Transcript CHAPTER 20

20-1
CHAPTER 20
USING ACCOUNTING FOR
QUALITY AND COST
MANAGEMENT
1st
1st
Quality and the New
Production Environment
Objective – To stay competitive through:
 Improving customer service and product
quality
 Reducing costs
20-2
20-3
Improving Quality
What can we
do to improve
quality?
How much will
it cost to
improve quality?
20-4
Cost of Quality
Texas 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
20-5
Cost of Quality
Texas Instruments Approach
 Internal failure costs are due
to defects discovered before
delivery to customers.
Scrap materials
 Rework
 Reinspection
 Lost sales resulting
from late deliveries

Cost
Report
20-6
Cost of Quality
Texas Instruments Approach
 External failure costs are due
to defects discovered after
delivery to customers.

Warranty repairs

Product liability

Marketing costs to
improve product image

Lost sales due to poor
product quality
20-7
Cost of Quality
Texas Instruments Approach
Objective
Cost of
prevention
and appraisal
Zero defects
while minimizing
all four quality
cost categories
Internal
and external
failure costs
20-8
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 defined
by the customer
20-9
Is Quality Worth the Investment?
Two Views
Cost vs. Benefit
Quality is free
Costs of quality programs
are easily measured, but
benefits of increased
customer satisfaction are
difficult to measure.
The long-run benefits of
increased customer
satisfaction far outweigh
the costs of improving
quality.
20-10
The Quality Is Free Concept
Quality
products
and
services
Increased
business
and
profits
Greater
customer
satisfaction
Methods to Identify
Quality Problems
Control charts
Pareto diagrams
Cause and
effect analysis
20-11
20-12
Quality & Customer Satisfaction
746
Measures
Performance measure
Quality control
Number of customer
complaints and defects
Delivery performance
Objective
Customer satisfaction and
high quality products
Increase on-time deliveries
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
Decrease scrap and waste;
improve product quality
Increase efficiency;
increase on-time
deliveries
20-13
Additional Quality Concepts
Motivation
Employees respond favorably
to quality initiatives
Strategic advantages
Favorable reputation among competitors
Benchmarking
Continuous process of measuring performance
against best of similar organizations
20-14
Just-In-Time (JIT) Inventory
Raw materials are
received just in time
for production
Products are
completed just in
time for shipment to
customers
20-15
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.
20-16
Just-In-Time (JIT) Inventory
Receive
customer
orders
Complete products
just in time to
ship to customers
Schedule
production
Receive materials
just in time for
production
Complete parts
just in time for
assembly into products
Relationship Between JIT and
Total Quality Management
Less warehouse
space needed
Reduced
inventory
carrying costs
Reduced risk
of obsolete
inventory
20-17
Relationship Between JIT and
Total Quality Management
Less warehouse
space needed
20-18
Higher quality
products
Reduced
inventory
carrying costs
Reduced risk
of obsolete
inventory
More rapid
response to
customer orders
Greater
customer
satisfaction
Relationship Between JIT and
Total Quality Management
Quality must be stressed
from the very beginning for
JIT to be successful.
Poor quality
items returned
20-19
Unhappy
customer
JIT factory is
idle, waiting on
quality raw
materials
Impact of Just-in-Time on
Accounting Procedures
JIT goal is to minimize inventories:
Raw
Materials
Work in
Process
Finished
Goods
Production costs are assigned directly
to cost of goods sold.
20-20
Impact of Just-in-Time on
Accounting Procedures
Any end-of-period inventory is
recorded in a procedure known
as backflush costing.
Cost of
Goods Sold
Inventory
20-21
20-22
Impact of Just-in-Time on
Accounting Procedures
JIT accounting entries
GENERAL JOURNAL
Page:
Date
Description
Cost of Goods Sold
Accounts Payable
PR
Debit
1
Credit
xxxxxx
xxxxxx
To record all purchases and uses of materials
Cost of Goods Sold
Payroll Summary
Manufacturing Overhead Applied
To record all labor and overhead
xxxxxx
xxxxxx
xxxxxx
20-23
Impact of Just-in-Time on
Accounting Procedures
Backflush entry if inventory remains
unsold or in process
GENERAL JOURNAL
Page:
Date
Description
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
To record inventory
PR
Debit
20
Credit
xx
xx
xxx
20-24
ROLL ‘EM !
Video #1
Video #2
(Approx. 8 min.)
(Approx. 3 min.)
20-25
Let’s change the subject!
20-26
Activity-Based Costing (ABC)
A costing method that first assigns indirect
costs to activities, then to products based
on their consumption of the activities.
Products
Consume
Activities
Activities
Consume
Resources
People
Manage
Activities
20-27
Activity-Based Costing
Benefits
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

Methods Used for
Activity-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.
A cost driver is a factor
that causes, or “drives,” an
activity’s cost.
20-28
Methods Used for
Activity-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
20-29
20-30
Activity-Based Costing
Identifying Cost Drivers

Cost drivers are related to volume or
complexity of production.
machine time, machine setups,
purchase orders, production orders
 Examples:

Cost driver factors (in order of preference):
 Causal relationship
 Benefits received
 Reasonableness
20-31
Activity-Based Costing
Cost Rate Per Cost Driver Unit
For a period of time, estimate total . . .
 indirect
costs for the activity
 cost driver units of activity
Predetermined
=
indirect cost rate
Estimated indirect costs
Estimated cost driver
units of activity
This formula applies to any indirect cost.
(e.g., manufacturing overhead,
administrative, distribution, marketing, etc.
20-32
Activity-Based Costing
Cost Rate Per Cost Driver Unit
For a period of time, estimate total . . .
 indirect
costs for the activity
 cost driver units of activity
Predetermined
=
indirect cost rate
Estimated indirect costs
Estimated cost driver
units of activity
Note that this concept is identical to that
used to calculate the predetermined
overhead rate in Chapter 18.
20-33
Activity-Based Costing
Example
.
At this point, we
need to look at
an example to
illustrate the
concepts.
20-34
Activity-Based Costing
Example
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:
Direct Material
Direct Labor Cost
Direct Labor Time
Expected Volume (units)
Deluxe
Model
$
150
16
1.6 hours
5,000
Regular
Model
$
112
8
0.8 hours
40,000
First, determine the unit cost of each model using
traditional costing methods.
20-35
Activity-Based Costing
Example
Traditional Costing
(Overhead Allocation)
5,000 units @ 1.6 hours
Deluxe Model
40,000 units @ 0.8 hours
Regular Model
Total Direct Labor Hours
Direct
Labor Hours
8,000
32,000
40,000
20-36
Activity-Based Costing
Example
Traditional Costing
(Overhead Allocation)
5,000 units @ 1.6 hours
Deluxe Model
40,000 units @ 0.8 hours
Regular Model
Total Direct Labor Hours
Direct
Labor Hours
8,000
32,000
40,000
Overhead Rate = $2,000,000 ÷ 40,000 hours = $50 per hour
20-37
Activity-Based Costing
Example
Traditional Costing
Direct Material
Direct Labor
Manufacturing Overhead
Total Unit Cost
Deluxe
Model
$ 150
16
Regular
Model
$ 112
8
20-38
Activity-Based Costing
Example
Traditional Costing
Direct Material
Direct Labor
Manufacturing Overhead
$50 per hour × 1.6 hours
$50 per hour × 0.8 hours
Total Unit Cost
Deluxe
Model
$ 150
16
Regular
Model
$ 112
8
80
$
246
$
40
160
20-39
Activity-Based Costing
Example
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.
A
B
C
20-40
Activity-Based Costing
Example
Activity
Center
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Cost
Driver
Orders
Orders
Tests
Hours
A
B
C
Overhead
Cost for
Activity
$
84,000
216,000
450,000
1,250,000
$ 2,000,000
Cost Driver Units
Deluxe Regular
400
800
300
600
4,000
11,000
20,000
30,000
20-41
Activity-Based Costing
Example
Activity
Center
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Cost
Driver
Orders
Orders
Tests
Hours
A
B
C
Overhead
Cost for
Activity
$
84,000
216,000
450,000
1,250,000
$ 2,000,000
Cost Driver Units
Deluxe Regular
400
800
300
600
4,000
11,000
20,000
30,000
Original budgeted
overhead total for
the period
20-42
Activity-Based Costing
Example
Activity
Center
Purchasing
Scrap Rework
Testing
Machine Related
Cost
Driver
Orders
Orders
Tests
Hours
A
B
C
Total
Cost Driver
Units
1,200
900
15,000
50,000
Cost Driver Units
Deluxe Regular
=
400 +
800
300 +
600
=
= 4,000 + 11,000
= 20,000 + 30,000
20-43
Activity-Based Costing
Example
Activity
Center
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Cost
Driver
Orders
Orders
Tests
Hours
Overhead Total Cost
Cost for
Driver
Activity
Units
$
84,000
1,200
216,000
900
450,000
15,000
1,250,000
50,000
$ 2,000,000
Rate per
Cost Driver
Unit
Rate = Overhead Cost for Activity ÷ Total Cost Driver Units
A
B
C
20-44
Activity-Based Costing
Example
Activity
Center
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Cost
