Horngren's Cost Accounting: A Managerial Emphasis - Chapter 20 - Balanced Scorecard: Quality and Time (PDF)

Horngren’s Cost Accounting: A Managerial Emphasis Seventeenth Edition Chapter 20 Balanced Scorecard: Quality and Time Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Learning Objectives (1 of 2) 20.1 Explain the four cost categories in a...

Horngren’s Cost Accounting: A Managerial Emphasis Seventeenth Edition Chapter 20 Balanced Scorecard: Quality and Time Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Learning Objectives (1 of 2) 20.1 Explain the four cost categories in a costs-of-quality program 20.2 Develop nonfinancial measures and methods to improve quality 20.3 Use costs-of-quality measures to make decisions 20.4 Use financial and nonfinancial measures to evaluate quality Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Learning Objectives (2 of 2) 20.5 Describe customer-response time and on-time performance and why delays occur 20.6 Determine the costs of delays 20.7 Use financial and nonfinancial measures of time Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Quality As a Competitive Tool (1 of 2) Quality—the total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use. Companies find that a focus on the quality of a product or service generally builds expertise in producing it, lowers the cost of providing it, creates higher satisfaction for customers using it, and generates higher future revenues for the company selling it. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Quality As a Competitive Tool (2 of 2) Companies are also using quality management and measurement practices to find cost-effective ways to reduce the environmental and economic costs of air pollution, wastewater, oil spills, and hazardous waste disposal. Product quality can also be an important engine for environmental progress. We’ll focus on two basic aspects of quality. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Two Basic Aspects of Quality 1. Design quality refers to how closely the characteristics of a product or service meet the needs and wants of customers. 2. Conformance quality refers to the performance of a product or service relative to its design and product specifications. Quality has both financial and nonfinancial components relating to customer satisfaction, improving internal quality processes, reducing defects and the training, and empowering of workers. Let’s look at it from the four perspectives of the balanced scorecard. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Two Aspects of Quality Illustrated: Quality and Failure Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Quality from the Four Perspectives of The Balanced Scorecard Financial—four categories of quality costs Customer—Nonfinancial measures of customer satisfaction Internal business process—Analyzing quality problems and improvements in quality Learning and growth—Quality improvements Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Financial Perspective: Costs of Quality (COQ) Four Categories of Quality Costs 1. Prevention costs—costs incurred to prevent the production of products that do not conform to specifications 2. Appraisal costs—costs incurred to detect which individual units of products do not conform to specifications 3. Internal failure costs—costs incurred on defective products before they are shipped to customers 4. External failure costs—costs incurred on defective products after they are shipped to customers Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Items Pertaining to Costs of Quality (COQ) Reports Exhibit 20.1 Items Pertaining to Costs of Quality Reports Prevention Costs Appraisal Costs Internal Failure Costs External Failure Costs Design engineering Inspection Spoilage Customer support Process engineering Online product Rework Manufacturing/process Supplier evaluations manufacturing and Scrap engineering for externaI process inspection failures Preventive equipment Machine repairs maintenance Product testing Warranty repair costs Manufacturing/process Quality training engineering on internaI Liability claims Testing of new failures materials Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Determining C O Q By Adapting the Seven-Step Activity-Based Costing Approach (Chapter 5) (1 of 2) 1. Identify the chosen cost object. 2. Identify the direct costs of the quality of the product. 3. Select the activities and cost-allocation bases to use for allocating the indirect costs of quality to the product. 4. Identify the indirect costs of quality associated with each cost-allocation base. 5. Compute the rate per unit of each cost-allocation base. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Determining C O Q By Adapting the Seven-Step Activity-Based Costing Approach (Chapter 5) (2 of 2) 6. Compute the indirect costs of quality allocated to the product. 7. Compute the total costs of quality by adding all direct and indirect costs of quality assigned to the product. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved  Costs of Quality: Opportunity Costs Opportunity costs result from poor quality: 1. Contribution margin and income forgone from lost sales 2. Lost production 3. Lower prices These opportunity costs are not recorded in the financial accounting systems. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Customer Perspective Nonfinancial measures of customer satisfaction – Market research information on customer preferences for and customer satisfaction with specific product features – Market share – Percentage of highly satisfied customers – Number of defective units shipped to customers as a percentage of total units shipped – Number of customer complaints – Percentage of products that fail soon after delivery – Average delivery delays – On time delivery rate Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Internal-Business-Process Perspective Three techniques for identifying and analyzing quality problems 1. Control charts 2. Pareto diagrams 3. Cause-and-effect diagrams Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Control Charts (1 of 2) Statistical quality control (SQC) is a formal means of distinguishing between random and nonrandom variations in an operating process. (Also called statistical process control—SPC.) Random variations occur, for example, when chance fluctuations in the speed of equipment cause defective products to be produced. Nonrandom variations occur when defective products are produced as a result of a systematic problem, such as an incorrect speed setting, a flawed part design, or mishandling of a component part. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Control Charts (2 of 2) Control charts are a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time. Each observation is plotted relative to specified ranges that represent the limits within which observations are expected to fall. Only those observations that fall outside the control limits are regarded as nonrandom and worth investigating. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Quality and Failure Exhibit 20.3 Statistical Quality Control Charts: Daily Defect Rate for 3D Printers at Formrob Corporation Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Pareto Diagrams Pareto diagram—a chart that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent Observations outside control limits serve as inputs for Pareto diagrams. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Pareto Diagram Example Exhibit 20.4 Pareto Diagram for 3D Printers at Formrob Corporation Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cause-and-Effect Diagrams Problems identified by the Pareto diagram are analyzed using cause-and-effect diagrams. Identifies potential causes of defects. Also called fishbone diagrams because they resemble the bone structure of a fish. The large “bones” coming off the backbone represent the main categories of potential causes of failure. The four categories are human factors, methods and design factors, machine-related factors and materials, and components factors. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cause-and-Effect Diagram Example Exhibit 20.5 Cause-and-Effect Diagram for 3D Printers with Small Holes (Defects) at Formrob Corporation Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Six Sigma Quality The ultimate goal of quality programs is to achieve Six Sigma quality. This means that the process is so well understood and tightly controlled that the mean defect rate and the standard deviation are both very small. To implement Six Sigma, companies use techniques such as control charts, Pareto diagrams, and cause-and-effect diagrams to define, measure, analyze, improve, and control processes to minimize variability in manufacturing and achieve almost zero defects. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Nonfinancial Measures of Internal- Business-Process Quality Companies routinely use nonfinancial measures to track the quality improvements they are making. The following are nonfinancial measures of internal-business-process quality: Percentage of defective products manufactured Percentage of reworked products Number of different types of defects analyzed using control charts, Pareto diagrams, and cause-and-effect diagrams Number of design and process changes made to improve design quality or reduce the costs of quality Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Learning-and-Growth Perspective for Quality Experience and qualifications of design engineers Employee training Employee turnover ratio Employee empowerment Employee satisfaction Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Weighing the Costs and Benefits of Improving Quality When faced with a quality issue, managers should evaluate each alternative identifying the relevant costs and benefits for each alternative. Ask: How will total costs and total revenues change under each alternative? Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Advantages of COQ (Financial) Measures To evaluate the firm’s quality performance, managers use both financial (COQ) and nonfinancial measures. That’s because each offers different advantages. COQ focuses managers’ attention on how poor quality affects operating income. Total costs of quality help managers evaluate the costs and benefits of incurring prevention and appraisal costs to eliminate internal and external failure costs. COQ measures assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Advantages of COQ (Nonfinancial) Measures Nonfinancial measures of quality are often easy to quantify and understand. Nonfinancial measures direct attention to physical processes that help managers identify the precise problem areas that need improvement. Nonfinancial measures provide immediate short-run feedback on whether quality-improvement efforts are succeeding. Nonfinancial measures are useful indicators of future long- run performance. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Time As a Competitive Tool Companies view time as a driver of strategy. Managers need to measure time properly to manage it. Two operational measures of time – Customer response time: how quickly companies respond to customers’ demands for their products and services – On-time performance: indicates how reliably companies meet their scheduled delivery dates Managers also measure the causes and costs of delays. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Customer-Response Time Illustrated Exhibit 20.7 Components of Customer-Response Time Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Time Drivers A time driver is any factor that causes a change in the speed of an activity when that factor changes. Two time drivers 1. Uncertainty about when customers will order products and services 2. Bottlenecks due to limited capacity  A bottleneck occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it. Managers should use the five-step decision-making process to examine opportunities. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Relevant Revenues and Costs of Delays Manufacturing cycle times affect both revenues and costs. Revenues are affected because customers are willing to pay a higher price for faster delivery. Relevant costs will likely include inventory carrying costs. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Balanced Scorecard and Time- Based Measures (1 of 3) We’ll use the structure of the balanced scorecard perspectives to summarize how financial and nonfinancial measures of time relate to one another, reduce delays, and increase the output of bottleneck operations. Financial measures – Revenue gains or price increases from fewer delays – Carrying costs of inventories Customer measures – Customer-response time – On-time performance Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Balanced Scorecard and Time- Based Measures (2 of 3) Internal-business-process measures – Average manufacturing time for key products – Manufacturing cycle efficiency for key processes – Defective units produced at bottleneck operations – Average reduction in setup time and processing time at bottleneck operations Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Balanced Scorecard and Time- Based Measures (3 of 3) Learning and growth measures – Employee satisfaction – Number of employees trained in managing bottleneck operations Managers use both financial and nonfinancial measures to manage the performance of their firms along the time dimension. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved