Chapter 26 : Managing Accounting in a Changing Environment

TOTAL QUALITY MANAGEMENT

• Quality - the requirement to meet or exceed customers' expectation then serve as

specification for operations throughout the organization.
• Total quality (management) - is the unyielding and continually improving effort by
everyone in an organization to understand, meet and exceed the expectation of
customers
o Focus on satisfying the customer - identifying the firm's customer, external and
internal ; determining their needs, requirements and expectations; and then
doing whatever it takes to satisfy them.
o Strive for Continuous Improvement - quality is a moving target, without
continuous improvement, quality disappears.
o Full Involvement of the Entire Workforce- any breakdown in the process no
matter how insignificant can lead to a defective product or service and
unsatisfied customers.
o Active Support and Involvement of Top Management- some assume that
successful implementation of TQM requires unwavering and active leadership
from CEO and senior manager but the CEO or top management alone cannot
bring forth all the desired benefits of TQM.
o Use Clear and Measurable Objectives- measurable objectives forge efforts
towards the common goal, to ensure success of total quality management firm
must set unambiguous and measurable objectives.
o Timely Recognition of Quality Achievement- quality achievement of people and
submits when recognized timely is the best way to emphasize the firm's
continuous struggle for better quality and to ensure efforts toward total quality
at every level.
o Continuous Education and Training- employee training program serve as a
communication link to convey management commitment to total quality and
provide employees with necessary skills to achieve total quality.
TQM IMPLEMENTATION GUIDELINES
Year one- Preparation and Planning
• Create quality council and staff
• Conduct executive- quality training program
• Conduct quality audits
• Prepare gap analysis
• Develop strategy on quality management

Year two- Training and Implementation

• Conduct employee communication and training program

• Establish quality teams
• Create a measurement system and set goals
Year three- Assessment, Review & Revise
 • Revise compensation/ appraisal/ recognition systems
• Launch external initiative with suppliers
• Review and revise
TYPES OF CONFORMANCE
1. Goalpost Conformance - conformance to a quality specification expressed as a specified
range around the target.
2. Absolute quality conformance - conformance which require that all products or services
to meet the target value exactly with no variation.
COST OF QUALTY
1. Prevention Cost - costs incurred to avoid poor- quality goods or services or educe the
number of defects in products or services.
2. Appraisal Cost - called inspection cost, are incurred to identify products before the
products are shipped to customers.
3. Internal Failure Cost - costs that result from identification of defects during the appraisal
process.
4. External Failure Cost- cost incurred when poor- quality goods or services are detected
after delivery to customers.
USES OF QUALITY COST INFORMATION
1. Quality cost information provides a basis for establishing budgets for quality cost as
management looks for ways to reduce the total cost involved.
2. Quality cost information helps managers see the financial significance of quality.
3. Quality cost information helps managers identify the relative importance of the quality
problems faced by the firm.
4. Quality cosy information helps managers see whether their quality costs are poorly
distributed and when needed, it helps them distribute the costs better.
LIMITATION OF QUALITY COST INFORMATION
1. Some important quality cost are typically omitted from the quality cost report.
2. Simply measuring and reporting quality cost does not solve quality programs.
3. A log may exist between when quality improvement programs are put into effect and
when the results are seen.
REPORTING QUALITY COST
• Purpose od reporting quality cost is to make management aware of the magnitude of
quality costs and to provide a baseline against which the impact of quality improvement
activities could be measured.
NONFINANCIAL MEASURES OF QUALITY AND CUSTOMER SATISFSCTION
1. On-time delivery rate
2. Delivery delays
3. Percentage of products that fail soon or often
4. Number of customer complaints
5. Number of defective units shipped to customers as a percentage of total units shipped
6. Market research information on customer preference and customer satisfaction with
specific products feature
TIME AS A COMPETITIVE TOOLS
• Customer- response time - duration from the time a customer places an order for a
product or service to the time the product or service is delivered to the customer.
• On time Performance- refers to the situations in which the product or services is actually
delivered by the time it was scheduled to be delivered.

