CHAPTER 11

MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual

Chapter 27 Managing Accounting in a Changing EnvironmentManaging Accounting in a Changing Environment Chapter 27

CHAPTER 27MANAGING ACCOUNTING IN

A CHANGING ENVIRONMENTI.Questions1.The American Heritage Dictionary defines quality as 1. a characteristic or attribute of something; property; a feature. 2. the natural or essential character of something. 3. excellence; superiority.

Quality for a product or service can be defined as a product or service that conforms with a design which meets or exceeds the expectations of customers at a price they are willing to pay.

2.Procter & Gamble defines TQM as the unyielding and continually improving effort by everyone in an organization to understand, meet, and exceed the expectations of customers. Typical characteristics of TQM include focusing on satisfying customers, striving for continuous improvement, and involving the entire workforce.

TQM is a continual effort and never completes. Global competition, new technology, and ever-changing customer expectations make TQM a continual effort for a successful firm.

3.The core principles of TQM include (1) focusing on satisfying the customer, (2) striving for continuous improvement, and (3) involving the entire work force.4.Continuous improvement (Kaizen) in total quality management is the belief that quality is not a destination; rather, it is a way of life and firms need to continuously strive for better products with lower costs.

In todays global competition, where firms are forever trying to outperform the competition and customers present ever-changing expectations, a firm can never reach the ideal quality standard and needs to continuously improve quality and reduce costs to remain competitive.

5.The Institute of Management Accountants (IMA) believes an effective implementation of total quality management will take between three and five years and involves the following tasks:

Year 1 Create a quality council and staff

Conduct executive quality training programs

Conduct quality audits

Prepare gap analysis

Develop strategic quality improvement plans

Year 2

Conduct employee communication and training programs

Establish quality teams

Create measurement systems and set goals

Year 3

Revise compensation / appraisal / recognition systems Launch external initiatives with suppliers Review and revise

6.Reward and recognition are the best means of reinforcing the emphasis on TQM. Moreover, proper reward and recognition structures can be very powerful stimuli to promote TQM. Efforts and progress will most likely be short-lived if no change is made to the compensation / appraisal / recognition systems to make them in line with the objectives of the firms TQM.7.The purposes of conducting a quality audit are to identify strengths and weaknesses in quality practices and levels of a firms quality and to help the firm identify the target areas for quality improvements.

8.A gap analysis is a type of benchmarking that includes analyzing the differences in practices between the firm and the best-in-class. The objective of gap analyses is to identify strengths, weaknesses, and target areas for quality improvement.

9.Some examples of costs associated with cost of quality categories are:

Prevention costs: Training costs such as instructors fees, purchase of training equipment, tuition for external training, training wages and salaries; salaries for quality planning and executions, cost of preventive equipment, printing and promotion costs for quality programs, awards for quality.

Appraisal costs: Costs of raw materials, work-in-process, and finished goods inspections.

Internal failure costs: Scrap, rework, loss due to downgrades, reinspection costs, and loss due to work interruptions.

External failure costs: Sales returns and allowance due to quality deficiency, warranty cost, and canceled sales orders due to quality deficiency.

10.Prevention costs rise during the early years of implementing TQM as the firm engages in education to prepare its employees and in the planning and promotion of the quality program. Appraisal costs will also likely rise during the early years of TQM, because the firm needs to ensure that quality is actually being achieved. The increase in appraisal cost, however, is most likely to occur at a slower pace than those of the prevention costs because at the beginning of a TQM program there will be substantial increases in quality training and in promotion to raise awareness on the importance of quality.

The firm may see some decreases in internal and external failure costs in the early years of implementing a TQM. However, these two costs most likely will remain at about the same level as before during the first several years of TQM. Many firms may actually see internal failure cost rise, because of the higher standard demanded by the TQM or the higher level of employees awareness on the critical importance of perfection in every step of the process. As the firm makes progress in TQM, both internal failure and external failure costs should decrease.

11.Costs of conformance are costs incurred to ensure that products or services meet quality standards and include prevention costs and appraisal costs.

Internal and external failure costs are costs of non-conformance. They are costs incurred or opportunity costs because of rejection of products or services.

12.Better prevention of poor quality often reduces all other costs of quality. With fewer problems in quality, appraisal is needed because the products are made right the first time. Fewer defective units also reduce internal and external failure costs as the occasion for repairs, rework, and recalls decrease.

It is easier to design and build quality in than try to inspect or repair quality in. Theoretically, if prevention efforts are completely successful, there will be no need to incur appraisal costs and there will be no internal failure or external failure costs. In practice, appraisal costs usually do not decrease, partly because management needs to ensure that quality is there as expected. Nonconformance costs, however, decrease at a much faster pace than prevention costs increase.

13.The role of management accountants in total quality management includes gathering all relevant quality information, participating actively in all phases of the quality program, and reviewing and disseminating quality cost reports.14.To meet the challenges of total quality management, management accountants need to have a clear understanding of TQM methodology. They must be able to design, create, or modify information systems that measure and monitor quality and evaluate progress toward total quality as expected of each organizational unit and the total enterprise.

15.Just-in-time (JIT) purchasing is the purchase of goods or materials such that a delivery immediately precedes demand or use. Benefits include lower inventory holdings (reduced warehouse space required and less money tied up in inventory) and less risk of inventory obsolescence and spoilage.

16.The sequence of activities involved in placing a purchase order can be facilitated by use of the Internet. A company can streamline the procurement process for its customers e.g., having online a complete price list, information about expected shipment dates, and a service order capability that is available 24 hours a day with email or fax confirmation.

17.Just-in-time (JIT) production is a demand-pull manufacturing system that has the following features:

Organize production in manufacturing cells,

Hire and retain workers who are multiskilled,

Aggressively pursue total quality management (TQM) to eliminate defects,

Place emphasis on reducing both setup time and manufacturing lead time, and Carefully select suppliers who are capable of delivering quality materials in a timely manner.

18.Reengineering is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction.

19.The three main measures used in the theory of constraints are:

a.Throughput contribution equal to sales revenue minus direct materials costs.b.Investments (inventory) equal to the sum of materials costs of direct materials inventory, work-in-process inventory and finished goods inventory, research and development costs, and costs of equipment and buildings.

c.Other operating costs equal to all operating costs (other than direct materials) incurred to earn throughput contribution.

20.The four key steps in managing bottleneck resources are:

Step 1:Recognize that the bottleneck operation determines throughput contribution.

Step 2:Search for, and find the bottleneck.

Step 3:Keep the bottleneck busy, and subordinate all nonbottleneck operations to the bottleneck operation.

Step 4:Increase bottleneck efficiency and capacity.

21.(a)Product warranty costs should be lower because a world-class manufacturer (WCM) will make fewer defectives.

(b)Salaries of quality control inspectors should be lower because a WCM will have its workers inspect as they go, rather than having separate inspections. Nor will a WCM inspect incoming materials and components because it will deal only with vendors whose quality has been demonstrated.

(c)Amounts paid to vendors for parts and components should be higher because a WCM will not search out the lowest prices, but will seek high-quality components delivered when needed.

(d)Wages rates for direct laborers should be higher because a WCMs workers will multiskilled and should therefore command premium wages.

(e)Total supervisory salaries should be lower because a WCMs workers will not need as much supervision.

(f)Warehousing costs should be lower because a WCM will produce as needed and so will not require storage space for materials or finished product.

22.At the final assembly stage in a JIT system, a signal is sent to the preceding workstation as to the exact parts and materials that will be needed over the next few hours for the final assembly of products. Only those parts and materials are provided. The same signal is sent back through each preceding workstation so that a smooth flow of parts and materials is maintained with no buildup of inventories at any point. Thus, all workstations respond to the pull exerted by the final assembly stage.

The pull approach just described can be contrasted to the push approach used in conventional systems. In a conventional system, inventories of parts and materials are built upoften simply to keep everyone busy. These semi-completed parts and materials are pushed forward to the next workstation whether or not there is actually any customer demand for the products they will become part of. The result is large stockpiles of work in process inventories.

23.A number of benefits accrue from reduced setup time. First, reduced setup time allows a company to produce in smaller batches, which in turn reduces the level of inventories. Second, reduced setup time allows a company to spend more time producing goods and less time getting ready to produce. Third, the ability to rapidly change from making one product to making another allows the company to respond more quickly to customers. Finally, smaller batches make it easier to spot manufacturing problems before they result in a large number of defective units.

II.ExercisesExercise 1 (Quality Cost Classification)

PreventionAppraisalInternal FailureExternal Failure

a. Warranty repairsx

b. Scrapx

c. Allowance granted due to blemishx

d. Contribution margins of lost salesx

e. Tuition for quality coursesx

f. Raw materials inspectionsx

g. Work-in-process inspectionx

h. Shipping cost for replacementsx

i. Recallsx

j. Attorneys fee for unsuccessful defense of complaints about quality x

k. Inspection of reworksx

l. Overtime caused by reworkingx

m. Machine maintenancex

n. Tuning of testing equipmentx

Exercise 2 (Cost of Quality Report)

Requirements 1 & 2Bali CompanyCost of Quality Report

For 2005 and 2006

Cost of Quality20062005

CategoryPeso%Peso%

Prevention costs:

Quality manualP 40,000P 50,000

Product design 300,000P 340,0005.67 270,000P320,0005.33

Appraisal costs:

TestingP 80,00080,0001.33P 60,00060,0001.00

Internal failure costs:

ReworkP200,000P250,000

Retesting50,00090,000

Disposal of defective units 90,000340,0005.67 85,000425,0007.08

External failure costs:

Product recallsP360,000P500,000

Field service 230,000 590,000 9.83 350,000 850,00014.17

Total cost of qualityP1,350,00022.50P1,655,00027.58

a.There were slight increases in both prevention and appraisal costs from 2005 to 2006. Each of these two cost of quality increased by approximately 0.33 percent of the total sales. These two costs increased by P40,000 over the two years.b.Both internal failure costs and external failure costs decreased substantially in 2006 as compared to those in 2005. The firm experienced a 1.41 percent decrease in internal failure and a 4.34 percent decrease in external failure costs with the total savings of P345,000. The savings was 863 percent of the increases in prevention and appraisal costs.

Requirement 3

Among nonfinancial measures the firm may want to monitor are: The number of defects or the processes yield (ratio of good output to total output)

The percentage of defective units shipped to customers to total units of products shipped

The number of customer complaints

Difference between delivery date requested by the customer

On-time delivery percentage (total units shipped on or before the scheduled date to the total units shipped)

Surveys of customer satisfaction

It should be noted that nonfinancial measures by themselves often have limited meaning. Nonfinancial measures are more informative when trends of the same measure over time are examined.

Exercise 3 (Cost of Quality Category)

Requirement 1

Costs of QualityPreventionAppraisalInternal FailureExternal Failure

ReworkP 6,000

RecallsP15,000

Reengineering effortsP 9,000

Repair12,000

Replacements12,000

Retesting5,000

SupervisionP18,000

Scrap9,000

Training15,000

Testing of incoming materials7,000

Inspection of work in process18,000

Downtime10,000

Product liability insurance9,000

Quality audits5,000

Continuous improvement1,000

Warranty repairs

15,000

Requirement 2

Total spent by categoryP25,000P48,000P42,000P51,000

Requirement 3

The company is currently spending the least on preventive costs. They should concentrate their efforts on preventive costs because they prevent poor quality products from being manufactured.

By increasing amount spent on prevention, they could reduce spending on the other cost of quality categories.

