Second Chapter

Application of Modern Management Accounting Tools for Quality and Cost Management
 Importance of good accounting information,
 Quality and new production environment, ,
 improving quality ,TQM,
 Control charts,
 Pare to diagram,
 Quality and customer satisfaction measures,
 Cost of quality,
 JIT systems and Accounting for JIT Vs Traditional system, JIT Vs Traditional cost flow.

Importance of good accounting information

Accounting information provides vital insight into a company's current financial position and is a
valuable indicator into how a firm will perform in the future.

Company Management
With accounting information, management is able to evaluate a company's financial position,
make appropriate use of resources, and plan how to take the company forward in the future.

Investors: Accounting data enables both individual and corporate investors to value how much
a firm is worth and whether or not they should invest in the company.

Lenders: If a company is not in a strong financial position, lenders will fear the company will
be unable to pay back the loan, and therefore reject the company's bid for a loan.

Tax Authorities: The corporate tax department relies on accounting data to calculate taxes
owed; the tax authorities then review the financials to confirm the company is following tax
guidelines and calculating taxes correctly.

Regulators: Some of the most important users of accounting information are regulators on the
state and federal levels. Regulators have been much more aggressive in reviewing the accuracy
of accounting information, doing their best to ensure the numbers represented in financials are
prepared under strict accounting guidelines.

Quality and new production environment

Simply put, a production environment is where the latest versions of software, products, or
updates are pushed live to the intended users. Think of it as a final phase of production. This is
the environment where the end user can see, experience, and interact with the new product. All
testing is completed before this point, and all bugs are squashed. Whereas a development
environment may contain several different versions of a product or update being worked on
and tested, a production environment contains just the final version of the product in order to
avoid any confusion or security vulnerabilities.
What is the difference between a production environment and development and stage
environments?

The best way to understand the differences between a development, stage, and production
environment is to think of it in terms of a band – the practice, dress rehearsal, and live
performance. So what does this mean exactly? In this analogy, the development environment
is like the band’s practice setting. This is where a band would come up with new songs, write
and refine the music, practice, and hash out any issues. A development environment is
essentially what is on the development team’s computers. It’s where the developers are writing
their code, making code updates, and where all their commits and branches exist. The
development environment does not affect what the end user sees. Instead, it allows
development to try out new features and updates before pushing them forward to deployment.
A lot of preliminary testing is done at this point before moving to the next environment – the
stage environment.

Like with a band’s final dress rehearsal before a live performance, any major issues must have
been already addressed and resolved before hitting the stage environment (also known as a
pre-production environment). The product version in this environment should be as close to the
real thing as possible, and should nearly mirror what the end users would see in the production
environment. This stage can often be rather quick, as most bugs and issues should have already
been hashed out in the development environment. Here is where the final testing of upcoming
product versions takes place before they are readied for deployment in the production
environment. A good example is a beta version of a videogame – there may be some minor
bugs you encounter, but overall, it works how the game is intended to be played.

This means the production environment is the live performance. This is what the users came
for, and they are expecting a good show. The production environment refers to where the
software or products have been made live for use of the intended users. Once something is in
the production environment, any and all bugs need to have already been fixed and the product
or update must work perfectly. All testing is done in the development and staging
environments, whereas new products and updates are launched in the production environment.
If any bugs exist in the production environment, they will be seen by the user. And nobody
wants an angry or frustrated user.

What are the benefits of a production environment strategy?

An infrastructure strategy with development, stage, and production environments allows teams
to build, test, and deploy products in different phases to ensure high quality products for their
users. With developers building in a separate development environment, it allows them to
experiment with new features, updates, and improvements without affecting the end product.
The stage environment allows your team to test a near-final version of the product to ensure
proper functioning and a good user experience before the product or update is deployed. Once
the product or update is in the production environment, all testing has been completed, all bugs
fixed, and it is now ready for the user.
This type of infrastructure allows teams to fully control the quality of their product releases
while encouraging improvements and innovation. It is helpful for effectively tracking a new
product or updates progress through development, testing, and deployment while also ensuring
the end user is provided with the best possible experience

What Is Total Quality Management (TQM)?

Total quality management (TQM) is the continual process of detecting and reducing or
eliminating errors in manufacturing, streamlining supply chain management, improving the
customer experience, and ensuring that employees are up to speed with training. Total quality
management aims to hold all parties involved in the production process accountable for the
overall quality of the final product or service.

TQM was developed by William Deming, a management consultant whose work had a great
impact on Japanese manufacturing. While TQM shares much in common with the Six Sigma
improvement process, it is not the same as Six Sigma. TQM focuses on ensuring that internal
guidelines and process standards reduce errors, while Six Sigma looks to reduce defects.

Total Quality Management (TQM)

The most popular approach to continuous improvement is known as Total Quality
management. There are two major characteristics of Total Quality Management (TQM):
(1) a focus on serving customers and (2) systematic problem solving using teams made
up of front line workers.

Process Reengineering
Process Reengineering is a more radical approach to improvement than TQM. Instead of
tweaking the existing system in a series incremental improvement, in process
reengineering a business process is diagrammed in detail, questioned, and then
completely redesigned to eliminate unnecessary steps, to reduce opportunities for errors,
and to reduce costs.

Control charts
Control charts, also known as Shewhart charts (after Walter A. Shewhart) or process-
behavior charts, are a statistical process control tool used to determine if a manufacturing or
business process is in a state of control. It is more appropriate to say that the control charts are
the graphical device for Statistical Process Monitoring (SPM). Traditional control charts are
mostly designed to monitor process parameters when underlying form of the process
distributions is known. However, more advanced techniques are available in the 21st century
where incoming data streaming can-be monitored even without any knowledge of the underlying
process distributions. Distribution-free control charts are becoming increasingly popular.

If analysis of the control chart indicates that the process is currently under control (i.e., is
stable, with variation only coming from sources common to the process), then no corrections or
changes to process control parameters are needed or desired. In addition, data from the process
can be used to predict the future performance of the process. If the chart indicates that the
monitored process is not in control, analysis of the chart can help determine the sources of
variation, as this will result in degraded process performance. A process that is stable but
operating outside desired (specification) limits (e.g., scrap rates may be in statistical control
but above desired limits) needs to be improved through a deliberate effort to understand the
causes of current performance and fundamentally improve the process.

The control chart is one of the seven basic tools of quality control. Typically control charts are
used for time-series data, though they can be used for data that have logical comparability (i.e.
you want to compare samples that were taken all at the same time, or the performance of
different individuals); however the type of chart used to do this requires consideration.

Pareto Diagram
A Pareto diagram is a simple bar chart that ranks related measures in decreasing order of
occurrence. The principle was developed by Vilfredo Pareto, an Italian economist and sociologist
who conducted a study in Europe in the early 1900s on wealth and poverty. He found that wealth
was concentrated in the hands of the few and poverty in the hands of the many. The principle is
based on the unequal distribution of things in the universe. It is the law of the "significant few
versus the trivial many." The significant few things will generally make up 80% of the whole,
while the trivial many will make up about 20%.
The purpose of a Pareto diagram is to separate the significant aspects of a problem from the
trivial ones. By graphically separating the aspects of a problem, a team will know where to direct
its improvement efforts. Reducing the largest bars identified in the diagram will do more for
overall improvement than reducing the smaller ones.
There are two ways to analyze Pareto data depending on what you want to know:
Counts Pareto: Use this type of Pareto analysis to learn which category occurs most often, you
will need to do a counts Pareto diagram. To create a counts Pareto, you will need to know the
categories and how often each occurred.
Cost Pareto: Use this type of Pareto analysis if you want to know which category of problem is
the most expensive in terms of some cost. A cost Pareto provides more details about the impact
of a specific category, than a count Pareto can. For example, suppose you have 50 occurrences of
one problem and 3 occurrences of another. Based on a count Pareto, you would be likely to
tackle the problem that occurred 50 times first. However, suppose the problem that occurred 50
times costs only $.50 per occurrence ($25 total) and the problem that occurs 3 times costs $50
each time ($150 total). Based on the cost Pareto, you may want to tackle the more expensive
problem first. To create a cost Pareto, you will need to know the categories, how often each
occurred, and a cost for each category.

