Presentation on theme: "CHAPTER 20 USING ACCOUNTING FOR QUALITY AND COST MANAGEMENT 1st 1st."— Presentation transcript:
1 CHAPTER 20USING ACCOUNTING FORQUALITY AND COSTMANAGEMENT1st1st
2 Quality and the New Production Environment Objective – To stay competitive through:Improving customer service and product qualityReducing costs
3 Improving Quality How much will it cost to improve quality? What can we do to improve quality?
4 Cost of Quality Texas Instruments Approach Prevention costsInspection of materials upon deliveryInspection of production processEquipment inspectionEmployee trainingAppraisal costsFinished goods inspectionField testing of products.
5 Cost of Quality Texas Instruments Approach Internal failure costs are due to defects discovered before delivery to customers.Scrap materialsReworkReinspectionLost sales resulting from late deliveriesCost Report
6 Cost of Quality Texas Instruments Approach External failure costs are due to defects discovered after delivery to customers.Warranty repairsProduct liabilityMarketing costs to improve product imageLost sales due to poor product quality
7 Cost of Quality Texas Instruments Approach Cost of prevention and appraisalInternal and external failure costsObjectiveZero defects while minimizing all four quality cost categories
8 Improving Quality Total Quality Management (TQM) Managing an organization so that it excels in areas important to the customerOrganization strives for excellenceQuality is defined by the customer
9 Is Quality Worth the Investment? Two ViewsCost vs. BenefitQuality is freeCosts 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.
10 The Quality Is Free Concept Quality products and servicesIncreased business and profitsGreater customer satisfaction
11 Methods to Identify Quality Problems Control chartsPareto diagramsCause and effect analysis
12 Quality & Customer Satisfaction Measures 746Performance measureQuality controlNumber of customer complaints and defectsDelivery performancePercentage of on-time deliveriesMaterials wasteScrap and waste as a percentage of materials usedMachine DowntimePercentage of time machines are not workingObjectiveCustomer satisfaction and high quality productsIncrease on-time deliveriesDecrease scrap and waste; improve product qualityIncrease efficiency; increase on-time deliveries
13 Additional Quality Concepts MotivationEmployees respond favorably to quality initiativesStrategic advantagesFavorable reputation among competitorsBenchmarkingContinuous process of measuring performance against best of similar organizations
14 Just-In-Time (JIT) Inventory Products are completed just in time for shipment to customersRaw materials are received just in time for production
15 Just-In-Time (JIT) Inventory In conventional system, materials are “pushed” through assembly process.In JIT system, materials are “pulled” through assembly process by customers’ needs.
16 Just-In-Time (JIT) Inventory Receive customer ordersComplete products just in time to ship to customersSchedule productionReceive materials just in time for productionComplete parts just in time for assembly into products
17 Relationship Between JIT and Total Quality Management Less warehouse space neededReduced inventory carrying costsReduced risk of obsolete inventory
18 Relationship Between JIT and Total Quality Management Less warehouse space neededHigher quality productsReduced inventory carrying costsMore rapid response to customer ordersGreater customer satisfactionReduced risk of obsolete inventory
19 Relationship Between JIT and Total Quality Management Unhappy customerLate deliveryQuality must be stressed from the very beginning for JIT to be successful.Raw materialsJIT factory is idle, waiting on quality raw materialsPoor quality items returned
20 Impact of Just-in-Time on Accounting Procedures JIT goal is to minimize inventories:Raw MaterialsWork in ProcessFinished GoodsProduction costs are assigned directly to cost of goods sold.
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 SoldInventory
22 Impact of Just-in-Time on Accounting Procedures JIT accounting entries
23 Impact of Just-in-Time on Accounting Procedures Backflush entry if inventory remains unsold or in process
24 ROLL ‘EM ! Put on your hard hat and click the reels. Video #1(Approx. 8 min.)Video #2(Approx. 3 min.)Put on your hard hat and click the reels.Hey! You’re just in time for the movies.
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.ProductsConsumeActivitiesActivitiesConsumeResourcesPeopleManageActivities
27 Activity-Based Costing Benefits More detailed measures of costsMore accurate product costs for...Pricing decisionsProduct elimination decisionsBetter information for use in managing activities that cause costsBenefits should always be compared to costs of implementation
28 Methods Used for Activity-Based Costing Activity-based costing involves these steps:Identify the activities that consume resources, and assign costs to those activities.Identify the cost driver(s) associated with each activity.A cost driver is a factorthat causes, or “drives,” anactivity’s cost.
29 Methods Used for Activity-Based Costing Activity-based costing involves these steps:Identify the activities that consume resources, and assign costs to those activities.Identify the cost driver(s) associated with each activity.Compute a cost rate per cost driver unit or transaction.Assign costs to products as follows:Cost driver rate × Cost driver units consumed
30 Activity-Based Costing Identifying Cost Drivers Cost drivers are related to volume or complexity of production.Examples: machine time, machine setups, purchase orders, production ordersCost driver factors (in order of preference):Causal relationshipBenefits receivedReasonableness
31 Activity-Based Costing Cost Rate Per Cost Driver Unit For a period of time, estimate total . . .indirect costs for the activitycost driver units of activityPredeterminedindirect cost rateEstimated indirect costsEstimated cost driverunits of activity=This formula applies to any indirect cost. (e.g., manufacturing overhead, administrative, distribution, marketing, etc.
32 Activity-Based Costing Cost Rate Per Cost Driver Unit For a period of time, estimate total . . .indirect costs for the activitycost driver units of activityPredeterminedindirect cost rateEstimated indirect costsEstimated cost driverunits of activity=Note that this concept is identical to that used to calculate the predeterminedoverhead rate in Chapter 18.
33 Activity-Based Costing Example At this point, we need to look at an example to illustrate the concepts..
34 Activity-Based Costing Example 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.
35 Activity-Based Costing Example (Overhead Allocation)
36 Activity-Based Costing Example (Overhead Allocation)
39 Activity-Based Costing Example 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.ABC
49 Activity-Based Costing Example These amounts did notchange as a result ofusing ABC.
50 Activity-Based Costing Example ComparisonRemember, we originally used a plant-wide rate, based on direct labor hours, to allocate overhead.ABC
51 Activity-Based Costing Example ComparisonMany companies have found that low-volume, specialized products have greater costs than previously realized.
52 Activity-Based Costing Example ComparisonCan you see how different allocationmethods might lead management to make different decisions?
53 Activity-Based Costing Final Observations As companies become more automated...Overhead tends to become a larger portion of product cost.Direct labor becomes a smaller portion of product cost and consequently a less reliable cost driver.Direct MaterialProduct CostDollar AmountMfg. OHDirect Labor
54 Activity-Based Costing Final Observations ABC is likely to result in cost reductions.Focus is on activity analysis.Cost reduction usually requires a change in activities.Costs
55 Activity-Based Costing Final Observations ABC is likely to result in cost reductions.Focus is on activity analysis.Cost reduction usually requires a change in activities.Activity-based costing concepts and methods are also applicable to marketing and administrative activities.
56 Activity-Based Costing Final Observations ABC is likely to result in cost reductions.Focus is on activity analysis.Cost reduction usually requires a change in activities.Activity-based costing concepts and methods are also applicable to marketing and administrative activities.Accountants implementing activity-based costing may experience opposition to change.
57 We finished just in time! THE ENDWe finished just in time!