Exercise 4 (Cost of Quality Analysis, Nonfinancial Quality Measures)

Requirements 1 and 2

20062005

Revenues P12,500,000P10,000,000

Costs of QualityCost

(1)Percentage of Revenues (2) = (1) ( P12,500,000Cost

(3)Percentage of Revenues (4) = (3) ( P10,000,000

Prevention costs

Design engineeringP240,000P100,000

Preventive maintenance90,00035,000

Training120,00045,000

Supplier evaluation 50,000 20,000

Total prevention costs 500,0004.0% 200,0002.0%

Appraisal costs

Line inspection85,000110,000

Product-testing equipment50,00050,000

Incoming materials inspection40,00020,000

Product-testing labor 75,000 220,000

Total appraisal costs 250,0002.0% 400,0004.0%

Internal failure costs

Scrap200,000250,000

Rework135,000160,000

Breakdown maintenance 40,000 90,000

Total internal failure costs

375,0003.0% 500,0005.0%

External failure costs

Returned goods145,00060,000

Customer support30,00040,000

Product liability claims100,000200,000

Warranty repair 200,000 300,000

475,000 3.8% 600,000 6.0%

Total costs of qualityP1,600,00012.8%P1,700,00017.0%

Between 2005 and 2006, Gabriels costs of quality have declined from 17% of sales to 12.8% of sales. The analysis of individual costs of quality categories indicates that Gabriel began allocating more resources to prevention activities design engineering, preventive maintenance, training and supplier evaluations in 2006 relative to 2005. As a result, appraisal costs declined from 4% of sales to 2%, costs of internal failure fell from 5% of sales to 3%, and external failure costs decreased from 6% of sales to 3.8%. The one concern here is that, although external failure costs have decreased, the cost of returned goods has increased. Gabriels management should investigate the reasons for this and initiate corrective action.

Requirement 3

Examples of nonfinancial quality measures that Gabriel Corporation could monitor are:

a.Number of defective grinders shipped to customers as a percentage of total units of grinders shipped.

b.Ratio of good output to total output at each production process.

c.Employee turnover.

Exercise 5 (Costs of Quality Analysis, Nonfinancial Quality Measures)

Requirements 1 and 2

Revenues, Costs of Quality and Costs of Quality as a Percentage of Revenues for Victoria

Revenues = P2,000 x 10,000 units = P20,000,000Costs of QualityCosts(1)Percentage of Revenues

(2) = (1) ( P20,000,000

Prevention costs

Design engineering (P75 x 6,000 hours)P 450,0002.25%

Appraisal costs

Testing and inspection (P40 x 1 hour x 10,000 units)400,0002.00%

Internal failure costs

Rework (P500 x 5% x 10,000 units)250,0001.25%

External failure costs

Repair (P600 x 4% x 10,000 units) 240,0001.20%

Total costs of qualityP1,340,0006.70%

Revenues, Costs of Quality and Costs of Quality as a

Percentage of Revenues for Vancouver

Revenues = P1,500 x 5,000 units = P7,500,000

Costs of QualityCosts(1)Percentage of Revenues

(2) = (1) ( P7,500,000

Prevention costs

Design engineering (P75 x 1,000 hours)P 75,000 1.00%

Appraisal costs

Testing and inspection (P40 x 0.5 x 5,000 units) 100,000 1.33%

Internal failure costs

Rework (P400 x 10% x 5,000 units) 200,000 2.67%

External failure costs

Repair (P450 x 8% x 5,000 units) 180,0002.40%

Estimated forgone contribution margin on lost sales [(P1,500 P800) x 300] 210,000 2.80%

Total external failure costs 390,000 5.20%

Total costs of qualityP765,00010.20%

Costs of quality as a percentage of sales are significantly different for Vancouver (10.20%) compared with Victoria (6.70%). Canada spends very little on prevention and appraisal activities for Vancouver, and incurs high costs of internal and external failures. Canada follows a different strategy with respect to Victoria, spending a greater percentage of sales on prevention and appraisal activities. The result: fewer internal and external failure costs and lower overall costs of quality as a percentage of sales compared with Vancouver.

