Janna Rae V.

Biongan
BSA-III

Course Title: Strategic Cost Management

Credit units: 3 units

Chapter 6: Organizational Innovations: Total Quality Management; Just-in-Time

Production System

1. Define quality.

According to Cabrera & Cabrera (2020), the ultimate test of a quality product or service is
whether the product or service meets or exceeds customers’ expectations. Further, quality could
be defined as a basic tool for a natural property of any good or service that allows it to be
compared with any other good or service of its kind. The word quality has many meanings, but
basically, it refers to the set of inherent properties of an object that allows satisfying stated or
implied needs. In business, it means providing value to the customer; that is, offering conditions
of product use or service that meet or exceed customer’s expectations, yet are still affordable.

2. What is TQM? At what point can a firm consider its effort to achieve total quality
management complete?

As aptly described by Procter & Gamble, Total Quality Management (TQM) as “the
unyielding and continually improving effort by everyone in an organization to understand, meet,
and exceed the expectations of customers.” It describes a management approach to long-term
success through customer satisfaction. In a TQM effort, all members of an organization participate
in improving processes, products, services, and the culture in which they work. A firm won’t
consider it effort to achieve total quality management complete because it is an effort that must
be done continuously for sustainability and success of a firm.

3. What are the core principles of total quality management?

Cabrera & Cabrera (2020) cited Seven (7) core principles of total quality management
namely: (1) Focus on satisfying the customer; (2) Strive for continuous improvement; (3) Involve
fully the entire workforce; (4) Support and involve top management actively; (5) Us e clear
measurable objective; (6) Recognize quality achievements in a timely manner; and (7) provide
training on TQM continuously.
4. Why is continuous quality improvement essential to achieve TQM and critical to an
organization's success and competitive position?

TQM seeks to improve quality and performance to ensure that there is always room to
develop processes as a fluid approach rather than a static approach that may rely on outdated
processes within the organization. Thus, continuous quality improvement is necessary to remain
competitive in today’s global marketplace. With competitors forever trying to outperform us and
customers exhibiting ever-changing expectations, a firm can never reach the ideal quality
standard. Which means that firms need to continuously update specifications for both internal
customers/suppliers and external suppliers to better serve external customers.

5. Describe the processes for an effective implementation of TQM.

The Institute of Management Accountants (IMA) has devised an 11-phase processes

spanning three years to establish TQM. Year one is for preparation and planning. It composed of
creating quality council and staff, conducting executive-quality training programs and quality
audits, preparation of gap analysis and development of strategy on quality improvement. The
year-two on the other hand is for training and implementation. It is the phase of conducting
employee communication and training program, establishment of quality teams, and creation of
a measurement system and set goals. Lastly, for the year-three or the year of assessment, review,
and revise. It contains phases such as revise compensation/ appraisal/ recognition systems,
launch external initiative with suppliers, and review and revise.

6. Why is it often necessary to revise a firm's compensation and appraisal systems when
implementing TQM?

An organization can have many reasons for reviewing its compensation and appraisal
systems when implementing TQM. It is necessary to revise a firm's compensation and appraisal
systems when implementing TQM because they relate to all activities in a company from initial
research and development through customer servicing. Therefore, as part of the quality cost
system, companies must gather the quality cost from each activity and accumulate these costs
on quality cash report.

7. What are the purposes of conducting a quality audit?

The purposes of conducting a quality audit are to make management aware of the
magnitude of quality costs and to provide a baseline against which the impact of quality
improvement activities could be measured. It is also used to identify strengths and weaknesses
in quality practices and levels of a firm’s quality and to help the firm identify the target areas for
quality improvements. A quality audit is used to evaluate or inspect a product, the manufacturing
process for a specific product or line of products, or the system that supports the product being
manufactured.

8. What is gap analysis?

According to Kenton (2020) A gap analysis is how an organization examines its current
performance with its target performance. A gap analysis can be useful when companies aren't
using their resources, capital, or technology to their full potential. A gap analysis is a sort of
benchmarking that examines the differences in practices between the company and the best-in-
class competitors. Gap assessments are used to identify strengths, shortcomings, and places
where quality can be improved. A gap analysis is a method for comparing present performance
to desired, expected performance. This analysis is performed to see if a company is reaching its
goals and successfully utilizing its resources. The objective of gap analyses is to identify
strengths, weaknesses, and target areas for quality improvement.