• Just-in-time (JIT) production- also called “lean production” is a demand-pull

manufacturing system because each component in a production line is produced as
soon as and only when needed by the next step in the production line.

➢ Key Features

1. Maintaining a limited number of suppliers

A company must learn to rely on a few ultrareliable suppliers who
are willing to make frequent deliveries in small lots.

2. Improving plant layout

Manufacturing flow lines in the company’s plant must be
improved. In a JIT system, all machines needed to make a
particular product are often brought together in one location
(focused factory approach).

3. Reducing Setup Time

It involves activities such as moving materials, changing machine
settings, setting up equipment, and running tests that must be
performed whenever production is switched over from making
one type to another.

4. Improving Production Scheduling

JIT businesses schedule production in small batches just in time to
satisfy needs.

5. Targeting Zero Defects

Defective units create big problems in a JIT environment because
they could delay the shipments of the order and may generate a
ripple effect that delays others order.
 6. Maintaining Flexible Workforce
Companies employing JIT must have workers who are flexible and
multiskilled.

➢ Financial Benefits of JIT

1. Greater transparency of the production process
2. Heightened emphasis on eliminating the specific causes of rework, scrap, and waste
and
3. Lower manufacturing lead times

➢ Performance Measures and Control in JIT Production

1. Financial performance measures such as inventory turnover ratio which is expected
to increase
2. Nonfinancial performance measures time , inventory, and quality such as

•Manufacturing lead time → expected to decrease

• Units produced per hour → expected to increase
• Number of days inventory
On hand → expected to decrease
Total setup time for machines → expected to decrease
• Total manufacturing time
• Number of units requiring rework of scrap → expected to decrease
Total number of units started and completed
➢ Process Reengineering
o Delivery systems at Timex 2003

• When timex receives a purchase order from a customer, a copy is sent to manufacturing
where a production scheduler begins the planning for manufacturing order items.
• After manufacturing is complete the finished products are sent to the Shipping
Department which matches the quantities to be shipped against customer purchase
order.
• Often the finished products are held in inventory until a truck is available for shipment
to the customer.
• The shipping documents are sent to the Billing Department for issuing invoices.
• Special staffs in the Accounting Department follow up with customer for payment.
 ➢ Theory of Constraints
o Three measurements:
1. Throughput Contribution
2. Investments
3. Operating Costs

Steps to manage bottleneck busy and increase bottleneck efficiency and capacity

1. Recognize that the bottleneck operation determines throughput contribution of the

entire system.
2. Find the bottleneck-operation by identifying operations with large quantities of
inventory waiting to be worked on.
3. Keep the bottleneck operation busy and subordinate all nonbottleneck operations to
the bottleneck operations
4. Take actions to increase the efficiency and capacity of the bottleneck operations.

There are number of actions that a company can take to relieve the bottleneck
constraints in an operation:
a. Eliminate idle time at the bottleneck operations
b. Process only those parts or products that increase throughput
contribution
c. Shifts product that do not have to be made on the bottleneck
machine to nonbottleneck machines or to outside processing
facilities
d. Reduce setup time and processing time at bottleneck operations
e. Improve the quality of parts or products manufactured at the
bottleneck operations

When should the Internal Accounting System be changed?

The preceding section analyzed four organizational innovations. These innovations

illustrate that internal accounting systems are an integral part of the organization’s architecture.
When managers change the architecture of their organization by decentralizing decision rights
and empowering employees via TQM programs because the firm’s business strategy changes,
accounting systems are likewise modified. Similarly when JIT production systems are installed
accounting system changes follow. However, there were no organization changes associated with
productivity measurements system and these accounting systems were not widely implemented.
 Often changes in customers’ organizational architecture cause suppliers to change their
architecture (and accounting systems). For example, when the large automakers switched to JIT,
firms supplying auto parts such as windshield wiper motors switched to JIT. If your major
customers are modifying their organizational architecture they are likely responding to
technological and market conditions. The way in which knowledge is generated and disseminated
has probably changed. These changes are likely affecting your firm’s organizational architecture.

