ACC 602 CH.19

True or false: Quality is a multidimensional concept.

true

True or false: The understanding of production processes is the cornerstone of target costing.

true (Reason: A clear understanding of how processes drive costs is critical to effective value engineering efforts.)

Define the value chain and describe its basic components.

we define the value chain as the set of activities and resources necessary to create and deliver the product or service valued by customers. Its basic components include research and development, production and supplier relations, marketing and distribution, and customer service activities.

Which of the following are expressions of productivity?

-Value-added time expressed as a percentage of cycle time. -Resources consumed by quality-related activities expressed as a percentage of sales dollars.

Which of the following are generally considered non-value-added activities associated with period costs?

-accounting and financial reporting activities -R&D activities that satisfy engineering specifications but do not meet customer needs

In which of the following stages of the value chain do value-added activities occur?

-customer service -R&D and design -suppliers and production -marketing and distribution

The design of a just-in-time system is often associated with

-high equipment reliability. -well-organized sequential production processes. -preventive maintenance.

Techniques discussed in this chapter that organizations commonly use to manage costs throughout the value chain include

-just-in-time procedures. -activity-based management. -total quality management. -target costing.

Four components of cost are typically considered when designing a measurement system to track quality costs

-prevention costs -appraisal costs -internal failure costs -external failure costs *these 4 types of quality costs are not independent

Which of the following are components of the target costing process?

-production and continuous improvement -production design and value engineering concept development -planning and market analysis

Examples of activity-based management initiatives to reduce or eliminate non-value-added activities may include

-using higher-quality direct materials to eliminate scrap and waste. -redesigning production processes. -outsourcing the maintenance and repair of production equipment.

The establishment of a target price and the setting of a target profit margin enable a company to determine the target ________ of a product or service.

cost

Target costing four components

- Planning and market analysis - Concept development - Production design and value engineering - Production and continuous improvement

Which of the following statements about target costing is/are true?

-An understanding of production processes is a critical element of the target costing process. -The target costing process requires a cross-functional team approach. -Target costing involves the entire value chain. -Target costing requires an emphasis on a product's functionality.

Which of the following are non-value-added activities in the value chain?

-Providing free but inconsistent service to customers after a sale has been made. -Designing products that meet engineering specifications but not customer needs.

Which of the following are value-added activities in the value chain?

-Selecting reliable suppliers of high-quality input resources. -Designing products that meet customer specifications.

Value-added activities

-add desirability to products and services in the eyes of the customer. -enhance a company's value chain.

McNamer Corporation has a manufacturing efficiency ratio of 40%, based on its cycle time of 30 minutes. The company's value-added time is ________ minutes.

12 (Reason: manufacturing efficiency ratio = value-added time/cycle time)

Which of the following are generally included among life-cycle costs?

Disposal costs Product development expenditures Warranty costs

Which of the following is an example of an external failure cost?

Experiencing lost sales.

In a cost of quality graph, what happens as the quality of production increases?

External and internal failure costs decrease. Prevention and appraisal costs increase.

What happens as the consumption of prevention and appraisal resources increases?

External failure costs decline. Customer satisfaction and repeat business increase.

True or false: Target costing focuses on activities associated with well-established processes.

False (Reason: Target costing focuses on activities associated with the earliest stages of product development.)

Which of the following tasks is/are associated with a company that uses activity-based costing but does not engage in activity-based management?

Identifying and creating multiple cost pools.

cycle time

Includes four separate elements: 1) processing time 2) storage and waiting time 3) movement time 4) inspection time *Only during processing time is value added to the product. *Other elements should be reduced as much as possible.

Does a JIT system ensure quality?

No. Rather, it establishes an organizational culture in which striving for quality becomes a primary goal.

Which of the following accurately depicts the target costing formula?

Target Cost = Target Price - Profit Margin

The practice of assigning costs to products using multiple cost-driving activities is referred to as _________-________ _________ .

activity-based costing

The process of analyzing activity-based costs to help minimize non-value-added activities is referred to as ______-_______ ________ .

activity-based management

IFRS requires that some research and development expenditures be ________ , whereas U.S. GAAP requires these activities to be __________ .

capitalized, expense

A widely used measure of production

defects per million units produced *measures of quality include: number of warranty claims, customer complaints, and the results of customer satisfaction surveys.

The largest and most difficult costs of quality to measure are

external failure costs

The consideration of all potential resources potentially consumed over a product's entire existence is often referred to as

life-cycle costing

A widely used measure of efficiency in a just-in-time environment is the _____ _____ _____ .

manufacturing efficiency ratio

External failure costs

the largest and most difficult to measure. these costs are incurred because quality failures are allowed to enter the market. they include lost sales, the cost of processing product returns, warranty costs, product liability costs, and diminished goodwill.

One widely used measure of production quality in JIT environments is ________ per million units produced.

defects

Target costing begins by analyzing customer desires and needs as they relate to a product's

functionality. price. quality.

Total quality management processes includes:

-assigning responsibility for managing quality -providing good quality measures for decision making -rewarding quality performance

Which of the following are generally considered value-added activities associated with period costs?

-clear and truthful marketing activities -timely and competent customer service activities

life-cycle costing

the consideration of all potential resources consumed by the product over its entire life.

Identify the relationship between target costing and the value chain.

the entire value chain is involved in the target costing process to identify activities that drive cost out while satisfying customer needs. A primary objective of the target costing process is to reduce development time. The cross-functional, cross-organizational value chain approach allows for simultaneous, rather than sequential, consideration of possible solutions, speeding up new product development time.

The overall objective of using ABC, target costing, JIT, and TQM is:

to eliminate non-value added activities from the value chain

Companies that compete globally on quality and cost should have a well-developed ____ ____ ____ process.

total quality management

In a quality cost report, TQM is an abbreviation for costs associated with ____ _____ _____ throughout the value chain.

total quality management

True or false: In order to engage in activity-based management, activity-based costing (ABC) information must first be created.

true (Reason: ABC is a subset (i.e., a cornerstone) of activity-based management.)

Examples of non-value-added activities

storing direct materials, setting up machinery, and times during which machinery or employees stand idle.

Swanson Manufacturing uses activity-based management to analyze the cost of non-value-added activities across its value chain. The company's annual budgeted costs in its Human Resources Department (HR) total $5 million. This amount is allocated to 3 cost pools, as follows: (1) 20% to Hiring & Recruiting; (2) 50% to Payroll; and (3) 30% to Employee Benefits. There are 3 activity cost drivers associated with HR's 3 cost pools: (1) travel; (2) information processing; and (3) professional development. These activities drive each of HR's cost pool amounts as follows: Hiring & Recruiting Cost Pool Drivers -- 70% travel activities -- 12% information processing activities -- 18% professional development activities Payroll Cost Pool Drivers -- 10% travel activities -- 65% information processing activities -- 25% professional development activities Employee Benefits Cost Pool Drivers -- 10% travel activities -- 30% information processing activities -- 60% professional development activities Of HR's total $5 million budget: $ is associated with travel activities. $ is associated with information processing activities. $ is associated with professional development activities.

Blank 1: 1,100,000 Blank 2: 2,195,000 Blank 3: 1,705,000

Swanson Manufacturing uses activity-based management to analyze the cost of non-value-added activities across its value chain. The company's annual budgeted costs in its Human Resources Department (HR) total $5 million. This amount is allocated to 3 cost pools, as follows: (1) 20% to Hiring & Recruiting; (2) 50% to Payroll; and (3) 30% to Employee Benefits. There are 3 activity cost drivers associated with HR's 3 cost pools: (1) travel; (2) information processing; and (3) professional development. These activities drive each of HR's cost pool amounts as follows: Hiring & Recruiting Cost Pool Drivers -- 70% travel activities -- 12% information processing activities -- 18% professional development activities Payroll Cost Pool Drivers -- 10% travel activities -- 65% information processing activities -- 25% professional development activities Employee Benefits Cost Pool Drivers -- 10% travel activities -- 30% information processing activities -- 60% professional development activities Of the Employee Benefits cost pool: $_____ is driven by travel activities. $______ is driven by information processing activities. $_______ is driven by professional development activities.

Blank 1: 150,000 Blank 2: 450,000 Blank 3: 900,000

Swanson Manufacturing uses activity-based management to analyze the cost of non-value-added activities across its value chain. The company's annual budgeted costs in its Human Resources Department (HR) total $5 million. This amount is allocated to 3 cost pools, as follows: (1) 20% to Hiring & Recruiting; (2) 50% to Payroll; and (3) 30% to Employee Benefits. There are 3 activity cost drivers associated with HR's 3 cost pools: (1) travel; (2) information processing; and (3) professional development. These activities drive each of HR's cost pool amounts as follows: Hiring & Recruiting Cost Pool Drivers -- 70% travel activities -- 12% information processing activities -- 18% professional development activities Payroll Cost Pool Drivers -- 10% travel activities -- 65% information processing activities -- 25% professional development activities Employee Benefits Cost Pool Drivers -- 10% travel activities -- 30% information processing activities -- 60% professional development activities Of the Employee Benefits cost pool: $aBlank 1Blank 1 a , Incorrect Unavailable is driven by travel activities. $aBlank 2Blank 2 a , Incorrect Unavailable is driven by information processing activities. $aBlank 3Blank 3 a , Incorrect Unavailable is driven by professional development activities.

