delivery cycle time consists of• Purchase order lead time

– The time it takes for materials to be ordered and received so that production can begin

• Production cycle time– The time it takes to make a product

• Delivery time– The time between the completion of the product

and its receipt by the customer



• For each component of delivery cycle time, management should – Emphasize the importance of minimizing the time– Track the actual time– Highlight trends– Make reports available daily or weekly



• Other measures designed to monitor delivery cycle time– Waste time– Order backlogs– On-time delivery performance– Percentage of orders filled


Customer Satisfaction

• Performance measurement continues beyond sale and shipment of a product– Use customer follow-up to evaluate total

customer satisfaction


Customer Satisfaction (cont’d)

• Measures used to determine the degree of customer satisfaction include– Number and types of customer complaints– Number and causes of warranty claims– Percentage of shipments returned by customers

• Or percentage of shipments accepted by customers

These measures help a company continuously produce higher-quality products, improve production

processes, and reduce throughput time and costs


Nonfinancial Measures of

Quality


Measuring Service Quality

Many of the costs of product conformance also apply to the development and delivery of a service

– Measures include• Flaws in service design

• Timely service delivery

• Services accepted or rejected

• Number of complaints

Many of the costs-of-quality categories and several of the nonfinancial measures of quality can also be applied directly to services

How can quality of services be measured and analyzed?


Stop & Review

Q. What are the components of the costs of quality?

A. The components of the costs of quality are the costs of conformance, which are the costs incurred to produce a quality product or service, and the costs of nonconformance, which are the costs incurred to correct defects in a product or service.


Measuring Quality: An Illustration

• Learning Objective 3– Use measures of quality to evaluate operating

performance.


Evaluating the Costs of Quality

• Evaluate each company’s approach to quality enhancement by analyzing the costs of quality and by answering the following questions:– Which company is most likely to succeed in the competitive

marketplace?

– Which company has serious problems with its products’ quality?

– What do you think will happen to the total costs of quality for each company over the next five years? Why?

Three companies, Able, Baker, and Cane, have taken different approaches to achieving product quality. All three companies are the same size, each having generated $15 million in sales last year.


Measures of Quality–Data for Analysis


Analysis of the Costs of Quality


Evaluating the Costs of Quality (cont’d)

• Able Company– Spent the most money on costs of quality

• Spent 80 percent of that money on costs of conformance

• Means that only a small amount had to be spent on internal and external failure costs

• Result is high-quality products, which leads to high customer satisfaction

Which company is most likely to succeed in the competitive marketplace?



• Baker Company– Spent the least on costs of quality

• Over 68 percent of its costs of quality was spent on internal and external failure costs

• Scrap costs, reinspection costs, the cost of downtime, warranty costs, and customer complaint costs were all high

• Products are very low in quality

Which company has serious problems with its products’ quality?



Able Company– Total costs of quality should be lower in the

future because the company is establishing a high level of quality

• Spent the most on costs of conformance early in the product’s life cycle

• Quality is integrated into the development and production processes

What do you think will happen to the total costs of quality for each company over the

next five years? Why?





Baker Company– Costs of conformance will have to increase

significantly if the company expects to stay in business

• Seven percent of sales revenue being spent on costs of failure

• Company is vulnerable because the marketplace is not accepting its products

• Is in a weak position to face competition





Cane Company– Company must learn to prevent high

internal and external failure costs to remain competitive

• Spending 53 percent of its costs of quality on conformance, so product quality should be increasing

• However, costs of nonconformance are high


EvaluatingNonfinancial Measures of Quality

• Evaluate each company’s experience in its pursuit of total quality management


Measures ofQuality–Data for Analysis


Evaluating NonfinancialMeasures of Quality (cont’d)

• Costs of conformance are having a positive effect– In 20x7, 98.2 percent of materials received form suppliers

were of high quality; Quality over the three years has been increasing

– Product defect rate has been decreasing rapidly

• Customer acceptance and satisfaction have been increasing– Percentage of on-time deliveries increasing

– Both percentage of returned orders and customer complaints decreasing

Able Company



• High costs of nonconformance are having a negative effect– Number of high-quality shipments of materials

from vendors decreasing– Product defect rate increasing (severe problem)– On-time deliveries poor and getting worse– Returned goods and customer complaints

increasing

Baker Company



• Making very slow progress toward higher-quality standards– Most nonfinancial measures show very slight

positive trend– Needs to spend more money on costs of

conformance

Cane Company


Comparison of Costs of Quality: Conformance Versus Nonconformance


Stop & Review

Q. When evaluating the costs of quality, how can you determine whether a company is likely to succeed in the competitive marketplace?

