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20-1 USING ACCOUNTING FOR QUALITY AND COST MANAGEMENT CHAPTER 20 1 st.

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Presentation on theme: "20-1 USING ACCOUNTING FOR QUALITY AND COST MANAGEMENT CHAPTER 20 1 st."— Presentation transcript:

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2 20-1 USING ACCOUNTING FOR QUALITY AND COST MANAGEMENT CHAPTER 20 1 st

3 20-2 Quality and the New Production Environment Objective – To stay competitive through: Ê Improving customer service and product quality Ë Reducing costs Objective – To stay competitive through: Ê Improving customer service and product quality Ë Reducing costs

4 20-3 Improving Quality What can we do to improve quality? How much will it cost to improve quality?

5 20-4 Ê Prevention costs u Inspection of materials upon delivery u Inspection of production process u Equipment inspection u Employee training Ë Appraisal costs u Finished goods inspection u Field testing of products Cost of Quality Texas Instruments Approach.

6 20-5 Ì Internal failure costs are due to defects discovered before delivery to customers. u Scrap materials u Rework u Reinspection u Lost sales resulting from late deliveries Cost Report Cost of Quality Texas Instruments Approach

7 20-6 Í External failure costs are due to defects discovered after delivery to customers. u Warranty repairs u Product liability u Marketing costs to improve product image u Lost sales due to poor product quality Cost of Quality Texas Instruments Approach

8 20-7 Cost of prevention and appraisal Internal and external failure costs Cost of Quality Texas Instruments Approach Objective Zero defects while minimizing all four quality cost categories

9 20-8 Improving Quality Total Quality Management (TQM) Managing an organization so that it excels in areas important to the customer Total Quality Management (TQM) Managing an organization so that it excels in areas important to the customer Organization strives for excellence Quality is defined by the customer

10 20-9 Is Quality Worth the Investment? Cost vs. BenefitQuality is free Costs of quality programs are easily measured, but benefits of increased customer satisfaction are difficult to measure. The long-run benefits of increased customer satisfaction far outweigh the costs of improving quality. Two Views

11 20-10 The Quality Is Free Concept Greater customer satisfaction Quality products and services Increased business and profits

12 20-11 Methods to Identify Quality Problems Control charts Pareto diagrams Cause and effect analysis

13 20-12 Quality & Customer Satisfaction Measures Performance measure Quality control Number of customer complaints and defects Delivery performance Percentage of on-time deliveries Materials waste Scrap and waste as a percentage of materials used Machine Downtime Percentage of time machines are not working Objective Customer satisfaction and high quality products Increase on-time deliveries Decrease scrap and waste; improve product quality Increase efficiency; increase on-time deliveries 746

14 20-13 Additional Quality Concepts Motivation Employees respond favorably to quality initiatives Motivation Employees respond favorably to quality initiatives Strategic advantages Favorable reputation among competitors Strategic advantages Favorable reputation among competitors Benchmarking Continuous process of measuring performance against best of similar organizations Benchmarking Continuous process of measuring performance against best of similar organizations

15 20-14 Products are completed just in time for shipment to customers Raw materials are received just in time for production Just-In-Time (JIT) Inventory

16 20-15 In conventional system, materials are “pushed” through assembly process. In JIT system, materials are “pulled” through assembly process by customers’ needs. Just-In-Time (JIT) Inventory

17 20-16 Complete parts just in time for assembly into products Receive materials just in time for production Receive customer orders Complete products just in time to ship to customers Schedule production Just-In-Time (JIT) Inventory

18 20-17 Relationship Between JIT and Total Quality Management Less warehouse space needed Reduced inventory carrying costs Reduced risk of obsolete inventory

19 20-18 Relationship Between JIT and Total Quality Management More rapid response to customer orders Greater customer satisfaction Higher quality products Less warehouse space needed Reduced inventory carrying costs Reduced risk of obsolete inventory

20 20-19 Relationship Between JIT and Total Quality Management JIT factory is idle, waiting on quality raw materials Raw materials Poor quality items returned Unhappy customer Late delivery Quality must be stressed from the very beginning for JIT to be successful.

21 20-20 Impact of Just-in-Time on Accounting Procedures JIT goal is to minimize inventories: Production costs are assigned directly to cost of goods sold. Raw Materials Work in Process Finished Goods

22 20-21 Impact of Just-in-Time on Accounting Procedures Any end-of-period inventory is recorded in a procedure known as backflush costing. Cost of Goods Sold Inventory

23 20-22 JIT accounting entries Impact of Just-in-Time on Accounting Procedures

24 20-23 Backflush entry if inventory remains unsold or in process Impact of Just-in-Time on Accounting Procedures

25 20-24 ROLL ‘EM ! Video #1 (Approx. 8 min.) Video #2 (Approx. 3 min.) Hey! You’re just in time for the movies. Put on your hard hat and click the reels.

26 20-25 Let’s change the subject!

27 20-26 Activity-Based Costing (ABC) A costing method that first assigns indirect costs to activities, then to products based on their consumption of the activities. Products Consume Activities Consume Resources People Manage Activities

28 20-27 Activity-Based Costing Benefits l More detailed measures of costs l More accurate product costs for... u Pricing decisions u Product elimination decisions l Better information for use in managing activities that cause costs l Benefits should always be compared to costs of implementation l More detailed measures of costs l More accurate product costs for... u Pricing decisions u Product elimination decisions l Better information for use in managing activities that cause costs l Benefits should always be compared to costs of implementation

29 20-28 Activity-based costing involves these steps: Ê Identify the activities that consume resources, and assign costs to those activities. Ë Identify the cost driver(s) associated with each activity. Activity-based costing involves these steps: Ê Identify the activities that consume resources, and assign costs to those activities. Ë Identify the cost driver(s) associated with each activity. Methods Used for Activity-Based Costing A cost driver is a factor that causes, or “drives,” an activity’s cost.

