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Chapter 7
Measuring and
Managing Process
Performance
QUESTIONS
7-1
7-2
In process layouts, all similar equipment and functions are grouped together.
Process layouts typically occur in organizations in which production is done in
small batches of unique products. In process layouts, products are moved and
processed from one area to another until the product is completed. In contrast, in
product layouts, equipment is organized to accommodate the production of a
specific product. Product layouts are most effective for companies producing
high-volume products. Typically, products move and are processed along an
assembly line.
7-3
7-4
7-5
7-6
Waste, rework and net cost of scrap are examples of internal failure costs.
7-7
7-8
7-9
the designated employees process the entire batch before moving all parts in the
batch to the next station. If the rate at which each processing area handles work
is unbalancedbecause one area is slower or has stopped working due to
problems with equipment, materials, or peoplework piles up at the slowest
processing station, increasing the work-in-process inventory level at that station.
Since supervisors evaluate many processing area managers on their ability to
meet production quotas, processing station managers try to avoid the risk of
having their facility idle. Many managers deliberately maintain large stocks of
incoming work in process so that they can continue to work even if the
processing area that feeds them is shut down. Similarly, to avoid idling the next
processing station and suffering the resulting recriminations, managers may store
finished work that they can forward to supply stations further down the line when
their stations are shut down because of problems. Finally, inventories may be
kept on hand just in case inputs to various stages of the manufacturing process
are defective.
Because group technology (cellular manufacturing) and just-in-time production
reduce the production cycle time and focus on reducing waste by improving
process and product quality, and quality improvement programs reduce the defect
rate, work-in-process inventory is likely to decrease on the implementation of
these programs.
7-11 Production cycle time and the level of work-in-process inventory are positively
related because reduction in time spent waiting for the next stage of production
reduces both production cycle time and work-in-process inventory levels.
7-12 The following three types of costs (only two are required for this question) are
incurred when implementing a group technology (cellular manufacturing) layout:
1.
2.
3.
235
2.
3.
4.
Reduced cost of storage because less space is used to store the reduced
work-in-process inventory.
5.
6.
7.
7-14 Kaizen costing is a method to reduce the cost of a product through small,
continuous improvements during the manufacturing stage of the total life cycle of
a product.
7-15 A cost variance investigation is undertaken under Kaizen costing in order to
compare actual cost reduction amounts to target Kaizen cost reduction amounts.
Variance investigation occurs whenever cost-reduction targets are not attained.
7-16 The Kaizen costing system operates outside of the standard costing system
because the standard costing system is oriented to complying with Japanese
financial accounting standards and not internal operations, per se.
7-17 Benchmarking is a process in which organizations gather information concerning the
best practices of others in order to meet or exceed the benchmark. Products,
functions, processes, and strategies all can be benchmarked. Benchmarking is highly
effective because organizations save time and money by avoiding mistakes that other
organizations have made or by not reinventing a process or method that other
companies have already developed and tested.
7-18 The five stages of benchmarking are: (1) internal study and preliminary
competitive analyses, (2) developing long-term commitment to the benchmarking
project and coalescing the benchmarking team, (3) identifying benchmarking
partners, (4) choosing information gathering and sharing methods, and (5) taking
action to meet or exceed the benchmark.
7-19 The three broad classes of information on which firms interested in
benchmarking can focus are: (1) productany type of product or service, (2)
functions or processall types of organizational activities from R&D,
236
237
EXERCISES
7-27 A grocery store is organized using a process layoutsimilar foods are grouped
together to make it easier for customers to find what they want. A grocery store
might be reorganized into a modified cell layout. For example, someone wanting
to prepare a certain meal, like lasagna, might find all the required ingredients in
one place. However, this approach is likely to be costly and impractical and
make stock rotation difficult.
7-28 Prevention costs are incurred to ensure that companies produce products
according to quality standards. Prevention costs include quality engineering,
training of employees in methods designed to maintain quality, etc. Appraisal
costs are related to inspecting products to make sure that they meet both internal
and external customers requirements. Inspection of purchased parts and
materials and process control monitoring are examples of appraisal costs.
Internal failure cost occurs when the manufacturing process produces a defective
component or
product. The cost of downtime in production as a result of
defects is an example of an internal failure cost. External failure costs are
incurred when a customer in the field detects a problem with a product or the
product fails. Examples of external failure costs include warranty costs, service
calls, and product liability recalls.
7-29 Of the four quality costing categories, an external failure cost is the most
damaging to the organization. Customer satisfaction and future sales may be
jeopardized. Moreover, product liability lawsuits can be extremely costly to the
organization not only in dollars, but also in terms of corporate reputation. One
key example of this is the Ford Pinto.
7-30 As shown below, benefits from the switch to JIT operations are estimated to be
$461,600:
Sales
Costs:
Direct material
Direct labor
Support
Inventory carrying costs
Profit
Before the
Change
$1,000,000
After the
Change
$1,500,000
Difference
$500,000
(250,000)
(200,000)
(270,000)
(26,400)
(300,000)
(225,000)
(255,000)
(4,800)
(50,000)
(25,000)
15,000
21,600
$253,600
$715,200
$461,600
238
7-31
Inventory Costs
Direct material
Work in process
Finished goods
Total
Inventory carrying
cost
Annual inventory
carrying cost
$3,000,000
5,000,000
3,500,000
$11,500,000
10%
$1,150,000
PROBLEMS
7-32 Both the theory of constraints and activity-based costing support aspects of
process improvement and improved profitability, but differ in many other
respects. The theory of constraints emphasizes the short-run optimization of
throughput contribution, and downplays operating costs (except direct materials)
because they are viewed as difficult to alter in the short-run. Consequently,
analyses of activities and cost drivers are not conducted as they are in activitybased costing. Proponents of activity-based costing take a long-term perspective
in which managers can alter capacity resources. Therefore, it is viewed as
beneficial to produce accurate cost information by tying actual resources
consumed to cost objects, such as products, services, channels, and customers.
The theory of constraints and activity-based costing might conceivably be used
together.
7-33
Incremental costs:
Machine moving and reinstallation
Incremental benefits:
Increase in contribution margin
$200,000 0.31 =
Savings in inventory carrying costs
$200,000 0.25 0.15 =
Net benefit (loss) from a change in plant layout in year 1
($100,000)
62,000
7,500
$(30,500)
The proposed change in plant layout should not be implemented because its costs
are greater than its benefits, if only one years benefits are considered. Net
present value analysis, which is covered in other courses, should be used to
evaluate the benefits over the entire useful life of the machine.
239
7-34 (a)
(b)
7-35 Group technology (cellular manufacturing) refers to the organization of the plant
into a number of cells so that within each cell, all machines required to
manufacture a group of similar products are arranged in close proximity to each
other. The shape of a cell is often a U shape, which allows workers convenient
accessibility to required parts. The machines in a cell manufacturing layout are
usually flexible and can be adjusted easily, or even automatically, to make the
different products. Often the number of employees needed to produce a product
can be reduced due to the new work design. The U shape also provides better
visual control because employees can observe more directly what their coworkers are doing. Group technology (cellular manufacturing) layouts reduce
costs and quality problems associated with conventional manufacturing and
facilities layouts. Usually production cycle time is improved with a group
technology (cellular manufacturing) approach.
A just-in-time manufacturing system requires making a good or service only
when the customer, internal or external, requires it. It is most appropriately used
in repetitive manufacturing for products such as automobiles or electronic
components. Just-in-time production requires a product layout with a continuous
flow (no delays) once production starts. This means that there must be a
substantial reduction in setup costs in order to eliminate the need to produce in
batches, therefore, processing systems must be reliable. A just-in-time production
system is based on the elimination of all nonvalue-added activities such as
materials movement, storage, rework, and waiting times in order to reduce cost
and time. It is an approach to continuous improvement and requires employee
empowerment and involvement to eliminate the need to perform nonvalue-added
activities. Just-in-time production encompasses all facets of making the good or
service, including developing the design, acquiring the factors of production,
making the good or service, delivering it to the customer, and following up after
the delivery. Critical performance indicators in just-in-time systems include
inventory levels, which should be as low as possible; the number of failures,
whether these are material, people, or machine failures, with a goal of zero;
moving with a goal of zero; and the amount of storing activities with a goal of
zero. The ultimate measure of success with JIT occurs when the manufacturing
240
cycle efficiency ratio equals 1 that is, when processing time equals total
production time.
The group technology (cellular manufacturing) approach is not inconsistent with
the philosophy of JIT as group technology (cellular manufacturing) also focuses
on continuous improvement. In fact, some JIT systems use manufacturing cells to
make specific components as part of the finished product.
7-36 Estimated cost savings as a result of the quality improvement:
Decrease in number of rejects: (0.064 0.051) 10,000 = 130
Rejected valves are returned to the initial production stage to be melted and
recast. The company recovers the brass but not any finishing materials. Rework
requires DL and TDABC support in Casting; DM, DL, and TDABC support in
Finishing; and DM (= $0), DL, and TDABC support in Inspection. There are no
Packing cost savings on reworked values because all finished valves are
inspected before packing and shipping. Assuming, as stated in the problem, that
the TDABC support costs can be reduced if not needed, the estimated total
savings as a result of the quality improvement are $89,810.
Rework costs
Casting Finishing Inspection
7- DM
$ 0
$ 12
$ 0
DL
84
121
24
TDABC support
122
164
30
Total per valve
$206
$297
$54
$ 557
130
Decrease in number of rejects
Savings from decrease in reject rate
$72,410
Savings from reduction in inventory carrying cost:
($386,000 $270,000) 0.15
Total savings
$17,400
$89,810
37
Before the rearrangement, PCE in minutes for Whisper Voice Systems equals
[70/(70 + 45 + 55 + 30)] = 70/200 = 0.35. After the rearrangement, PCE in minutes
equals [30/(30 + 10 + 20 + 15)] = 30/75 = 0.40. The percentage improvement in PCE
after the rearrangement is [(0.4 0.35)/0.35] = .143 or 14.3%. Thus, the change
exceeds Ray Browns requirement of a 12% improvement in PCE.
7-38 (a)
inventory in each of the specific bins that they use for, lets say, Big Macs,
fish sandwiches, regular hamburgers, etc. Having inventory at predefined
levels keeps the production process going. The motivation to use the
traditional production method is to sustain a certain level of inventory to
reduce the time the customer has to wait for an order. Notice in McDonalds
that hot lights are used to keep the sandwiches warm. One goal of this
approach is that customers perceive that they can get their sandwich very
quickly due to the inventory of sandwiches always on hand. On the other
hand, Wendys uses more of a pull or JIT system. As you enter into Wendys,
notice that you cannot really observe any sandwich inventory building up. The
idea in forming one line is that each person has the perception (and often the
reality) that each sandwich is made on the spot. This procedure is designed to
show customers how fresh the sandwiches are. The motivation to use a justin-time approach is to improve the quality of the food and to reduce waste by
eliminating the need to throw out food that has been sitting too long. As
processing time and setup costs drop, the organization can move closer to
just-in-time, reducing the waste and quality problems that arise with batch
production.
(b)
7-39 (a)
243
7-40 There really is no one correct way to allocate the $2 million of quality costs to
the four categories. Clearly, managers hope that they can minimize quality costs
as much as possible. But, in this hypothetical example, we are assuming that
managers, a priori, have much more discretion than they probably do.
Probably the most desirable quality cost trend is to load up costs at the
prevention stage and to incur some costs during the appraisal stage. By
increasing prevention costs, such as extensive training and quality engineering,
and appraisal costs, such as maintenance of test equipment, process control
monitoring and inspection of incoming materials, an organization can reduce
other quality costs, especially those related to internal and external failure.
Regarding the allocation of the $2,000,000, the correct trend is a high level of
costs for prevention, followed next by lower costs for appraisal, internal failure
and external failure.
244
7-41
(a)
Percent of
Sales*
0.13%
0.50%
0.25%
0.09%
0.08%
1.04%
Appraisal Costs:
Inspection of and testing of in-coming
materials
Maintenance of test equipment
Process-control monitoring
Product-quality audits
Total
$ 480,000
420,000
1,200,000
570,000
$2,670,000
0.40%
0.35%
1.00%
0.48%
2.23%
$ 840,000
762,000
1,440,000
150,000
$3,192,000
0.70%
0.64%
1.20%
0.13%
2.66%
$5,400,000
1,020,000
2,814,000
1,440,000
2,400,000
$13,074,000
4.50%
0.85%
2.35%
1.20%
2.00%
10.90%
$20,184,000
16.82%
(b)
The most obvious problem at Madrigal is the extremely high externalfailure costs of almost 11%. Since as a norm many companies would like
to keep their quality costs below 4% to 5% of sales, Madrigal Companys
quality costs are out of line. Note in particular that product-liability
lawsuits, warranty claims, and product recalls are the biggest external 245
failure costs. Madrigal must find out why its products seem to be failing in
the field.
Madrigal should first turn to an analysis of its other quality costs. Quality
costs are incurred throughout the total life cycle of a product. If Madrigal
does not control quality costs early in the research, development, and
engineering stage by ensuring good product design, then design problems
will lead to increased quality costs later on.
At Madrigal both prevention and appraisal costs are a relatively small
percent of total quality costs (1.04% and 2.23%, respectively). Madrigal
should consider putting more effort into quality training, quality
engineering, statistical process control, and supplier certification. The
company should also determine whether to spend more money on
appraisal.
With regard to internal-failure costs, Madrigal also apparently incurs a
great deal of rework costs. The product seems to require many additional
costs that need not be incurred if the company could produce it correctly
the first time. Perhaps the production process is at fault, or maybe
Madrigals workers are not well trained.
Note that Madrigals quality-related costs are very low at the prevention
stage and increase for the appraisal and internal-failure cost categories.
The external failure costs are extremely high. This pattern of quality costs
is what most organizations hope to avoid because the highest category of
quality costs corresponds to poor quality recognized only after products
are in customers hands.
The more desirable quality-cost trend is the reverse of Madrigals pattern.
That is, organizations desire to have the greatest proportion of quality
costs incurred in the prevention stage. By increasing quality training and
quality engineering costs during this stage, a company can reduce other
quality costs. With the companys products failing less frequently in the
customers hands, customer satisfaction should increase and the
companys reputation should improve.
7-42
(a)
Percent of
Sales*
0.20%
0.27%
300,000
350,000
$1,000,000
0.40%
0.47%
1.33%
Appraisal Costs:
Inspection of and testing of in-coming
Materials
Process-control monitoring
Product-quality audits
Total
$ 300,000
350,000
350,000
$1,000,000
0.40%
0.47%
0.47%
1.33%
$ 900,000
1,500,000
2,000,000
600,000
$5,000,000
1.20%
2.00%
2.67%
0.80%
6.67%
$ 500,000
375,000
420,000
380,000
325,000
$2,000,000
0.67%
0.50%
0.56%
0.51%
0.43%
2.67%
$9,000,000
12.00%
(b)
Since as a norm many companies would like to keep their quality costs
below 4% to 5% of sales, Ideal Companys total quality costs are
relatively high. The highest level of quality costs occur for internal failure
(6.67%) and external failure (2.67%) compared to lower levels for
prevention and appraisal (1.33% each). Therefore, management should
investigate why internal failure costs are so high, especially for scrap and
rework costs. Regarding external failure costs, the two highest are for
product liability lawsuits and warranty claims. Nevertheless, these costs
are relatively low as a percentage of sales. The company should
investigate whether placing more emphasis on prevention and appraisal
would decrease internal failure and external failure costs.
247
7-43 Exhibit 7-10 illustrates the comparison between Kaizen costing and standard
costing. In contrast to traditional standard costing, Kaizen costing focuses on
cost reduction and continuous improvement as overriding concepts in
manufacturing, revises cost reduction targets monthly, uses cost variance analysis
to compare target costs versus actual costs, and assumes that workers have the
best knowledge to reduce costs.
Standard costing uses a cost control system concept and assumes stability in
current manufacturing processes. Standards are set annually or semiannually and
cost variance analysis is used to compare actual to standard costs. The
assumption is that managers and engineers have the best knowledge to develop
standards as they have the technical expertise.
7-44 According to the Kaizen costing approach, workers have the best knowledge to
reduce costs. The reason is that workers are much closer to the production
process and have far more detailed knowledge and insight than engineers and
managers.
7-45 Kaizen is the Japanese term for making improvements to a process through small,
incremental amounts, rather than through large innovations. Kaizen costing is a
method to reduce costs through small, continuous improvements.
7-46 If the cost of disruptions to production is greater than the savings due to Kaizen
costing, then the cost savings due to Kaizen costing will not be applied.
7-47 (a)
The biggest problem with Kaizen costing is similar to the one that faces
target costing, and that is the system places enormous pressure on
employees to reduce every conceivable cost. The results of this pressure
are internal conflicts among various parties and a great deal of employee
burnout. Another concern has been that Kaizen costing leads to
incremental rather than radical process improvements. This can cause
myopia as management tends to focus on the details rather than the overall
system.
(b)
loss of face, letting down the company, etc., associated with not achieving
targets. In the United States the threat of job loss is much more salient.