A. The amount of money a company spends on costs of quality and a comparison of its costs of conformance to its costs of nonconformance are indicators of whether it is likely to succeed. If costs of conformance are much higher than costs of nonconformance, it means that only a small amount had to be spent on internal and external failure costs. The result is high-quality products, which leads to high customer satisfaction.


The Evolving Concept of Quality

• Learning Objective 4– Discuss the evolving concept of quality.


The Evolving Concept of Quality

Return on quality (ROQ)– Results when the marginal revenues possible

from a higher-quality good or service exceed marginal costs of providing that higher quality

Before the advent of TQM…

Managers assumed there was a trade-off between costs and benefits of improving quality


The Evolving Concept of Quality (cont’d)

• In the 1980s, quality gave organizations a competitive edge in the global marketplace– Advocates of TQM stressed improved quality

as a means of enhancing an organization’s efficiency and profits

– Companies emphasized kaizen, the continual and gradual improvement of products and processes while reducing costs



• Quality control methods eliminated defects in the design and manufacture of products– Statistical analysis– Computer-aided design (CAD)– Six Sigma

• Today, more than 90 percent of Fortune 500 companies use a combination of these methods



• Efforts then expanded to include the quality of nonmanufacturing processes– Benchmarking

• Measurement of the gap between the quality of a company’s process and the quality of a parallel process at the best-in-class company

– Process mapping• Method of diagramming in a flow diagram

• Helps managers identify unnecessary efforts and inefficiencies in a business process



Concept of quality must continuously evolve to:

– Fulfill customers’ needs and expectations

– Meet the demands of the changing business environment

– Meet or exceed a variety of expectations about customer service

– Create innovative products and services that anticipate the opportunities in an ever-changing marketplace

Dimensions of Quality

• Products and services must be defect-free and dependable

• Embody intangibles such as prestige and good taste


Stop & Review

Q. What is kaizen?

A. Kaizen is the continual and gradual improvement of products and processes while reducing costs.


Recognition of Quality

• Learning Objective 5– Recognize the awards and organizations that

promote quality.



• Deming Application Prize

• Malcolm Baldrige Quality Award

• International Organization for Standardization

To promote the importance of quality, many awards and organizations have

been established


Deming Prize

• Established by the Japanese Union of Scientists and Engineers in 1951

• Honors individuals or groups who have contributed to the development and dissemination of total quality management


Deming Application Prize

• Also established by the Japanese Union of Scientists and Engineers

• Honors companies that achieve distinctive results by carrying out total quality control

• Originally limited to Japanese companies– Interest so great, rules were revised to allow participation of

companies outside of Japan

Recent Winners

• Hosei Brake Industry Co., Limited (Japan)

• Krishna Maruti Limited, Seat Division (India)

• Rane Engine Valves Limited (India)

• Rane TRW Steering Systems Limited, Steering Gear Division (India)


Malcolm Baldrige Quality Award

• Established by U.S. Congress in 1987• Recognizes U.S. organizations for their

achievements in quality and business performance• Purpose is to raise awareness of the importance of

quality and performance excellence

Recent Winners

• Sunny Fresh Foods, Inc. Monticello, MN

• DynMcDermott Petroleum Operations, New Orleans, LA

• Richmond College, Dallas, TX



• Organizations are evaluated on the basis of a set of standards in seven categories– Leadership– Strategic planning– Customer and market focus– Information and analysis– Human resource focus– Process management– Business results


Recognition of Quality (cont’d)

• Thousands of organizations throughout the world accept the Baldrige criteria as the standards for performance excellence– Use them for training and self-assessment,

whether they plan to compete or not

• Award winners are showcased and encouraged to share their best practices with others


International Organizationfor Standardization (ISO)

• Worldwide federation of national standards bodies from over 130 countries

• Promotes standardization with a view to facilitating the international exchange of goods and services


ISO 9000Set of guidelines for businesses

• Covers the design, development, production, final inspection and testing, installation, and servicing of products, processes, and services

Standardizes quality management and quality assurance

The ISO 14000 series provides a similar framework for environmental management


Stop & Review

Q. What does the International Organization for Standardization (ISO) promote?

A. It promotes standardization with a view to facilitating the international exchange of goods and services.


Chapter Review

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

2. Define total quality management (TQM), and identify financial and nonfinancial measures of quality.


Chapter Review (cont’d)

3. Use measures of quality to evaluate operating performance.

4. Discuss the evolving concept of quality.

5. Recognize the awards and organizations that promote quality.

managerial accounting, chapter 13 by crosson, needles

Documents

nonfinancial information

management decision

costs of quality

reliable information

useful information

quality managementto

business processes

integrated database