Blank 1: 150,000 Blank 2: 450,000 Blank 3: 900,000

Swanson Manufacturing uses activity-based management to analyze the cost of non-value-added activities across its value chain. The company's annual budgeted costs in its Human Resources Department (HR) total $5 million. This amount is allocated to 3 cost pools, as follows: (1) 20% to Hiring & Recruiting; (2) 50% to Payroll; and (3) 30% to Employee Benefits. There are 3 activity cost drivers associated with HR's 3 cost pools: (1) travel; (2) information processing; and (3) professional development. These activities drive each of HR's cost pool amounts as follows: Hiring & Recruiting Cost Pool Drivers -- 70% travel activities -- 12% information processing activities -- 18% professional development activities Payroll Cost Pool Drivers -- 10% travel activities -- 65% information processing activities -- 25% professional development activities Employee Benefits Cost Pool Drivers -- 10% travel activities -- 30% information processing activities -- 60% professional development activities Of the Payroll cost pool: $hBlank 1Blank 1 h , Incorrect Unavailable is driven by travel activities. $hBlank 2Blank 2 h , Incorrect Unavailable is driven by information processing activities. $jBlank 3Blank 3 j , Incorrect Unavailable is driven by professional development activities.

Blank 1: 250,000 Blank 2: 1,625,000 Blank 3: 625,000

Swanson Manufacturing uses activity-based management to analyze the cost of non-value-added activities across its value chain. The company's annual budgeted costs in its Human Resources Department (HR) total $5 million. This amount is allocated to 3 cost pools, as follows: (1) 20% to Hiring & Recruiting; (2) 50% to Payroll; and (3) 30% to Employee Benefits. There are 3 activity cost drivers associated with HR's 3 cost pools: (1) travel; (2) information processing; and (3) professional development. These activities drive each of HR's cost pool amounts as follows: Hiring & Recruiting Cost Pool Drivers -- 70% travel activities -- 12% information processing activities -- 18% professional development activities Payroll Cost Pool Drivers -- 10% travel activities -- 65% information processing activities -- 25% professional development activities Employee Benefits Cost Pool Drivers -- 10% travel activities -- 30% information processing activities -- 60% professional development activities Of the Hiring & Recruiting cost pool: $ is driven by travel activities. $ is driven by information processing activities. $ is driven by professional development activities.

Blank 1: 700,000 Blank 2: 120,000 Blank 3: 180,000

Describe the characteristics of quality measures.

Quality measures must be customer focused because quality failures can be identified only by customers. These measures should be multidimensional, including both financial and non financial components, to help management focus on activities that drive quality costs.

Which of the following statements is/are true about accounting for research and development activities (R&D) under U.S. GAAP and IFRS?

R&D activities are expensed under U.S. GAAP but are often capitalized under IFRS.

Explain how activity-based management is related to activity-based costing (ABC).

activity-based management requires an understanding of the link between activities that consume resources and the costs associated with those resources. The objective of ABC is to create the cost per unit of a measured cost driver. The objective of activity-based management is to create the cost per unit of a measured cost driver. The objective of activity-based management is to manage the activities that drive those costs. The process of using activity-based costs to help reduce and eliminate non-value-added activities is ABC. This can include redesigning equipment layout, acquiring higher-quality materials, buying new equipment, outsourcing repair work, or some combination of these management decisions may reduce or eliminate costs and conserve resources.

appraisal costs

are incurred to determine whether products conform to quality standards. Examples include inspecting incoming materials, products in production, and finished goods inventories: monitoring of production processes: and maintaining testing equipment to ensure quality.

Conducting industry studies and engaging in competitive bidding activities are examples of how companies that use activity-based management collect external __________ information for comparative purposes.

benchmark

Concerns of the ______ ultimately drive value and non-value-added activities.

customer

value engineering

engineering and experienced production personnel use value engineering to determine the least costly combination of resources required to create a product desired by the customer

A Just-in-time (JIT) system is characterized by...

extremely small or nonexistent inventories of materials, work in process, and finished goods. *one goal of the JIT system is to reduce or eliminate costs associated with storing inventory, most of which do not add value to the product. *most important goal of a successful JIT system is to control product costs without sacrificing product quality. *the goal is achieved, in part, by cultivating strong and lasting relationships with a limited number of selected suppliers. *Reliable vendor relationships are essential for achieving long-term quality, even if vendor prices are not the lowest available. *Slightly higher prices related to higher quality may actually result in cost savings in long run due to less dedicated time of inspections. *JIT system must be extremely versatile *efficient layout plan is critical *equipment reliability is very important