The last thing that U.S. managers would want to do is to threaten job loss
to those who did not achieve targets. This would simply exacerbate the
problem. In the final analysis, Kaizen costing has to be understood as a
tool for change, but not as a hammer. With respect to the second problem
above, management needs to focus on the overall production process as
well as the details.
7-48 The key factors in identifying benchmarking partners are the size of partners, the
number of partners, the relative position of partners within and across industries,
and the degree of trust among partners. Choices on each of these variables will
change from one benchmarking study to the next. Organizations will likely want
to obtain information about a firm similar in size because of their comparable
situations. It is useful to have a large number of participants in order to increase
the amount of information obtained. Developing trust among partners is critical
to obtaining truthful and timely information. Newcomers to an industry probably
would like to see a wider variety of partners.
7-49 A manager asked to benchmark another organizations target costing system
would want information pertaining to the method by which target prices and
target margins (and consequently, target costs) are set, supplier relations, how the
organization uses value engineering to reduce costs, and the organizational
structure and culture needed to manage the target costing process. While these
are critical variables on which to gather information, target costing always has to
be studied and understood in relation to the specific organization involved.
7-50 The Kaizen costing system differs from a traditional standard costing system. Under
the traditional standard costing system, the typical goal is to meet the cost standard
while avoiding unfavorable variances. With Kaizen costing, the goal is to achieve
cost reduction targets. Further, variance analysis under a standard cost system
usually compares actual to standard costs, while under Kaizen costing, variance
analysis compares target Kaizen costs with actual cost reduction amounts. Kaizen
costing, then, operates outside of the standard costing system, in part because
standard costing systems in Japan are oriented towards complying with financial
accounting standards.
Another key difference between standard and Kaizen costing has to do with the
assumptions about who has the best knowledge to improve processes and reduce
costs. Traditional standard costing assumes that engineers and managers know
best since they have the technical expertise. Thus they determine procedures that
workers are required to perform according to pre-set standards and procedures.
249
Under Kaizen costing, workers are assumed to have superior knowledge about
how to improve processes since they actually work with manufacturing
processes to produce products. Thus, one of the central goals of Kaizen costing
is to give workers the responsibility to improve processes and reduce costs.
Thus, the standard costing system and the Kaizen costing system are used for
very different purposes. The standard costing system is used for financial
reporting purposes while the Kaizen costing system is used for cost management.
The systems do coexist, although many believe that there is really no need for
both systems, especially if the financial reporting system was modified to
accommodate Kaizen costing.
7-51 (a)
(b)
7-52 The first thing that the student should do is determine what definition to follow
regarding who the best student is. The definition could vary depending on
whether best was defined as the one who consistently scores the highest on
exams, or perhaps, the one who seemed to provide the most intelligent answers
to questions in class, etc. The latter definition is the one that may be the most
desirable in the long run (as a good test taker may not always be a successful
decision maker), but also the hardest to try to emulate, as there may be a level of
innate intelligence that cannot be learned. In order to do the exercise, lets use
the definition of best as the one who scores the highest on exams and assume
that the student is trying to benchmark the study habits of the best student.
The student should ask the best student questions like the following:
1.
b.
c.
d.
e.
f.
g.
2.
3.
How do you decide what times of day are most effective for studying?
4.
5.
6.
7.
8.
Implementing some or all of these changes will take time especially if the other
students habits are very different from what the student currently does. One
suggestion is to start by implementing one or two suggestions at a time and to
251
gradually implement more once the initial suggestions have been mastered. The
implementation will probably fail if the student tries to simultaneously change on
all dimensions. Obviously, this exercise is designed to illustrate to the student
how difficult personal change is and this should be a nice lead in how complex
organizational change is.
7-53 The instructor should:
1.
Make sure that students have done their homework on what the
organization that they are going into produces and any other important
background information.
2.
Make sure that students have read the material in the text on
benchmarking and understand the five stages of benchmarking, which are:
Stage 1:
Stage 2:
Training employees
Stage 3:
Size of partners
Number of partners
Stage 4:
Product
Functional (process)
Unilateral
Cooperative:
Database
Indirect/third party
Group
Stage 5:
3.
4.
