1. 1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University MANAGERIAL ACCOUNTING 10 TH EDITION BY MAHER, STICKNEY & WEIL STRATEGIC MANAGEMENT: COSTS, QUALITY, & TIME STUDENT CHAPTER 4 © Copyright 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South- Western are trademarks used herein under license.

2. Managerial Decision Making 2 1.Distinguish between traditional view of quality & quality-based view. 2.Define quality according to the customer. 3.Compare costs of quality control with costs of failing to control quality. 4.Explain why firms make trade-offs in quality control costs & failure costs. 5.Describe tools firms use to identify quality control problems. LEARNING OBJECTIVES Continued

3. Managerial Decision Making 3 6.Explain why just-in-time requires total quality management. 7.Explain why time is important in a competitive environment. 8.Explain how activity-based management can reduce customer response time. 9.Explain how traditional managerial accounting systems require modifications to support total quality management. LEARNING OBJECTIVES

4. Managerial Decision Making 4 CHAPTER GOAL This chapter illustrates the significance of quality.  Prizes recognize improvements in quality.  Japan: Deming Prize  US: Baldrige Quality Award  International standards measure quality  ISO 9000: standards for quality management  ISO 14000: standards for communicating financial impact of environmental issues ☼☼

5. Managerial Decision Making 5 TRADITIONAL VIEW The traditional view of quality assumes that improving quality always requires increasing costs.  Firms can reduce total costs by  Producing lower-quality goods  Tolerating some level of defective goods LO 1

6. Managerial Decision Making 6 QUALITY-BASED VIEW The quality-based view holds that firms should always attempt to improve quality.  Attempts to improve quality will succeed without limit  Firms  Should not wait for inspections of finished products to reveal defects  Must establish quality goals & procedures  Aim for zero defects  High quality pays for itself LO 1

7. Managerial Decision Making 7 TRADITIONAL VS. QUALITY- BASED VIEW LO 1 Traditional ViewQuality-based View Quality increases costsQuality decreases costs Goods require inspectionDefect-free goods require no inspection Workers cause most defectsSystem causes most defects Require standards, quotas, goalsEliminate standards, quotas, goals Buy from lowest cost supplierBuy on basis of lowest total cost Focus on short-run profitsFocus on long-run profits EXHIBIT 4.1

8. Managerial Decision Making 8 QUALITY: Customer View 3 success factors to meet customer requirements  Service  All the products features, tangible & intangible  Quality  Firm’s ability to deliver its service commitments  Cost  Customers will buy product that provides them with preferred mix of quality, service, price LO 2

9. Managerial Decision Making 9 VALUE CHAIN LO 2 Research & Development Design Production Marketing Distribution Customer Service Prevent quality problems here Identify quality problems here Deal with unhappy customers here EXHIBIT 4.3

10. Managerial Decision Making 10 COSTS OF QUALITY  Prevention  Procurement inspection  Processing control  Design  Quality training  Machine inspection  Appraisal  End-process sampling  Field testing LO 3

11. Managerial Decision Making 11 COSTS OF FAILING TO IMPROVE QUALITY  Internal failure costs: detection before delivery  Scrap  Rework  Reinspection/retesting  External failure costs: detection after delivery  Warranty repairs  Product liability  Marketing costs  Lost sales LO 3

12. Managerial Decision Making 12 Is quality free? Although initially quality production is costly, in the long run companies consider quality to be free. LO 4

13. Managerial Decision Making 13 Harvey Firestone believed honesty was the keystone of business. How did Firestone react to its defective tires? Firestone was more concerned about the cost of fixing a problem when it occurred. Ultimately, the cost was higher & their reputation tarnished. LO 4 MANAGERIAL APPLICATION E!!!

14. Managerial Decision Making 14 TOOLS Tools to identify quality problems include  Control charts  Cause-and-effect analysis  Pareto charts Produce signals about quality control LO 5

15. Managerial Decision Making 15 SIGNAL: Definition Is information provided to a decision maker.  Warning signal indicates something is wrong  Diagnostic signal suggests cause of problem & possible solutions LO 5

16. Managerial Decision Making 16 CAUSE & EFFECT: Definition Is analysis that first defines the effect & then identifies the cause. LO 5

17. Managerial Decision Making 17 EXHIBIT 4.7 LO 5 Pareto charts illustrate graphically the problems or defects.

18. Managerial Decision Making 18 JIT Factors for success in JIT  Total quality  Smooth production flow  Purchasing quality materials  Well-trained, flexible workforce  Short customer-response times  Backlog of orders LO 6

19. Managerial Decision Making 19 NEW-PRODUCT DEVELOPMENT TIME: Definition Refers to the period between a firm’s first consideration of a product & its delivery to the customer. LO 7

20. Managerial Decision Making 20 BREAK-EVEN TIME: Definition Refers to time required before the firm recovers its investment in new-product development. LO 7

21. Managerial Decision Making 21 BREAK-EVEN TIME EQUATION LO 7 Break-even time = (Investment ÷ Annual Discounted Cash Flow) + Time period from Project approval until Sales begin

22. Managerial Decision Making 22 LIMITATIONS: Break-even Time  Break-even time  Ignores cash flows after break-even point  Does not consider strategic, nonfinancial reasons for new product  Varies from one business to next, depending on product life cycles & investment requirements. LO 7

23. Managerial Decision Making 23 BALANCED SCORECARD: Definition Reports an integrated group of financial & nonfinancial performance measures based on vision & strategy. LO 8

24. Managerial Decision Making 24 TOTAL QUALITY MANAGEMENT (TQM) TQM requires 5 changes to traditional managerial accounting systems  System includes information to help solve problems  Line employees collect information for feedback  Information should be available quickly  Information should be more detailed  Base rewards on quality, customer satisfaction LO 9

25. Managerial Decision Making 25 CHAPTER 4 THE END