Customer Satisfaction
Here’s a look at the most used metrics when it comes to measuring customer satisfaction.
Customer Satisfaction Score
The customer satisfaction score, or CSAT, is a time-tested metric. It is a customer satisfaction
survey that targets the customer with variations of a very basic question: “how would you rate
your experience interacting with our sales/customer service/support department?”
The scale typically ranges from:

Very unsatisfactory-1
Unsatisfactory-2 /
Neutral-3 /
Satisfactory-4 /
Very satisfactory-5

The CSAT is versatile, since it can relate to any interaction of a client with your business. It’s
also immediate, because you will get precise feedback relative to a certain experience. The
CSAT is most useful to track short-term changes in customer approval before and after a
change or new initiative. If the score shifts notably, you will have an inkling of what did or
didn’t go over well.
However, the question won’t cover a customer’s overarching impression of your company.
Likewise, its results tend to be biased, since mildly satisfied or dissatisfied customers will tend
to disregard the question entirely. Lastly, it won’t be a predictor of customer behavior, nor will
it account for your company’s potential for growth. Though the CSAT is an unavoidable
metric, it is by no means a complete one.
Net Promoter Score
The Net Promoter Score was introduced to account for the lack of predictive power of the
CSAT when incomes to customer loyalty. This question looks like this:
“On a scale of 1 to 10, how likely are you to recommend our product/service to a friend?”
The question is straightforward and easy to answer. However, unhappy customers tend to
respond more often than satisfied customers. This can seem daunting, but in fact is an
opportunity to zero in on areas needing improvement, and make a great impression on a
dissatisfied customer.
Nevertheless, in a vacuum, the NPS score is rather one-dimensional. Moreover, without
incentive, there is no reason for promoter responders to actually make the leap and recommend
your brand.
Customer Effort Score
The Customer Effort Score takes a different approach to how to measure customer satisfaction
than the previous two methods. It asks the customer: “how hard did you have to work to get
a problem fixed/query answered/service rendered?”
The scale usually goes from 1 (it was very easy and simple to handle my issue) to 5 (it was a
monster headache). The lower your score, the better.
In a now-famous article, it was demonstrated that going above and beyond in terms of
customer satisfaction didn’t necessarily result in increased loyalty. Past a certain point, the
energy expended to delight a customer is better utilized trying to spare the customer some
effort. The CES is a good indicator of increasing customers’ loyalty by saving them time and
effort. Since the scale is close-ended, you could also add an open answer box for the customer
to vent. For instance, a response such as “the support team was very helpful, but if the FAQs
had been easier to navigate, I wouldn’t have had to call in the first place” is invaluable. CES
allows you to pinpoint areas of your service which need improvement to better satisfy your
customers.Like the other metrics, the utility of the CES used as a standalone is limited. It takes
into account a very important factor for customer loyalty but still doesn’t encompass the whole
picture.
Direct Feedback and Customer Satisfaction
The most straightforward way of giving your customers the support they want is by asking
them directly through a customer satisfaction survey. Surveys are a useful tool for collecting
data pertaining to the customer satisfaction metrics listed above. The various types of surveys
target different customer demographics, and will yield different results.
In-app customer surveys
These are presented to the customer while they are in the process of using your service. This
means an immediate reaction and a potentially high response rate.
Nevertheless, in-app surveys must be seamlessly inserted to the interface, so as not to pester or
detract from the user experience. Adding a subtle comment bar at the top of your interface
means only having room for a pictogram-based rating, or one of two questions. Therefore,
make them concise and to-the-point.
Post-service customer surveys
These types of surveys approach the customer immediately following a service interaction.
They can occur via email, live chat, or over the phone. It’s essential to not make gathering
feedback the only object of the call or message, with no added value to the customer. Rather,
ask for feedback right after solving an issue, or while presenting a new feature. Post-service
surveys can be a little more long-winded than the previous example but beware of costing your
customers too much additional time.
Customer Surveys via Email
If you’re looking to ask broader questions about the entire customer experience, then email is
the way to go. You can also target segmented customers to ask in-depth questions about their
situation. While these surveys have the lowest response rates, they allow customers who wish
to do so to answer in greater detail and really give you constructive feedback. You can use this
in-depth feedback to increase customer satisfaction across a wider spectrum.
Volunteered feedback
Asking for customer feedback in a survey is one thing, but it’s also important to offer a way for
customers to speak up of their own desire. Dedicating a comment box or an email address to
customer satisfaction is a great move. However, customers often won’t bother to leave
feedback because they don’t think the company will care, or take it into account. You need to
incentivize honest customer involvement, because it your business cannot afford to ignore it.
Explicitly promise speedy involvement, and deliver on it. Responding with a non-automated to
submit feedback is polite and constructive. The result is beneficial to all parties. Customers
will get what they wanted, and you can use examples of successfully acting on customer
feedback as a success story on your website.