The instructor might also ask students what criteria they will use to decide
whether benchmarking was successful. For a short exercise like this,
students will probably have to rely on what their interviewees tell them. It
is unlikely that the organization will volunteer to show them actual
company data to illustrate the effects of such a change. Discussing the
need to rely on what interviewees say should lead naturally to discussing
how one goes about determining the effects of management accounting
253
254
CASES
7-54 (a)
In the following diagram, (v) indicates activities that add value from the
customers perspective, and (n) indicates activities that do not.
Woodpoint Furniture Manufacturing Process Flow Chart
Order raw materials (n)
(b)
Package product(v)
7-55 (a)
(b)
(c)
Competitors such as Zara sell chic items that are less expensive than Louis
Vuittons. Moreover, Zara excels at speed to market; the company can
move from design to stocking the merchandise in stores in as little as two
weeks (Capell 2008). Zaras approach of manufacturing in small batches
contributes to an aura of exclusivity and helps avoid the need for slashing
prices to sell merchandise. Yet, Zaras manufacturing flexibility allows the
company to quickly increase the volume of items that are unexpectedly
popular. Capell 2008).
In the face of this competition, Louis Vuittons value proposition has
changed. The company will remain a luxury-goods company, but now
views having desired products available in its stores as part of its value
proposition. The new production process will enable the company to
produce items more quickly and with much lower defect rates, so that
stores will have an ample supply of desired products.
(d)
7-56 (a)
residue from the manufacturing process. Further the U.S. Food and Drug
Administration (FDA) reported that bacteria contaminated raw materials
that are ingredients for childrens Tylenol products. Problems were traced
to the Fort Washington, Pennsylvania plant, and later also to the Las
Piedras, Puerto Rico plant (Kimes 2010).
Singer (2010b) and Rockoff and Kamp (2010) report that Johnson &
Johnson (J&J) recalled their hip replacement implants because many of
the implants failed, requiring patients to undergo another hip-replacement
surgery. Rockoff and Kamp (2010) also report that J&J withdrew about
100,000 boxes of contact lenses sold in Asia and Europe because a
manufacturing problem prompted some customers to complain of pain,
stinging or redness. The problems with the lenses were traced to a plant
in Ireland.
(b)
The external failure costs include lost sales due to loss of reputation and
concerns about quality, and the need to shut down the Fort Washington,
Pennsylvania plant. Singer (2010c) reports that J&Js, sales of over-thecounter drugs and nutritional products in the United States plummeted to
$438 million in the third quarter from $732 million in same time period
last year, a decrease of about 40 percent. In addition, she reports
projections of a persistent decrease in market share in over-the-counter
drugs.
Other external failure costs include product liability lawsuits, the cost of
returned products, the cost of developing materials for recall web pages
and press releases, providing toll-free phone calls to consumers, and staff
to respond to calls and messages.
(c)
257
References
Kimes, M. Why J&Js Headache Wont Go Away, Fortune (September 6,
2010), pages 100-108.
Rockoff, J. D. FDA Widens Probe of J&J's McNeil Unit; Inquiry Follows
Recent Recall of Over 40 Children's Medicines Because of Manufacturing
Problems, The Wall Street Journal (May 18, 2010), page B1.
Rockoff, J. D. and J. Kamp. J&J Latest Recall: Hip-Repair Implants, Wall
Street Journal (Online) (August 26, 2010).
Singer, N. Maker of Tylenol Explains Actions Taken to Alleviate Musty Smell
of Pills, The New York Times (March 17, 2010). Accessed online on January
11, 2011 at http://www.nytimes.com/2010/03/18/business/18drug.html?
_r=1&scp=1&sq=Las%20Piedras&st=cse. The online source has links to an
FDA report on one of J&Js plants and a letter with J&Js response.
Singer, N. Johnson & Johnson Recalls Hip Implants, The New York Times
(August 26, 2010).
Singer, N. Tylenol Recalls Erode Johnson & Johnson Sales, The New York
Times (October 19, 2010).
7-57 (a)
(b)
Polley is likely to consider the decreased health risks for workers with the
new solvent, decreased risks of violating OSHA regulations and incurring
penalties, and decreased risks of negative media coverage. Polley is also
likely to consider the potential increase in demand for Kwik Cleans
services if the company markets its environmentally safer process. Polley
may also try to assess whether individual customers are more sensitive to
such marketing than are business customers.