9. Name three types of costs associated with each of the following cost categories:

a. Prevention. The three types of costs associated in this category are: (1) Statistical process
control activities, (2) Quality engineering, and (3) Supervision of prevention activities

b. Appraisal. The three types of costs associated in this category are: (1) Finished product testing
and inspection, (2) Supervision of testing and inspection activities, and (3) Test and inspection of
coming materials

c. Internal failure. The three types of costs associated in this category are: (1) Net cost of scrap,
(2) Rework labor and overhead, and (3) Net cost of spoilage

d. External failure. The three types of costs associated in this category are: (1) Warranty repairs
and replacements, (2) Product recalls, and (3) Returns and allowances arising from quality
problems

10. Which of the following cost categories tend to increase during the early years of TQM?
Which of them tend to decrease over the years due to successful total quality
management? Why?

a. Prevention - rise during the early years of implementing TQM as the firm engages in education
to prepare its employees and in the planning and promotion of the quality program.
b. Appraisal - will also likely rise during the early years of TQM, because the firm needs to ensure
that quality is being achieved. The increase in appraisal cost, however, is most likely to occur at
a slower pace than those of the prevention costs because at the beginning of a TQM program
there will be substantial increases in quality training and in promotion to raise awareness on the
importance of quality

c. Internal failure – some decreases in the early years of implementing a TQM. However, costs
most likely will remain at about the same level as before during the first several years of TQM.
Many firms may see internal failure cost rise, because of the higher standard demanded by the
TQM or the higher level of employees’ awareness on the critical importance of perfection in every
step of the process. As the firm makes progress in TQM, internal failure costs should decrease.

d. External failure - some decreases in the early years of implementing a TQM. However, costs
most likely will remain at about the same level as before during the first several years of TQM. As
the firm makes progress in TQM, external failure costs should decrease.

11. What is cost of conformance? Nonconformance?

Costs of conformance are costs incurred to ensure that products or services meet quality
standards and include prevention costs and appraisal costs. Internal and external failure costs
are costs of non-conformance. They are costs incurred or opportunity costs because of rejection
of products or services. In other words, The Cost of Conformance is focused on avoiding potential
failures and the Cost of Nonconformance is the cost incurred as a result of any failures because
the quality expectations were not met.

12. Many organizations found that investments in prevention and appraisal usually
resulted in major cost savings in other areas. Explain this phenomenon.

Prevention cost and appraisal costs are incurred to keep poor quality of conformance from
occurring. A company can reduce it total quality costs by focusing its efforts on prevention and
appraisal. By this means, failures are minimized, and any defects are detected before delivery of
products to customers. It will be noted that quality costs do not just relate to manufacturing; rather
they relate to all activities in a company from initial research and development through customer
servicing. Therefore, as part of the quality cost system, companies must gather the quality costs
from each activity and accumulate these costs on a quality cost report. Better prevention of poor
quality often reduces all other costs of quality. With fewer problems in quality, appraisal is needed
because the products are made right the first time. Fewer defective units also reduce internal and
external failure costs as the occasion for repairs, rework, and recalls decrease. It is easier to
design and build quality in than try to inspect or repair quality in. Theoretically, if prevention efforts
are completely successful, there will be no need to incur appraisal costs and there will be no
internal failure or external failure costs. In practice, appraisal costs usually do not decrease, partly
because management needs to ensure that quality is there as expected. Nonconformance costs,
however, decrease at a much faster pace than prevention costs increase.

13. What roles do management accountants play in TQM?

The role of management accountants in total quality management includes gathering all
relevant quality information, participating actively in all phases of the quality program, and
reviewing and disseminating quality cost reports.

14. How can management accountants meet the challenges of TQM?

Management Accountants can meet the challenges of Total Quality Management by

having a clear understanding of TQM methodology. They must be able to design, create, or modify
information systems that measure and monitor quality and evaluate progress toward total quality
as expected of each organizational unit and the total enterprise.