A production environment in which workers are highly skilled, able to perform multiple tasks, and capable of shifting from producing one product to another is sometimes referred to as _______ manufacturing

flexible

Explain the nature and goals of a just-in-time (JIT) manufacturing system.

in a JIT system, materials are acquired and goods are produced just in time to meet sales requirements. Thus, production is pulled by customer demand, rather than pushed by an effort to produce inventory. The goals of a JIT system are to eliminate (minimize) non-value-added activities and to increase the focus on product quality throughout the production process. *sometimes called demand-pull manufacturing

Internal failure costs

include additional production-related costs incurred to correct low-quality output. Examples include having to rework flawed products, downtime, processing engineering change orders, and disposing of scrap.

marketing and distribution activities

include providing information to potential customers and making products and services easily accessible.

Customer service activities

include the consumption of resources required to support products or services after they are sold to customers

Research and development (R&D) and design activities

include the creation of ideas and the development of prototype products, processes, and services. *IFRS requires that many R&D activities be capitalized, whereas U.S. GAAP requires that most R&D expenditures be expensed immediately.

Suppliers and production related activities

include the procurement of raw materials and supplies and the activities needed to convert them into finished goods and services

Activity-based cost information is important for controlling the production chain's production costs as well as many other costs, such as customer service, that are matched to time ________ .

periods

Rungren Corporation uses activity-based management to reduce non-value-added activities from its value chain. The company's Accounting Department is considering outsourcing its planning function to an independent consulting firm for $150,000 per year. Currently, 3 full-time Accounting Department employees spend 70% of their time engaged in financial planning activities. These employees earn a total of $200,000 annually. If the Accounting Department outsources its financial planning function, it will

increase its non-value-added costs by $10,000. (Reason: Reason: The $140,000 current cost of the function ($200,000 × 70% = $140,000) is $10,000 less than the $150,000 outsourcing cost. Even if these employees are not retained, someone must perform the other functions that currently occupy 30% of their time.)

Productivity is usually measured by comparing

input resources used for a given level of output achieved.

The term ______-______-______ refers to acquiring materials and manufacturing products on an as-needed basis to fill customer orders.

just-in-time

The consideration of all potential resources potentially consumed over a product's entire existence is often referred to as _______-_______ costing

life cycle

Cost of quality reports typically include 4 sections of TQM costs: (1)_______ costs (such as training and maintenance); (2) ________ costs (such as materials and equipment inspections); (3) ________ failure costs (such as downtime and scrap); and (4) _________ failure costs (such as warranties and lost sales).

prevention, appraisal, internal, external

Market planning, market analysis, and concept development enable a company to determine a target _________ for a product or service.

price

Identify the components of the cost of quality.

quality costs are classified into four groups: (1) costs associated with preventing poor quality from occurring. (2) costs of appraising and inspecting quality into the product, (3) internal failure costs that are incurred to correct quality problems before the customer receives the good or service, (4) external failure costs that happen when an unsatisfactory good or service is delivered to a customer.

Accounting systems in JIT companies measure _______ , __________ , and cycle times.

quality, cost

prevention cost

refer to the cost of resources consumed in activities that prevent defects from occurring. Examples include employee training, quality process audits, including quality control costs in target costing new products, and supplier quality evaluations.

Sarbanes-Oxley Act

requires public companies and their auditors to issue separate reports on the effectiveness of their internal control structures.

The creation of ideas and the development of prototypes are examples of

research and development and design activities.

The procurement of materials and the activities needed to convert them into finished products are examples of

suppliers and production-related activities.

In contrast to just-in-time systems, manufacturing environments have historically been ______ ______ systems in which companies simply produced as many goods as possible.

supply push

In contrast to just-in-time systems, manufacturing environments have historically been ________ _________ systems in which companies simply produced as many goods as possible.

supply push

Describe the target costing process and list its components.

target costing is a business process aimed at the earliest stages of new product and service development. The components of target costing consist of concept development through planning and market analysis; product development using value engineering; and production with continuous improvement goals.

True or false: Non-value-added activities can occur across the entire value chain, including, but not limited to, production activities.

true (Reason: Non-value-added activities are not confined to the production facets of the value chain.

Across the value chain, ________-_______ ________ add to a product's or service's desirability in the eyes of the consumer.

value-added activities

Distinguish between non-value-added and value-added activities.

value-added activities add to the product's or service's desirability in the eyes of the consumer. Non-value added activities do not add to the product's desirability. *An organization can decrease its costs if non-value-added activities can be eliminated without changing the product's desirability. *One example of a non-value-added activity is having excessive amounts of raw materials, work in process, or finished goods inventory.