(c)
(b)
(c)
RS3 can clearly learn from RS4s approach of diagnosing the problem
shortly after the TV arrives in the shop. This allows the shop to order parts
shortly after the TV enters the shop, with the result that the total time that
the TV spends in the shop is likely to much shorter than in RS3. RS3s
approach introduces unnecessary waiting time, a nonvalue-added activity
from the customers perspective. In addition, RS3 needs space to store all
the items waiting for diagnosis or parts. The customer faces additional
waiting time because of RS3s inability to pick up TVs on a timely basis.
$648,000a
63,000b
(410,000)c
$301,000
Raw materials
Work-in-process
Finished goods
36,000
$144,000
36,000
$225,000
36,000
$276,000
$12
4/12
$25
3/12
$46
2/12
$645,000
Inventory levels with the new machine
Raw materials
48,000 $11 1.5/12 = $ 66,000
Work-in-process 48,000 $20 1.5/12 = $120,000
Finished goods
48,000 $36 1/12 = $144,000
$330,000
Change in annual inventory carrying costs:
($330,000 645,000) 20% = $63,000 decrease
c
$900,000$490,000 = $410,000 increase
260
(b)
Rossman should replace its old machine with the new machine because
the penalty of $280,000 for early termination of the lease is more than
offset by the net annual benefit of $301,000 for each of four years with the
new machine.
(c)
A manager evaluated on the basis of net income may decide not to replace
the existing machinery if there is considerable uncertainty about the
projections for increased sales or reduced costs, given the relatively small
benefit in the first year based on the stated projections. This benefit is
$301,000 $280,000 = $21,000. Thus, a manager with a short-term focus
may not lease the new machinery even though it would increase
Rossmans income over the long-run.
This case focuses on prevention activities (see question (f)), as well as internal
1
Source: Institute of Management Accountants, Cases from Management Accounting Practice, Instructors Manual,
Volume 12. Adapted with permission.
261
failure and external failure costs for the order entry department at Precision
Systems, Inc., where internal and external failures are defined with respect to the
order entry department.
Suggested Solutions to Required Questions
(a)
(b)
There are many possible flows. For example, a sales representative may
contact order entry to request a quote for a system for a customer.
Subsequently, the customer contacts order entry to place the order; and
order entry then generates an order acknowledgement, which is sent to
manufacturing, invoicing, and sales administration. Once the system has
been shipped, an invoice is sent to the customer. Ultimately, collections
will receive the invoice. Customer support will contact the customer to
arrange installation and will be available to answer questions over the
phone.
A request for parts from a service representative or directly from a
customer would be received by order entry, which would generate an
order acknowledgement that might then be routed to the stockroom, after
which the part would be shipped and the customer would be billed. A
request for service would result in an order acknowledgement being sent
to the service department (see the following chart).
262
(c)
Items 1, 2, 5, 8, 10, and 12 are internal failures; the remainder are external
failure items. Internal customers affected by external failure items are
listed below.
Item Number
3
4
6
7
9
11
263
(d)
(e)
264
(f)
segments.
Develop a system that allows parts customers to get their own quotes
on-line.
Note: Today, customers may add a request for a quote to their shopping
cart but the web page does not provide a quote online.
Incremental Improvements Made by PSI
1.
2.
3.
4.
5.
266
3.
268
(h)
269
Order serial #
Is this a new order?
Yes I No (If not, please specify )
Is this an engineering special?
Yes / No
Is all information available and clear?
Yes I No
Is the quotation # available on the Purchase Order? Yes I No
If not, how did you track down the quotation?
By dollar amount ____ By customer name ____
Called sales rep. ____
Other
Is all relevant information available and clear on the customers P.O.? Yes I No Please
provide below details of all the clarifications required.
Serial No. Explanation of problem / clarification
How long did it take you to prepare the first draft of the order (including time spent
obtaining clarifications?
How much time did you spend inspecting the quote before finally giving it to your
supervisor for inspection?
Were there any changes as a result of your inspection(s)?
Yes / No
Time taken to make changes _____ minutes/hours.
How many drafts of the order were printed including the one you gave to your
supervisor for inspection?
Complete after your supervisor has inspected the order
Were there any changes as a result of your supervisors inspection? Yes / No
Time taken to make changes _____ minutes/hours.
After your supervisors inspection, how many drafts of the order were printed in
addition to the final version mailed to the customer?
Date and time order sent out to your internal customer?
Other comments:
270
Nature of
error/clarification
required/problem
How clarification
obtained
271
Time spent in
obtaining
clarification
(including waiting
time)