Survey best practices

We’ve seen how surveys can provide valuable insight, and involve customers in a direct
process. However, they can be a tricky matter to get right. Here are ways to pull of effective,
non-invasive survey campaigns:
 Never presume that your customer’s time is more valuable than yours.
 Keep your questions relevant to your overarching goal of customer loyalty.
 Craft precise questions. Keep them short unless the format of your survey allows for
more open-ended questions.
 Ask clever questions. Don’t insult the intelligence of the customer taking the survey.
Besides, asking vague or irrelevant questions won’t serve your own purposes.
 Remain unbiased. Don’t use leading questions. It will make your business seem
untrustworthy, and false the results of your examination.
 Keep your rating scales consistent and transparent. Don’t mix stars and smiley faces, or
switch between numbered scales and letter grades.
Analytics
You can use your website traffic and content to measure customer satisfaction. Not only will
the publication of content drive your activity, but you can use it to gain insight into your
customers’ habits. Keep track of shares of your content, of the time spent on your website
(especially pages like your roadmap, which will tell you about the interest in your upcoming
features), and the bounce rate of your newsletters.
Collecting all this data will be moot if you don’t know what to do with it. Make sure to always
align the concrete data with the vision you have for your customer service.
Cover every channel
There are multiple channels to take into account when measuring customer satisfaction. Every
means the customer has of getting in touch with your company is an opportunity to gather
feedback.
We’ve seen you can conduct surveys over email, on your website, over the phone, etc. But
diversifying the channels on which you measure customer satisfaction is a no-brainer. For
example, given the growing importance of mobile phones in the field of customer support, it’s
important not to neglect that channel.
Social media is also a valuable channel to monitor customer happiness. Its immediacy and
personable touch can allow your business to interact with your customers in an informal and
proximate way. Customers can contact your business easily and spontaneously, and you can
provide equally expeditious support. Keeping track of the fluctuation in followers, shares, and
likes on every platform you use will give you a good idea of customers’ loyalty and overall
satisfaction. As we’ve established, measuring customer satisfaction means taking multiple
factors into account. You’ll need to be creative to stay relevant and unobtrusive, and draw
pertinent conclusions from the mass of information you collect. No metric is perfect on its
own, and the real measure of your customers’ satisfaction lies at the intersection of your
collected data.

Cost of Quality
In process improvement efforts, quality costs or cost of quality is a
means to quantify the total cost of quality-related efforts and
deficiencies. It was first described by Armand V. Feigenbaum in a 1956
Harvard Business Review article.

Just In Time (JIT)

When companies use the Just-in-Time (JIT) production and inventory control System, they
purchase materials and produce units only as needed to meet actual customer demand. In a J1T
system, inventories are reduced to the minimum and in some cases is zero.

Just in time means that raw materials are received just in time to go into production,
manufactured parts are completed just in time to be assembled into products are completed just
in time to be shipped to customers.

The main benefits of JIT are the following:

1. Funds that were tied up in inventories can be used elsewhere.
2. Areas previously used to store inventories are made available for other, more productive
uses.
3. Throughput time is reduced, resulting in less waste and greater customer satisfaction.
4. Defect rates are reduced, resulting in greater potential output