This text has emphasized the dual role of internal accounting systems for decision
making and control. Because the internal accounting systems is performing two separate roles,
trade-offs between these roles must be made. In its decision making role, the accounting system
is the first place managers turn to help them estimate opportunity costs. However, accounting
numbers are not forward looking opportunity costs. Accounting systems record historical costs,
which are back looking. Therefore, accounting numbers are useful for decision making only under
very strong assumptions, primarily that the future will look like the past.
 Exercise Problems:

Sales Variance

Arrow Brewery has two main products — premium and regular beer. Its operating results and master
budget for 2018 (000 omitted) are

Operating Results of 2018 Master Budget for 2018

Premium Regular Total Premium Regular Total

Barrels 180 540 720 240 360 600
Sales 28,800.00 62,100.00 90,900.00 36,000.00 43,200.00 79,200.00
Variable expenses 16,200.00 40,500.00 56,700.00 21,600.00 27.00 48,600.00
Contribution margin 12,600.00 21,600.00 34,200.00 14,400.00 16,200.00 30,600.00
Fixed expenses 10,000.00 5,000.00 15,000.00 10,000.00 5,000.00 15,000.00
Operating income 2,600.00 16,600.00 19,200.00 4,400.00 11,200.00 15,600.00

Sam Kortes, CEO, estimated at the time she prepared the master budget that total industry sales would
be 1,500,000 barrels during the period. After the year was over Mar Gopez, the controller, reported the
total industry sales were 1,600,000 barrels.

Required: Calculate the

1. Selling price variances for the period for each of the products and for the firm.

2. Sales volume variances for the period for each of the products and for the firm.

3. Sales quantity variances for the firm and for each of the products.

4. Sales mix variances for the period for each of the products and for the firm.

5. The sum of the sales quantity variance and sales mix variance and verify that this total equals the
sales volume variance.
6. Market size variances.
7. Market share variances.
8. The sum of market size variance and market share variance and verify that this total equals the sales
quantity variance.
The management of Boogie Company thinks that its total costs of quality can be reduced by increasing
expenditures in certain key costs of quality categories. The following costs of quality have been
identified by management:

Cost of Quality Costs

Rework 6,000
Recalls 15,000
Reengineering efforts 9,000
Repair 12,000
Replacements 12,000
Retesting 5,000
Supervision 18,000
Scrap 9,000
Training 15,000
Testing of incoming materials 7,000
Inspection of work in process 18,000
Downtime 10,000
Product liability insurance 9,000
Quality audits 5,000
Continuous improvement 1,000
Warranty repairs 15,000
Required:
1. Classify these costs into the four costs of quality categories.
2. Determine the total pesos being spent on each of the categories.

3. Based on the company's expenditures by cost of quality categories, on which cost category should the
company concentrate its efforts to decrease its overall costs of quality?
The Gabriel Corporation manufactures and sells industrial grinders. The following table presents
financial information pertaining to quality in 2018 and 2019 (in thousands):

2019 2018
Revenues 12,500 10,000
Line inspection 85 110
Scrap 200 250
Design engineering 240 100
Cost of returned goods 145 60
Product-testing equipment 50 50
Customer support 30 40
Rework costs 135 160
Preventive equipment maintenance 90 35
Product liability claims 100 200
Incoming materials inspection 40 20
Breakdown maintenance 40 90
Product-testing labor 75 220
Training 120 45
Warranty repair 200 300
Supplier evaluation 50 20

Required:
1. Classify the cost items in the table into prevention, appraisal, internal failure, or external failure
categories.
2. Calculate the ratio of each COQ category to revenues in 2018 and 2019. Comment on the trends
in costs of quality between 2018 and 2019.
3. Give two examples of nonfinancial quality measures that Gabriel Corporation could monitor as
part of a total quality control effort.