crosson needles managerial accounting 10e quality management and measurement 12 c h a p t e r ©...

CrossonNeedles

Managerial Accounting

10e

Quality Management and Measurement12

C H A P T E R

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Concepts Underlying Quality(slide 1 of 4)

In a business setting, quality is 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.

Total quality management (TQM) is an organizational environment in which all business functions work together to build quality into the firm’s products or services.

A return on quality (ROQ) results when the marginal revenues possible from a higher-quality good or service exceed the marginal costs of providing that higher quality.

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Before the advent of TQM over 20 years ago, managers assumed that there was a trade-off between the costs and the benefits of improving quality.

In the 1980s, quality gave organizations a competitive edge in the global marketplace.– As a result, managers focused on increasing

customer satisfaction and product or service quality, and organizations recognized the value of producing highly reliable products.

– Companies emphasized kaizen, or the gradual and ongoing improvement of products and processes while reducing costs.



As a result of losing market share to high-quality Japanese goods, Motorola set the goal of Six Sigma quality, which meant that its customers would perceive the company’s products and services as perfect.– It used the DMAIC (define, measure, analyze, improve,

control) and DMADV (define, measure, analyze, design, verify) methods to improve both existing processes and new ones.

– Thousands of companies have embraced the data-driven approach of Six Sigma to reduce errors.

– However, Six Sigma has its drawbacks, including diminished worker morale and invention, and many companies are rethinking Six Sigma as a business cure-all.



Two respected techniques made popular by Six Sigma are still widely used and allow managers to understand and measure quality improvements:

Benchmarking—the 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—a method of using a visual diagram to indicate process inputs, outputs, constraints, and flows to help managers identify unnecessary efforts and inefficiencies in a business process


Recognition of Quality

Many awards and organizations have been established to recognize and promote the importance of quality, including:– Deming Prizes—established by the Japanese Union of

Scientists and Engineers to honor individuals or groups who have contributed to the development and dissemination of total quality control

– EFQM Excellence Award—presented by the European Foundation for Quality Management to businesses and organizations operating in Europe that excel in quality management

– Malcolm Baldrige National Quality Award—created by the U.S. Congress to recognize U.S. organizations for their achievements in quality and business performance and to raise awareness of the importance of quality


ISO Standards

The International Organization for Standardization (ISO) is a worldwide federation of national standards bodies that promotes standardization with a view to facilitating the international exchange of goods and services.– The ISO 9000 series covers the design, development,

production, final inspection and testing, installation, and servicing of products, processes, and services.

– The ISO 14000 series provides a management framework to minimize the harmful environmental effects of business activities and continually improve environmental performance.

– ISO 26000 provides social responsibility guidance.– ISO 31000 outlines risk management principles and

guidelines.


Financial and Nonfinancial Measures of Quality

Quality is not something that a company can simply add at some point in the production process or assume will happen automatically.

Managers need to create a total quality management (TQM) environment by taking these steps:1. Identify and manage the financial measures of

quality, or the costs of quality.2. Analyze operating performance using nonfinancial

measures.3. Require that all processes and products or services

be improved continuously.


Financial Measures of Quality(slide 1 of 2)

The costs of quality are the costs that are specifically associated with the achievement or nonachievement of product or service quality. They have the following two components:– Costs of conformance: the costs of good quality that

are incurred to ensure the successful development of a product or service

– Costs of nonconformance: the costs of poor quality that are incurred to correct defects in a product or service

There is an inverse relationship between the costs of conformance and the costs of nonconformance.


Financial Measures of Quality(slide 2 of 2)

The costs of conformance are made up of:– Prevention costs: the costs associated with the

prevention of defects and failures in products and services– Appraisal costs: the costs of activities that measure,

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

The costs of nonconformance include:– Internal failure costs: costs incurred to correct mistakes

found by the company when defects are discovered before a product or service is delivered to a customer

– External failure costs: costs incurred to correct mistakes discovered by customers after the delivery of a defective product or service


Quality Ratios

Common quality ratios and the formulas showing how to compute them follow.