30 20-29 Activity-based costing involves these steps: Ê Identify the activities that consume resources, and assign costs to those activities. Ë Identify the cost driver(s) associated with each activity. Ì Compute a cost rate per cost driver unit or transaction. Í Assign costs to products as follows: Activity-based costing involves these steps: Ê Identify the activities that consume resources, and assign costs to those activities. Ë Identify the cost driver(s) associated with each activity. Ì Compute a cost rate per cost driver unit or transaction. Í Assign costs to products as follows: Cost driver rate × Cost driver units consumed Methods Used for Activity-Based Costing

31 20-30 u Cost drivers are related to volume or complexity of production. l Examples: machine time, machine setups, purchase orders, production orders u Cost driver factors (in order of preference): Ê Causal relationship Ë Benefits received Ì Reasonableness u Cost drivers are related to volume or complexity of production. l Examples: machine time, machine setups, purchase orders, production orders u Cost driver factors (in order of preference): Ê Causal relationship Ë Benefits received Ì Reasonableness Activity-Based Costing Identifying Cost Drivers

32 20-31 Predetermined indirect cost rate Estimated indirect costs Estimated cost driver units of activity = For a period of time, estimate total... u indirect costs for the activity u cost driver units of activity For a period of time, estimate total... u indirect costs for the activity u cost driver units of activity Activity-Based Costing Cost Rate Per Cost Driver Unit This formula applies to any indirect cost. (e.g., manufacturing overhead, administrative, distribution, marketing, etc.

33 20-32 Predetermined indirect cost rate Estimated indirect costs Estimated cost driver units of activity = For a period of time, estimate total... u indirect costs for the activity u cost driver units of activity For a period of time, estimate total... u indirect costs for the activity u cost driver units of activity Activity-Based Costing Cost Rate Per Cost Driver Unit Note that this concept is identical to that used to calculate the predetermined overhead rate in Chapter 18.

34 20-33 At this point, we need to look at an example to illustrate the concepts. Activity-Based Costing Example.

35 20-34 Ritz Company manufactures a product in regular and deluxe models. Overhead is assigned on the basis of direct labor hours. Estimated overhead for the current year is $2,000,000. Other information: First, determine the unit cost of each model using traditional costing methods. Activity-Based Costing Example

36 20-35 Activity-Based Costing Example (Overhead Allocation)

37 20-36 Activity-Based Costing Example (Overhead Allocation)

38 20-37 Activity-Based Costing Example

39 20-38 Activity-Based Costing Example

40 20-39 Ritz Company plans to adopt activity-based costing. Using the following activity center data, determine the unit cost of the two products if activity-based costing is implemented. A B C Activity-Based Costing Example

41 20-40 A B C Activity-Based Costing Example

42 20-41 Original budgeted overhead total for the period A B C Activity-Based Costing Example

43 20-42 A B C Activity-Based Costing Example ========

44 20-43 A B C Activity-Based Costing Example

45 20-44 A B C Activity-Based Costing Example

46 20-45 A B C Activity-Based Costing Example

47 20-46 A B C Activity-Based Costing Example

48 20-47 Activity-Based Costing Example A B C

49 20-48 Activity-Based Costing Example A B C

50 20-49 Activity-Based Costing Example A B C These amounts did not change as a result of using ABC.

51 20-50 Activity-Based Costing Example Comparison A B C Remember, we originally used a plant-wide rate, based on direct labor hours, to allocate overhead.

52 20-51 Many companies have found that low-volume, specialized products have greater costs than previously realized. Activity-Based Costing Example Comparison

53 20-52 Can you see how different allocation methods might lead management to make different decisions? Activity-Based Costing Example Comparison

54 20-53 Activity-Based Costing Final Observations As companies become more automated... u Overhead tends to become a larger portion of product cost. u Direct labor becomes a smaller portion of product cost and consequently a less reliable cost driver. As companies become more automated... u Overhead tends to become a larger portion of product cost. u Direct labor becomes a smaller portion of product cost and consequently a less reliable cost driver. Direct Material Product Cost Dollar Amount Mfg. OH Direct Labor

55 20-54 l ABC is likely to result in cost reductions. u Focus is on activity analysis. u Cost reduction usually requires a change in activities. l ABC is likely to result in cost reductions. u Focus is on activity analysis. u Cost reduction usually requires a change in activities. Activity-Based Costing Final Observations Costs

56 20-55 l ABC is likely to result in cost reductions. u Focus is on activity analysis. u Cost reduction usually requires a change in activities. l Activity-based costing concepts and methods are also applicable to marketing and administrative activities. l ABC is likely to result in cost reductions. u Focus is on activity analysis. u Cost reduction usually requires a change in activities. l Activity-based costing concepts and methods are also applicable to marketing and administrative activities. Activity-Based Costing Final Observations

57 20-56 l ABC is likely to result in cost reductions. u Focus is on activity analysis. u Cost reduction usually requires a change in activities. l Activity-based costing concepts and methods are also applicable to marketing and administrative activities. l Accountants implementing activity-based costing may experience opposition to change. l ABC is likely to result in cost reductions. u Focus is on activity analysis. u Cost reduction usually requires a change in activities. l Activity-based costing concepts and methods are also applicable to marketing and administrative activities. l Accountants implementing activity-based costing may experience opposition to change. Activity-Based Costing Final Observations

58 20-57 THE END We finished just in time!


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