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USING ACCOUNTING FOR QUALITY AND COST MANAGEMENT

1 st. 1 st. CHAPTER 20. USING ACCOUNTING FOR QUALITY AND COST MANAGEMENT. Quality and the New Production Environment. Objective – To stay competitive through: Improving customer service and product quality Reducing costs. How much will it cost to improve quality?.

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USING ACCOUNTING FOR QUALITY AND COST MANAGEMENT

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

  2. Quality and the New Production Environment Objective – To stay competitive through: • Improving customer service and product quality • Reducing costs

  3. How much willit cost toimprove quality? What can wedo to improvequality? Improving Quality

  4. Cost of QualityTexas Instruments Approach • Prevention costs • Inspection of materials upon delivery • Inspection of production process • Equipment inspection • Employee training • Appraisal costs • Finished goods inspection • Field testing of products .

  5. CostReport Cost of QualityTexas Instruments Approach • Internal failure costs are due to defects discovered before delivery to customers. • Scrap materials • Rework • Reinspection • Lost sales resultingfrom late deliveries

  6. Cost of QualityTexas Instruments Approach • External failure costs are due to defects discovered after delivery to customers. • Warranty repairs • Product liability • Marketing costs toimprove product image • Lost sales due to poorproduct quality

  7. Internaland external failure costs Cost of preventionand appraisal Cost of QualityTexas Instruments Approach Objective Zero defectswhile minimizingall four qualitycost categories

  8. Improving Quality Total Quality Management (TQM) Managing an organization so that it excels in areas important to the customer Organization strives for excellence Quality is definedby the customer

  9. Cost vs. Benefit Quality is free Costs of quality programsare easily measured, butbenefits of increasedcustomer satisfaction aredifficult to measure. The long-run benefits ofincreased customersatisfaction far outweighthe costs of improvingquality. Is Quality Worth the Investment? Two Views

  10. Increasedbusinessandprofits Greatercustomersatisfaction The Quality Is Free Concept Qualityproductsandservices

  11. Methods to IdentifyQuality Problems Control charts Pareto diagrams Cause andeffect analysis

  12. 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 Quality & Customer Satisfaction Measures 746

  13. Additional Quality Concepts Motivation Employees respond favorablyto quality initiatives Strategic advantages Favorable reputation among competitors Benchmarking Continuous process of measuring performance against best of similar organizations

  14. Just-In-Time (JIT) Inventory Products are completed just in time for shipment to customers Raw 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. Complete productsjust in time toship to customers Scheduleproduction Receive materialsjust in time forproduction Complete partsjust in time forassembly into products Just-In-Time (JIT) Inventory Receivecustomerorders

  17. Relationship Between JIT andTotal Quality Management Less warehousespace needed Reducedinventorycarrying costs Reduced riskof obsoleteinventory

  18. Relationship Between JIT andTotal Quality Management Less warehousespace needed Higher qualityproducts Reducedinventorycarrying costs More rapidresponse tocustomer orders Greatercustomersatisfaction Reduced riskof obsoleteinventory

  19. Unhappy customer Latedelivery Raw materials Poor qualityitems returned Relationship Between JIT andTotal Quality Management Quality must be stressedfrom the very beginning forJIT to be successful. JIT factory isidle, waiting onquality rawmaterials

  20. Impact of Just-in-Time on Accounting Procedures JIT goal is to minimize inventories: Raw Materials Work inProcess FinishedGoods Production costs are assigned directlyto cost of goods sold.

  21. Cost ofGoods Sold Inventory Impact of Just-in-Time on Accounting Procedures Any end-of-period inventory is recorded in a procedure knownas backflush costing.

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

  25. Let’s change the subject!

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

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

  28. A cost driver is a factor that causes, or “drives,” an activity’s cost. Methods Used forActivity-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.

  29. Methods Used forActivity-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 CostingIdentifying Cost Drivers • Cost drivers are related to volume or complexity of production. • Examples: machine time, machine setups, purchase orders, production orders • Cost driver factors (in order of preference): • Causal relationship • Benefits received • Reasonableness

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

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

  33. Activity-Based CostingExample At this point, we need to look at an example to illustrate the concepts. .

  34. Activity-Based CostingExample 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 CostingExample (Overhead Allocation)

  36. Activity-Based CostingExample (Overhead Allocation)

  37. Activity-Based CostingExample

  38. Activity-Based CostingExample

  39. A C B Activity-Based CostingExample 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.

  40. A C B Activity-Based CostingExample

  41. A C B Activity-Based CostingExample Original budgeted overhead total forthe period

  42. A C B Activity-Based CostingExample ==== ++++

  43. A C B Activity-Based CostingExample

  44. A C B Activity-Based CostingExample

  45. A C B Activity-Based CostingExample

  46. A C B Activity-Based CostingExample

  47. A C B Activity-Based CostingExample

  48. A C B Activity-Based CostingExample

  49. A C B Activity-Based CostingExample These amounts did not change as a result of using ABC.

  50. A C B Activity-Based CostingExample Comparison Remember, we originally used aplant-wide rate, based on directlabor hours, to allocate overhead.

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