Requirement 3

Examples of nonfinancial quality measures that Canada Industries could monitor as part of a total quality-control effort are:a.Outgoing quality yield for each product

b.Returned refrigerator percentage for each product

c.On-time delivery

d.Employee turnover

III.ProblemsProblem 1 (Quality Improvement, Relevant Cost Analysis)

Requirement 1

Cost of new equipment and installationP12,000,000

Training 3,000,000

Total additional cost of the new processP15,000,000

Requirement 2

Quality cost if no change is made:Rework 3,000 x 40% x P2,000 = P 2,400,000Repair3,000 x 15% x P2,500 =1,125,000

Appraisal

600,000

Inspection3,000 x P50 =150,000

Lost contribution:

Contribution margin per unitP12,000 x 85% - P2,500 = P7,700

Lost sales3,000 ( 0.8 3,000 = x 750 5,775,000Total current cost of quality

P10,050,000

Quality cost with the new process:

Warranty repair3,000 ( 0.8 x 5% x P1,000 = 187,500

Savings from the new process each year

P 9,862,500

Years effective

x 3

Total

P29,587,500

Appraisal and inspection cost in Year 1

750,000

Total savings over 3 years

P28,837,500Requirement 3

Yes. The cost of the new process is P15,000,000 and the expected benefits is P28,837,500 over three years. The firm can expect to earn a return of over 90%.

Requirement 4

The following factors should be considered before making the final decision:a.Accuracy of cost estimates including

Contribution margin per unit

Costs of current repair and rework Cost of repair with the new process Cost of the new process

b.Reliability of estimations of

Rates of rework and repair

Lost sales

Amount of time before the current product become obsolete

c.Reaction of competitors

Requirement 5

The member of the board would be right if we ignore the financial payoff of the new process and if the firm is going to be in business for only three years. Having high quality products, especially for a high-end product such as the one the firm is selling, is crucial for a long term success.Problem 2 (Preparing a Cost of Quality Report)

The Adoracion Company

Comparative Costs of Quality Report

Costs Categories20052006Increase (Decrease)

Prevention costs:

Training

P 75,000P 100,000P 25,000

Product design 150,000 175,000 25,000

Total prevention225,000275,00050,000

Appraisal costs:

Testing50,000150,000100,000

Calibration 75,000 100,000 25,000

Total appraisal125,000250,000125,000

Internal failure costs:

Rework325,000100,000(225,000)

Retesting 250,000 200,000 (50,000)

Total internal failure575,000300,000(275,000)

External failure costs:

Warranty repairs150,00075,000(75,000)

Product recalls400,000200,000(200,000)

Product liability 125,000 75,000 (50,000)

Total external failure 675,000 350,000 (325,000)

Total costs of qualityP1,600,000P1,175,000P (425,000)

Problem 3 (JIT Production, Relevant Benefits, Relevant Costs)

Requirement 1

Relevant ItemsIncremental Costs under Current Production SystemIncremental Costs under JIT Production System

Annual tooling costsP150,000

Required return on investment

12% per year x P900,000 of average inventory per yearP108,000

12% per year x P200,000 of average inventory per year24,000

Insurance, space, materials handling, and setup costs200,000140,000a

Rework costs350,000280,000b

Incremental revenues from higher selling prices

(90,000)c

Total net incremental costsP658,000P504,000

Annual difference in favor of JIT productionP154,000

aP200,000 (1 0.30) = P140,000bP350,000 (1 0.20) = P280,000

cP3 x 30,000 units = P90,000

Requirement 2

Other nonfinancial and qualitative factors that Francisco should consider in deciding whether it should implement a JIT system include:a.The possibility of developing and implementing a detailed system for integrating the sequential operations of the manufacturing process. Direct materials must arrive when needed for each subassembly so that the production process functions smoothly.

b.The ability to design products that use standardized parts and reduce manufacturing time.

c.The ease of obtaining reliable vendors who can deliver quality direct materials on time with minimum lead time.

d.Willingness of suppliers to deliver smaller and more frequent orders.

e.The confidence of being able to deliver quality products on time. Failure to do so would result in customer dissatisfaction.f.The skill levels of workers to perform multiple tasks such as minor repairs, maintenance, quality testing and inspection.

