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MANAGEMENT ACCOUNTING - Solutions Manual
CHAPTER 27
MANAGING ACCOUNTING IN
A CHANGING ENVIRONMENT
I. Questions
1. 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. . e!cellence; superiority."
#uality for a product or ser$ice can be defined as a product or ser$icethat conforms %ith a design %hich meets or e!ceeds the e!pectations of
customers at a price they are %illing to pay."
2. &rocter ' (amble defines T#) as the unyielding and continually
impro$ing effort by e$eryone in an organi*ation to understand+ meet+ and
e!ceed the e!pectations of customers." Typical characteristics of T#)
include focusing on satisfying customers+ stri$ing for continuous
impro$ement+ and in$ol$ing the entire %or,force.
T#) is a continual effort and ne$er completes. (lobal competition+ ne%
technology+ and e$er-changing customer e!pectations ma,e T#) a
continual effort for a successful firm.
. The core principles of T#) include 1/ focusing on satisfying thecustomer+ 2/ stri$ing for continuous impro$ement+ and / in$ol$ing the
entire %or, force.
0. ontinuous impro$ement ai*en/ in total quality management is the
belief that quality is not a destination; rather+ it is a %ay of life and firms
need to continuously stri$e for better products %ith lo%er costs.
In today3s global competition+ %here firms are fore$er trying to
outperform the competition and customers present e$er-changing
e!pectations+ a firm can ne$er reach the ideal quality standard and needs
to continuously impro$e quality and reduce costs to remain competiti$e.
4. The Institute of )anagement Accountants I)A/ belie$es an effecti$e
implementation of total quality management %ill ta,e bet%een three andfi$e years and in$ol$es the follo%ing tas,s5
Year 1
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Managing Accounting in a Changing Environment Chapter 27
reate a quality council and staff
onduct e!ecuti$e quality training programs
onduct quality audits
&repare gap analysis
De$elop strategic quality impro$ement plans
Year 2
onduct employee communication and training programs
6stablish quality teams
reate measurement systems and set goals
Year 3
7e$ise compensation 8 appraisal 8 recognition systems 9aunch e!ternal initiati$es %ith suppliers
7e$ie% and re$ise
:. 7e%ard and recognition are the best means of reinforcing the emphasis
on T#). )oreo$er+ proper re%ard and recognition structures can be
$ery po%erful stimuli to promote T#). 6fforts and progress %ill most
li,ely be short-li$ed if no change is made to the compensation 8 appraisal
8 recognition systems to ma,e them in line %ith the obecti$es of the
firm3s T#).
. ?ome e!amples of costs associated %ith cost of quality categories are5
Prevention costs5 Training costs such as instructors3 fees+ purchase of
training equipment+ tuition for e!ternal training+ training %ages andsalaries; salaries for quality planning and e!ecutions+ cost of pre$enti$e
equipment+ printing and promotion costs for quality programs+ a%ards
for quality.
Appraisal costs5 osts of ra% materials+ %or,-in-process+ and finished
goods inspections.
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Managing Accounting in a Changing Environment Chapter 27
Internal failure costs5 ?crap+ re%or,+ loss due to do%ngrades+
reinspection costs+ and loss due to %or, interruptions.
External failure costs5 ?ales returns and allo%ance due to quality
deficiency+ %arranty cost+ and canceled sales orders due to quality
deficiency.
1@. &re$ention costs rise during the early years of implementing T#) as the
firm engages in education to prepare its employees and in the planning
and promotion of the quality program. Appraisal costs %ill also li,ely
rise during the early years of T#)+ because the firm needs to ensure that
quality is actually being achie$ed. The increase in appraisal cost+
ho%e$er+ is most li,ely to occur at a slo%er pace than those of the
pre$ention costs because at the beginning of a T#) program there %ill
be substantial increases in quality training and in promotion to raisea%areness on the importance of quality.
The firm may see some decreases in internal and e!ternal failure costs in
the early years of implementing a T#). Ho%e$er+ these t%o costs most
li,ely %ill remain at about the same le$el as before during the first
se$eral years of T#). )any firms may actually see internal failure cost
rise+ because of the higher standard demanded by the T#) or the higher
le$el of employees3 a%areness on the critical importance of perfection in
e$ery step of the process. As the firm ma,es progress in T#)+ both
internal failure and e!ternal failure costs should decrease.
11. osts of conformance are costs incurred to ensure that products or
ser$ices meet quality standards and include pre$ention costs andappraisal costs.
Internal and e!ternal failure costs are costs of non-conformance. They
are costs incurred or opportunity costs because of reection of products orser$ices.
12. etter pre$ention of poor quality often reduces all other costs of quality.
Bith fe%er problems in quality+ appraisal is needed because the products
are made right the first time. Ce%er defecti$e units also reduce internaland e!ternal failure costs as the occasion for repairs+ re%or,+ and recalls
decrease.
It is easier to design and build quality in than try to inspect or repair
quality in. Theoretically+ if pre$ention efforts are completely successful+there %ill be no need to incur appraisal costs and there %ill be no internal
failure or e!ternal failure costs. In practice+ appraisal costs usually do
not decrease+ partly because management needs to ensure that quality is
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Chapter 27 Managing Accounting in a Changing Environment
there as e!pected. onconformance costs+ ho%e$er+ decrease at a much
faster pace than pre$ention costs increase.
