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Copyright © Houghton Mifflin Company. All rights reserved. 1
Financial & Managerial Financial & Managerial Accounting 2002eAccounting 2002e
Belverd E. Needles, Jr.Belverd E. Needles, Jr.Marian PowersMarian PowersSusan CrossonSusan Crosson
- - - - - - - - - - -Multimedia Slides by:
Harry Hooper Santa Fe Community College
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Chapter 27Chapter 27Quality Management Quality Management
and Measurementand Measurement
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1. Define cost management, describe a
management information system, and
explain how it enhances the management
cycle.
2. Define total quality management and identify
and compute the costs of quality for
products and services.
3. Use nonfinancial measures of quality to
evaluate operating performance.
LEARNING OBJECTIVESLEARNING OBJECTIVES
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4. Discuss the evolving concept
of quality.
5. Identify the awards and
organizations that promote
quality.
LEARNING OBJECTIVESLEARNING OBJECTIVES
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Management Information SystemsManagement Information Systems
OBJECTIVE 1
Describe a management information system
and explain how it enhances the management
cycle.
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Management Information SystemsManagement Information Systems•A management information system (MIS)
is a management reporting system that
identifies
monitors
maintains
continuous, detailed analyses of a
company’s activities and provides
managers with timely measures of
operating results.
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Management Information SystemsManagement Information Systems
• Primary focus of an MIS is on the management of activities (not costs). • Nonvalue-adding activities are
highlighted.• Individual customer profitability is
analyzed.• Resource usage and each activity cost is
identified.•Managerial decision making is fostered,
leading to continuous improvement.
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Management Information SystemsManagement Information Systems
• An MIS may consist of separate or linked systems. • An MIS may be a fully integrated data-base
system: an enterprise resource planning (ERP) system. • An ERP system combines the management
of all major business functions: purchasing, manufacturing, marketing, sales, logistics, order fulfillment, accounting, human resources, etc.• Managerial decision making is fostered,
leading to continuous improvement.
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The Management CycleThe Management Cycle
1. Planning stage: Managers use the MIS database for formulating strategic plans, making forecasts, and preparing budgets.
2. Executing stage: Managers use the MIS database for implementing decisions about personnel, resources, and activities to minimize waste and improve quality.
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The Management CycleThe Management Cycle
3. Reviewing stage: Managers track financial and nonfinancial performance measures for evaluating major business functions.
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The Management CycleThe Management Cycle
4. Reporting stage: Managers
generate customized reports to
evaluate performance and
support decision-making.
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The Management Cycle and a Management Information SystemThe Management Cycle and a Management Information System
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Discussion Discussion Q. What are some of the activities
included in a cost management system?
A. 1. Purchasing
2. Manufacturing
3. Marketing
4. Sales
5. Logistics
6. Order fulfillment
7. Accounting
8. Human resources
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Accounting for Accounting for Product and Service QualityProduct and Service Quality
OBJECTIVE 2
Define total quality management and
identify and compute the costs of quality
for products and services.
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Total Quality ManagementTotal Quality Management
• Total quality management (TQM)
exists when all business functions
work together to achieve quality.
• Quality means satisfying the customer
the first time.
• Costs of quality exist when quality is
achieved and when it is not achieved.
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Costs of QualityCosts of Quality
• The costs of conformance
include prevention costs and
appraisal costs.
• The costs of nonconformance
include internal and external
failure costs.
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Financial Measures of QualityFinancial Measures of Quality
Costs of Conformance to Customer StandardsCosts of Conformance to Customer Standards
Prevention costs Technical support for vendors Quality-certified suppliers Integrated system development Quality circles Quality improvement projects Preventive maintenance Quality training of employees Statistical process control Design review of products and Process Engineering processes
Appraisal costs Inspection of materials, processes, Maintenance of test equipment and machines Quality audits of products and End of process sampling and processes testing Vendor audits and sample testing Field testing
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Financial Measures of QualityFinancial Measures of Quality
Costs of Nonconformance to Customer StandardsCosts of Nonconformance to Customer StandardsInternal failure costs Scrap and rework Failure analysis Reinspection and retesting of rework Inventory control and scheduling Quality-related downtime Downgrading because of defects Scrap disposal losses External failure costs Lost sales Returned goods
and replacements Restoration of reputation Investigation of defects Warranty claims and adjustments Product recalls Customer complaint processing Product-liability settlements
Measures of qualityTotal costs of quality as a percentage of net salesRatio of costs of conformance to total costs of qualityRatio of costs of nonconformance to total costs of qualityCosts of nonconformance as a percentage of net sales
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Financial Measures of QualityFinancial Measures of Quality
Measures of QualityMeasures of Quality
Total costs of quality as a percentage of net sales
Ratio of costs of conformance to total costs of quality
Ratio of costs of nonconformance to total costs of quality
Costs of nonconformance as a percentage of new sales
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Discussion Discussion
Q. What are the four cost
categories in total quality
management?
A. 1. Prevention costs.
2. Appraisal costs.
3. Internal failure costs.
4. External failure costs.
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Nonfinancial Measures of QualityNonfinancial Measures of Quality
OBJECTIVE 3
Use nonfinancial measures of quality
to evaluate operating performance.
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Nonfinancial Measures of QualityNonfinancial Measures of Quality
• A business should establish a system
to detect poor quality early.
• Nonfinancial measures help determine
the degree of quality achieved.
• A commitment to ongoing
improvement enhances quality and
ultimately maximizes the financial
return from operations.
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Nonfinancial MeasuresNonfinancial Measures
• Nonfinancial measures of quality include:
• Measures of product design quality.
• Measures of vendor performance.• Measures of production
performance.• Measures of delivery cycle time.• Measures of customer satisfaction.