Driver
Orders
Orders
Tests
Hours
Overhead Total Cost
Rate per
Cost for
Driver
Cost Driver
Activity
Units
Unit
$
84,000
1,200 $ 70 per order
216,000
900
240 per order
450,000
15,000
30 per test
1,250,000
50,000
25 per hour
$ 2,000,000
Rate = Overhead Cost for Activity ÷ Total Cost Driver Units
A
B
C
20-45
Activity-Based Costing
Example
Rate per
Cost
Activity
Driver Unit
Purchasing
$ 70/order
Scrap Rework
240/order
Testing
30/test
Machine Related
25/hour
Total overhead
Deluxe Model
Regular Model
Actual
Cost
Actual
Cost
Cost Driver Allocated Cost Driver Allocated
Units
to Product
Units
to Product
400
800
300
600
4,000
11,000
20,000
30,000
Cost Allocated to Product = Rate × Actual Cost Driver Units
A
B
C
20-46
Activity-Based Costing
Example
Rate per
Cost
Activity
Driver Unit
Purchasing
$ 70/order
Scrap Rework
240/order
Testing
30/test
Machine Related
25/hour
Total overhead
Deluxe
Actual
Cost Driver
Units
400
300
4,000
20,000
Model
Regular Model
Cost
Actual
Cost
Allocated Cost Driver Allocated
to Product
Units
to Product
$ 28,000
800 $
56,000
72,000
600
144,000
120,000
11,000
330,000
500,000
30,000
750,000
$ 720,000
$ 1,280,000
Cost Allocated to Product = Rate × Actual Cost Driver Units
A
B
C
Overhead assigned to Deluxe
Overhead assigned to Regular
Total overhead
$
$
720,000
1,280,000
2,000,000
20-47
Activity-Based Costing
Example
Costs Assigned to Products:
Deluxe Model $720,000 ÷ 5,000 units = $144 per unit
Regular Model $1,280,000 ÷ 40,000 units = $32 per unit
A
B
C
20-48
Activity-Based Costing
Example
Costs Assigned to Products:
Deluxe Model $720,000 ÷ 5,000 units = $144 per unit
Regular Model $1,280,000 ÷ 40,000 units = $32 per unit
Deluxe
Model
A
B
Direct Materials
Direct Labor
Manufacturing Overhead
Total Unit Cost
C
$
144
310
Regular
Model
$
32
152
20-49
Activity-Based Costing
Example
Costs Assigned to Products:
Deluxe Model $720,000 ÷ 5,000 units = $144 per unit
Regular Model $1,280,000 ÷ 40,000 units = $32 per unit
A
B
Direct Materials
Direct Labor
Manufacturing Overhead
Total Unit Cost
C
Deluxe
Model
$
150
16
144
$
310
These amounts did not
change as a result of
using ABC.
Regular
Model
$
112
8
32
$
152
20-50
Activity-Based Costing
Example
Summary
Comparison
Activity-based Costing
Traditional Costing
A
B
C
Deluxe
Model
$
310
246
Remember, we originally used a
plant-wide rate, based on direct
labor hours, to allocate overhead.
Regular
Model
$
152
160
20-51
Activity-Based Costing
Example
Summary
Comparison
Activity-based Costing
Traditional Costing
Deluxe
Model
$
310
246
Regular
Model
$
152
160
Many companies have found that
low-volume, specialized products have
greater costs than previously realized.
20-52
Activity-Based Costing
Example
Summary
Comparison
Activity-based Costing
Traditional Costing
Deluxe
Model
$
310
246
Regular
Model
$
152
160
Can you see how different allocation
methods might lead management
to make different decisions?
20-53
Activity-Based Costing
Final Observations
As companies become more automated...

Overhead tends to become a larger portion
of product cost.
Direct labor becomes
a smaller portion of
product cost and
consequently a less
reliable cost driver.
Dollar Amount

Mfg.
OH
Direct
Material
Direct
Labor
Product Cost
20-54
Activity-Based Costing
Final Observations

ABC is likely to result in cost reductions.
Focus is on activity analysis.
 Cost reduction usually requires a change
in activities.

20-55
Activity-Based Costing
Final Observations

ABC is likely to result in cost reductions.
Focus is on activity analysis.
 Cost reduction usually requires a change
in activities.


Activity-based costing concepts and
methods are also applicable to
marketing and administrative activities.
20-56
Activity-Based Costing
Final Observations

ABC is likely to result in cost reductions.
Focus is on activity analysis.
 Cost reduction usually requires a change
in activities.



Activity-based costing concepts and
methods are also applicable to
marketing and administrative activities.
Accountants implementing
activity-based costing may
experience opposition to change.
20-57
THE END
We finished just in time!