Nonfinancial Measures of Quality

Managers need a measurement and evaluation system that signals poor quality early enough to allow problems to be corrected before a defective product or service reaches the customer.

Nonfinancial measures of performance are used to supplement cost-based measures. The five categories are:– Product design– Vendor performance– Production performance– Delivery cycle time– Customer satisfaction


Product Design

Most automated production operations use computer-aided design (CAD), a computer-based engineering system with a built-in program to identify poorly designed parts or manufacturing processes before production begins.

Among the measures that managers consider are:– number and types of design defects detected– average time between defect detection and correction– number of unresolved design defects at the time of

product introduction


Vendor Performance

Companies analyze their vendors to determine which ones are most reliable, furnish high-quality goods, have a record of timely deliveries, and charge competitive prices.

Managers use measures of quality (such as defect-free materials as a percentage of total materials received) and measures of delivery (such as timely deliveries as a percentage of total deliveries) to identify reliable vendors and monitor their performance.


Production Performance

More and more companies have adopted computer-integrated manufacturing (CIM) systems, in which production and its support operations are coordinated by computers.– In CIM systems, most direct labor hours are replaced by

machine hours, and very little direct labor cost is incurred.

Measures of production quality, parts scrapped, equipment utilization, machine downtime, and machine maintenance time help managers monitor production performance.


Delivery Cycle Time(slide 1 of 2)

To evaluate their responsiveness to customers, companies examine their delivery cycle time, which is the time between the acceptance of an order and the final delivery of the product or service.

The formula to compute delivery cycle time follows:

– Purchase-order lead time is the time it takes a company to take and process an order and organize so that production can begin.

– Production cycle time is the time it takes to make a product.

– Delivery time is the time between the completion of a product and its receipt by the customer.


Delivery Cycle Time(slide 2 of 2)

Other measures designed to monitor delivery cycle time include order backlogs, on-time delivery performance, percentage of orders filled, and waste time.– The formula to compute waste time follows:


Customer Satisfaction

Measures used to determine the degree of customer satisfaction include:– the number and types of customer complaints– the number and causes of warranty claims– the percentage of shipments returned by customers

(or the percentage of shipments accepted by customers)

Several companies have developed their own customer satisfaction indexes from these measures so that they can compare different product lines over different time periods.


Measuring Service Quality

Many of the costs-of-quality categories and several of the nonfinancial measures of quality apply directly to services and can be used by any type of service organization.– Flaws in service design lead to poor-quality services.– Timely service delivery is as important as timely

product shipments.– Customer satisfaction in a service business can be

measured by services accepted or rejected, the number of complaints, and number of returning customers.

– Poor service development leads to internal and external failure costs.


The Role of Management Information Systemsin Quality Management

A management information system (MIS) should identify, monitor, and maintain continuous, detailed analyses of a company’s activities, use social media and mobile technologies, and provide managers with timely measures of operating results.– By focusing on activities, rather than costs, an MIS

provides managers with information that is needed to increase responsiveness to customers and reduce processing time.

– The MIS identifies resource usage and cost for each activity and fosters managerial decisions that lead to continuous improvement throughout the organization.


Enterprise Resource Planning Systems and Software as a Service (slide 1 of 2)

An MIS can be designed as a fully integrated database system known as an enterprise resource planning (ERP) system.– An ERP system combines the management of all

major business activities with support activities to form one easy-to-access, centralized data warehouse.

– Advantages of an ERP system are its integration and ability to communicate within an organization and with other businesses’ databases.

– However, an ERP system is costly to implement and maintain, can be less than user friendly, and leaves many frustrated.


Enterprise Resource Planning Systems and Software as a Service (slide 2 of 2)

The emerging alternative to ERP systems is software as a service (SaaS).– SaaS utilizes the Internet, social media, and mobile

technologies to manage all business activities on demand.

– Advantages include low acquisition costs, quick implementations, predictable pricing, reduced internal support staff, and a potentially more agile ability to innovate.

– Its primary disadvantage is data security and internal controls, as multiple company data may co-exist on a shared web infrastructure as multi-tenants.


crosson needles managerial accounting 10e quality management and measurement 12 c h a p t e r ©...

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