Problem 4 (JIT Purchasing, Relevant Benefits, Relevant Costs)

Requirement 1

Incremental Costs under Current Purchasing SystemIncremental Costs under JIT Purchasing Policy

Required return on investment

20% per year x P600,000 of average inventory per yearP120,000

20% per year x P0 of inventory per yearP 0

Annual insurance costs14,0000

Warehouse rent60,000(13,500)a

Overtime costs

No overtime0

Overtime premium40,000

Stockout costs

No stockouts 0

P6.50b contribution margin per unit x 20,000 units 130,000

Total incremental costsP194,000P156,500

Difference in favor of JIT purchasingP37,500

aP(13,500) = Warehouse rental revenues, [(75% x 12,000) x P1.50].

bCalculation of unit contribution margin

Selling price (P10,800,000 ( 900,000 units)

P12.00

Variable costs per unit:

Variable manufacturing costs per unit

(P4,050,000 ( 900,000 units)P4.50

Variable marketing and distribution

costs per unit

(P900,000 ( 900,000 units) 1.00

Total variable costs per unit

5.50

Contribution margin per unit

P6.50

Note that the incremental costs of P40,000 for overtime premiums to make the additional 15,000 units are less than the contribution margin from losing these sales equal to P97,500 (P6.50 x 15,000). Josefina would rather incur overtime than lose 15,000 units of sales.

Problem 5 (Theory of Constraints, Throughput Contribution, Relevant Costs)

Requirement 1

Finishing is a bottleneck operation. Hence, producing 1,000 more units will generate additional throughput contribution and operating income.

Increase in throughput contribution (P72 P32) x 1,000P40,000

Incremental costs of the jigs and tools 30,000

Net benefit of investing in jigs and toolsP10,000

Zashi should invest in the modern jigs and tools because the benefit of higher throughput contribution of P40,000 exceeds the cost of P30,000.

Requirement 2

The Machining Department has excess capacity and is not a bottleneck operation. Increasing its capacity further will not increase throughput contribution. There is, therefore, no benefit from spending P5,000 to increase the Machining Departments capacity by 10,000 units. Zashi should not implement the change to do setups faster. Problem 6 (Theory of Constraints, Throughput Contribution, Relevant Costs)

Requirement 1

Finishing is a bottleneck operation. Hence, getting an outside contractor to produce 12,000 units will increase throughput contribution.

Increase in throughput contribution (P72 P32) x 12,000P480,000

Incremental contracting costs P10 x 12,000 120,000

Net benefit of contracting 12,000 units of finishingP360,000

Zashi should contract with an outside contractor to do 12,000 units of finishing at P10 per unit because the benefit of higher throughput contribution of P480,000 exceeds the cost of P120,000. The fact that the costs of P10 are double Zashis finishing cost of P5 per unit are irrelevant.

Requirement 2

Operating costs in the Machining Department of P640,00, or P8 per unit, are fixed costs. Zashi will not save any of these costs by subcontracting machining of 4,000 units to Rainee Corporation. Total costs will be greater by P16,000 (P4 per unit x 4,000 units) under the subcontracting alternative. Machining more filing cabinets will not increase throughput contribution, which is constrained by the finishing capacity. Zashi should not accept Rainees offer. The fact that Rainees costs of machining per unit are half of what it costs Zashi in-house is irrelevant.Problem 7 (Theory of Constraints, Throughput Contribution, Quality)

Requirement 1

Cost of defective unit at machining operation which is not a bottleneck operation is the loss in direct materials (variable costs) of P32 per unit. Producing 2,000 units of defectives does not result in loss of throughput contribution. Despite the defective production, machining can produce and transfer 80,000 units to finishing. Therefore, cost of 2,000 defective units at the machining operation is P32 x 2,000 = P64,000.