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Measures of Product Design QualityMeasures of Product Design Quality
• Computer-aided design (CAD) helps detect product design flaws.
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Measures of Vendor PerformanceMeasures of Vendor Performance
• Companies analyze vendors to determine which are most reliable, furnish high-quality goods, deliver on time, and charge competitive prices.
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• Companies adopt computer-integrated manufacturing (CIM) systems to evaluate performance of production equipment and to evaluate performance of maintenance personnel.
Measures of Production PerformanceMeasures of Production Performance
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• Delivery cycle time (time between accepting an order and final delivery
of the product or service) consists of: • Purchase order lead time (time to order
and receive materials).
• Production cycle time (time to make the product).
• Delivery time (time between completion of product and its receipt by the customer).
Measures of Delivery Cycle TimeMeasures of Delivery Cycle Time
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• Customer follow-up helps evaluate customer satisfaction.
• Companies may develop their own customer satisfaction indexes.
Measures of Customer SatisfactionMeasures of Customer Satisfaction
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Nonfinancial Measures of QualityNonfinancial Measures of Quality
Measures of Product Design QualityMeasures of Product Design Quality
Product design flaws Number and types of design defects detectedAverage time between defect detection and correctionNumber of unresolved design
defects at time of product introduction
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Nonfinancial Measures of Nonfinancial Measures of QualityQuality
Measures of Vendor PerformanceMeasures of Vendor Performance
Vendor quality Defect-free materials as a percentage of total materials received; prepared for each vendor
Vendor delivery Timely deliveries of materials as a percentage of total deliveries; prepared for each vendor
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Nonfinancial Measures of Nonfinancial Measures of QualityQuality
Measures of Production PerformanceMeasures of Production Performance
Production quality
Parts scrapped
Equipment utilization rate
Machine downtime
Machine maintenance time
Number of defective products per million produced
Number and type of materials spoiled during production
Productive machine time as a percentage of total time available for production
Amount of time each machine is idle
Amount of time each machine is idle for maintenance and upgrades
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Nonfinancial Measures of QualityNonfinancial Measures of Quality
Measures of Delivery Cycle TimeMeasures of Delivery Cycle Time
On-time deliveries Shipments received by promised date as a percentage of total shipments
Orders filled Orders filled as a percentage of total orders received
Average process time Average time required by production to make a product available for shipment
Average setup time Average amount of time elapsed between the acceptance of an order and the beginning of production
Purchase order lead time Time it takes for materials to be ordered and received so that production can begin
Production cycle time Time it takes to make a product available for shipment
Delivery time Time between the completion of a product and its receipt by the customer
Delivery cycle time Time between the acceptance of an order and the final delivery of the product or service (purchase order lead time + production cycle time + delivery time)
Waste time Production cycle time – average process time – average setup time
Production backlog Number and type of units waiting to begin processing
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Nonfinancial Measures of QualityNonfinancial Measures of Quality
Measures of Customer SatisfactionMeasures of Customer Satisfaction
Customer complaints Number and types of customer complaints
Warranty claims Number and causes of claims
Returned orders Shipments returned as a percentage of total shipments
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• Many of the quality cost categories and nonfinancial measures can be applied to service organizations.
• Flaws in service design lead to poor-quality services.
• Poor service development leads to internal and external failure costs.
Measuring Service QualityMeasuring Service Quality
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Discussion Discussion
Q. What five areas of nonfinancial measures can help determine the degree of quality achieved?
A. 1. Product design quality.
2. Vendor performance.3. Production performance.4. Delivery cycle time.5. Customer satisfaction.
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The Evolving Concept of QualityThe Evolving Concept of Quality
OBJECTIVE 4
Discuss the evolving concept of quality.
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• In the past, the benefits of quality were weighed against the costs of improving quality.
• A “return on quality” was required.
• In the 1980s, Deming and others promoted Total Quality Management (TQM).
• Companies came to believe that quality gave companies a competitive edge.
• Quality control methods were implemented to eliminate defects in product design and
manufacture.
The Evolving Concept of QualityThe Evolving Concept of Quality
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• Companies expanded quality management to include nonmanufacturing processes.
• Benchmarking compares the quality of a process with a parallel process at the best-in-class company (from any industry).
• Process mapping diagrams process inputs, outputs, constraints, and flows to identify unnecessary efforts and inefficiencies.
• Service businesses also seek to maximize customer satisfaction.
The Evolving Concept of QualityThe Evolving Concept of Quality
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• The concept of quality evolves to fulfill customer needs and expectations as the business environment changes.
• Quality dimensions include freedom from defects, dependability, prestige, good taste, customer expectations, innovation.
• The goal is customer satisfaction and customer retention.
The Evolving Concept of QualityThe Evolving Concept of Quality
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Full Cost Profit MarginFull Cost Profit Margin
OBJECTIVE 5
Identify the awards and organizations
that promote quality.
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Awards to recognize and promote the
importance of quality include: • The Deming Application Prize—awarded by
the Japanese Union of Scientists and Engineers.
• The Malcolm Baldrige Quality Award—awarded to U.S. organizations for achievements in quality and business performance excellence.
The International Standards Organization (ISO) has developed ISO 9000, setting quality management and quality assurance standards.
Recognition of QualityRecognition of Quality
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1. Describe a management information system, and explain how it enhances the cycle.
2. Define total quality management and identify and compute the costs of quality for products and services.
3. Use nonfinancial measures of quality to evaluate operating performance.
OK, Let’s ReviewOK, Let’s Review
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4. Discuss the evolving concept of quality.
5. Identify the awards and organizations that promote quality.
And Finally . . .And Finally . . .