1. The role of management accountants in total quality management
includes gathering all rele$ant quality information+ participating acti$ely
in all phases of the quality program+ and re$ie%ing and disseminating
quality cost reports.
10. To meet the challenges of total quality management+ management
accountants need to ha$e a clear understanding of T#) methodology.
They must be able to design+ create+ or modify information systems that
measure and monitor quality and e$aluate progress to%ard total quality
as e!pected of each organi*ational unit and the total enterprise.
14. Eust-in-time EIT/ purchasing is the purchase of goods or materials such
that a deli$ery immediately precedes demand or use. enefits include
lo%er in$entory holdings reduced %arehouse space required and less
money tied up in in$entory/ and less ris, of in$entory obsolescence and
spoilage.
1:. The sequence of acti$ities in$ol$ed in placing a purchase order can be
facilitated by use of the Internet. A company can streamline the
procurement process for its customers F e.g.+ ha$ing online a completeprice list+ information about e!pected shipment dates+ and a ser$ice order
capability that is a$ailable 20 hours a day %ith email or fa! confirmation.
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a. Throughput contribution equal to sales re$enue minus direct
materials costs.b. In$estments in$entory/ equal to the sum of materials costs of direct
materials in$entory+ %or,-in-process in$entory and finished goods
in$entory+ research and de$elopment costs+ and costs of equipmentand buildings.
c. Gther operating costs equal to all operating costs other than direct
materials/ incurred to earn throughput contribution.
2@. The four ,ey steps in managing bottlenec, resources are5
?tep 15 7ecogni*e that the bottlenec, operation determines throughput
contribution.
?tep 25 ?earch for+ and find the bottlenec,.
?tep 5 eep the bottlenec, busy+ and subordinate all nonbottlenec,
operations to the bottlenec, operation.
?tep 05 Increase bottlenec, efficiency and capacity.
21. a/ &roduct %arranty costs should be lo%er because a %orld-class
manufacturer B)/ %ill ma,e fe%er defecti$es.b/ ?alaries of quality control inspectors should be lo%er because a
B) %ill ha$e its %or,ers inspect as they go+ rather than ha$ing
separate inspections. or %ill a B) inspect incoming materials
and components because it %ill deal only %ith $endors %hose quality
has been demonstrated.
c/ Amounts paid to $endors for parts and components should be higherbecause a B) %ill not search out the lo%est prices+ but %ill see,
high-quality components deli$ered %hen needed.
d/ Bages rates for direct laborers should be higher because a B)3s
%or,ers %ill multis,illed and should therefore command premium
%ages.
e/ Total super$isory salaries should be lo%er because a B)3s
%or,ers %ill not need as much super$ision.
f/ Barehousing costs should be lo%er because a B) %ill produce asneeded and so %ill not require storage space for materials or finished
product.
22. At the final assembly stage in a EIT system+ a signal is sent to the
preceding %or,station as to the e!act parts and materials that %ill beneeded o$er the ne!t fe% hours for the final assembly of products. Gnly
those parts and materials are pro$ided. The same signal is sent bac,
through each preceding %or,station so that a smooth flo% of parts and
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Chapter 27 Managing Accounting in a Changing Environment
materials is maintained %ith no buildup of in$entories at any point. Thus+
all %or,stations respond to the pull" e!erted by the final assemblystage.
The pull" approach ust described can be contrasted to the push"
approach used in con$entional systems. In a con$entional system+
in$entories of parts and materials are built upoften simply to ,eep
e$eryone busy. These semi-completed parts and materials are pushed"
for%ard to the ne!t %or,station %hether or not there is actually any
customer demand for the products they %ill become part of. The result is
large stoc,piles of %or, in process in$entories.
2. A number of benefits accrue from reduced setup time. Cirst+ reduced
setup time allo%s a company to produce in smaller batches+ %hich in turn
reduces the le$el of in$entories. ?econd+ reduced setup time allo%s acompany to spend more time producing goods and less time getting
ready to produce. Third+ the ability to rapidly change from ma,ing one
product to ma,ing another allo%s the company to respond more quic,ly
to customers. Cinally+ smaller batches ma,e it easier to spotmanufacturing problems before they result in a large number of defecti$e
units.
II. Exercises
Eer!ise 1 "#ualit$ Cost Classi%i!ation&
Prevention Appraisal
InternalFailure
ExternalFailure
a. Barranty repairs !
b. ?crap !
c. Allo%ance granted dueto blemish !
d. ontribution margins of
lost sales !
e. Tuition for quality
courses !
f. 7a% materials
inspections !g. Bor,-in-process
inspection !
h. ?hipping cost for
replacements !
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Managing Accounting in a Changing Environment Chapter 27
i. 7ecalls !
. Attorney3s fee forunsuccessful defense of
complaints about quality !
,. Inspection of re%or,s !
l. G$ertime caused by
re%or,ing !
m. )achine maintenance !
n. Tuning of testingequipment !
Eer!ise 2 "Cost o% #ualit$ (eport&
Requirements 1 & 2
ali ompany
ost of #uality 7eportCor 2@@4 and 2@@:
Cost of ualit! 2""# 2""$
Categor! Peso % Peso %
&re$ention costs5
#uality manual & 0@+@@@ & 4@+@@@&roduct design @@+@@@ & 0@+@@@ 4.:< 2@+@@@
Disposal of defecti$eunits >@+@@@ 0@+@@@ 4.:< =4+@@@ 024+@@@ @+@@@ >.= 4@+@@@ =4@+@@@ 10.1