Requirement 2

A defective unit produced at the bottleneck finishing operation costs Zashi materials costs plus the opportunity cost of lost throughput contribution. Bottleneck capacity not wasted in producing defective units could be used to generate additional sales and throughput contribution. Cost of 2,000 defective units at the finishing operation is:

Lost of direct materials P32 x 2,000P 64,000

Forgone throughput contribution (P72 P32) x 2,000 80,000

Total cost of 2,000 defective unitsP144,000

Alternatively, the cost of 2,000 defective units at the finishing operation can be calculated as the lost revenue of P72 x 2,000 = P144,000. This line of reasoning takes the position that direct materials costs of P32 x 2,000 = P64,000 and all fixed operating costs in the machining and finishing operations would be incurred anyway whether a defective or good unit is produced. The cost of producing a defective unit is the revenue lost of P144,000.Problem 8

Requirement (a)

The following table reclassified the cost-of-quality expenses:

Anthony Foods

Quality Costs

2005-2006

(Millions)

20052006

Q1Q2Q3Q4Q1Q2Q3Q4

Quality assurance administrationP 6.20P 6.52P 6.86P 7.19P 7.93P 8.74P 9.61P10.53

Training13.1014.3915.9017.4621.1225.5030.3736.35

Process engineering 2.20 2.46 2.76 3.11 3.87 4.86 6.13 7.58

Prevention 21.50 23.37 25.52 27.76 32.92 39.10 46.11 54.46

Inspection1.401.561.751.952.392.963.634.46

Testing 1.60 1.72 1.85 1.99 2.29 2.62 3.01 3.45

Appraisal 3.00 3.28 3.60 3.94 4.68 5.58 6.64 7.91

Rework 15.8012.6510.038.497.256.165.565.00

Scrap 17.60 14.48 11.92 10.32 8.92 7.72 7.00 6.34

Internal failure 33.40 27.13 21.95 18.81 16.17 13.88 12.56 11.34

Returns26.9021.0916.3513.5311.329.508.437.52

Customer complaint dept.3.903.453.032.762.502.272.142.01

Lost sales 49.20 40.31 33.11 28.42 24.45 21.08 19.20 17.44

External failure 80.00 64.85 52.49 44.71 38.27 32.85 29.77 26.97

Total costsP137.90P118.63P103.56P95.22P92.04P91.41P95.08P100.68

Requirement (b)

From the preceding data we see that prevention and appraisal costs are increasing while internal and external failure costs have been decreasing. The following graph plots three series: prevention and appraisal costs, failure costs, and total quality costs.

Appraisal and prevention costs

Failure costs

Total quality costs

A preliminary conclusion from the graph is that Anthony Foods is probably now spending too much on trying to improve quality. Assuming that the underlying production processes have not changed over time, quality costs were minimized in the second quarter of 2006. Since then, the additional money spent on appraisal and prevention has yielded smaller internal- and external-failure costs savings.

Problem 9 (Applying TQM in Manufacturing versus Administration)

The ability of TQM to deliver cost savings and performance enhancements depends directly on how easy it is to measure and observe the output of the process. If a TQM teams output is easy to measure, it is easier to hold the team members responsible for improving quality. If quality improvements are difficult to observe, then holding team members responsible imposes more risk on them. It is easier for them to argue that they didnt achieve their goals because they were hard to observe. If the benefits from TQM are lower because it is more difficult to observe the TQM output, less will be invested in such activities.

Measuring quality improvements in a manufactured process tends to be easier than a service. Engineering standards can be set for a manufactured good and conformance to the standards can be relatively easy to measure. But the output of many administrative departments is multidimensional and often hard to observe. Manufacturing involves repetitive processes with few exceptions. Administrative functions often involve handling numerous exceptions. It is likely to be easier to observe quality improvements in a television set than it is in a human resources department or a legal department.

IV.Multiple Choice Questions1. C11. C

2. B12. A

3. C13. C

4. D14. B

5. D15. C

6. A16. D

7. C17. D

8. C18. D

9. D19. A

10. D20. A

Quarters

2006

2005

140

120

100

80

60

40

20

0

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

27-127-2227-21