15. Describe JIT purchasing and its benefits.

JIT purchasing is when you buy goods in advance of when they're needed to meet
customer demand. When you use JIT, you plan purchases based on customer orders. To meet
customer demand, you buy the bare minimum of items. Smaller orders and frequent deliveries
are common with JIT purchasing. The following are some of the advantages of JIT: a. Increased
transparency in the manufacturing process, b. Manufacturing lead times are shorter, and c.
Increased focus on addressing the root causes of rework, scrap, and waste.

16. Describe how the Internet can be used to reduce the costs of placing purchase orders.

The sequence of activities involved in placing a purchase order can be facilitated by use
of the Internet. A company can streamline the procurement process for its customers – e.g.,
having online a complete price list, information about expected shipment dates, and a service
order capability that is available 24 hours a day with email or fax confirmation.
17. What are the main features in a JIT production system?

There are Six (6) key features of a JIT production system. First is Maintaining a limited
number of suppliers A company must learn to rely on a few ultrareliable suppliers who are willing
to make frequent deliveries in small lots. Dependability is essential since companies are highly
vulnerable to any interruption in supply when JIT is in use. Second is improving plant layout
Manufacturing flow lines in the company's plant must be improved. In a JIT system, all machines
needed to make a particular product are often brought together in one location so that partially
completed units are not shifted from place to place all over the factory to minimize handling and
moving. Third feature is Reducing Setup Time Setups involve activities such as moving materials,
changing machine settings, setting up of equipment, and running tests that must be performed
whenever production is switched over from making one type of item to another. Fourth feature is
Improving Production Scheduling JIT businesses schedule production in small batches just in
time to satisfy needs. There should be good coordination of efforts throughout the value chain
from the time the orders are received from the customers to the time the goods are manufactured
and readied for delivery to the same customers. The fifth one is Targeting Zero Defects Defective
units create big problems in a JIT environment because they could delay the shipment of the
order and may generate a ripple effect that delays other orders. This procedure makes the
company's production workers directly responsible for spotting defective and the supervisors and
other workers determining immediately the cause of the defect and correcting it before any further
defective units are produced. Early detection saves rework and scrap costs. Lastly, Maintaining
Flexible Workforce Companies employing JIT must have workers who are flexible and
multiskilled. Workers assigned to a particular JIT product flow line are often expected to know
how to operate all the equipment on that line. Cross training increases flexibility, boosts employee
morale, and decreases costs.

18. Indicate whether each of the following costs should be higher or lower for a world-
class (or JIT) manufacturer than for a conventional manufacturer. Briefly state why.

(a) Product warranty costs. Product warranty costs should be lower because a world-class
manufacturer (WCM) will make fewer defectives.

(b) Salaries of quality control inspectors. Salaries of quality control inspectors should be lower
because a WCM will have its workers inspect as they go, rather than having separate inspections.
Nor will a WCM inspect incoming materials and components because it will deal only with vendors
whose quality has been demonstrated.
(c) Amounts paid to vendors for parts and components. Amounts paid to vendors for parts and
components should be higher because a WCM will not search out the lowest prices but will seek
high-quality components delivered when needed.

(d) Wage rates for direct laborers. Wages rates for direct laborers should be higher because a
WCM’s workers will multiskilled and should therefore command premium wages.

(e) Total supervisory salaries. Total supervisory salaries should be lower because a WCM’s
workers will not need as much supervision.

(f) Warehousing costs, including rent or depreciation on space, salaries and wages of employees,
utilities, etc. Warehousing costs should be lower because a WCM will produce as needed and so
will not require storage space for materials or finished product.

19. In a Just-in-Time (JIT) system, what is meant by the pull approach to the flow of goods,
as compared to the push approach used in conventional systems?

In a JIT system, at the final assembly stage, a signal is sent to the preceding workstation
indicating the exact parts and materials that will be required for the final assembly of products
over the next few hours. Only those components and materials are available. The identical signal
is sent back through each previous workstation to ensure a continuous flow of components and
supplies with no inventory building at any point. As a result, the final assembly stage exerts a
"pull" on all workstations. The “pull” approach just described can be contrasted to the “push”
approach used in conventional systems. In a conventional system, inventories of parts and
materials are built up—often simply to keep everyone busy. These semi-completed parts and
materials are “pushed” forward to the next workstation whether there is any customer demand for
the products they will become part of. The result is large stockpiles of work in process inventories.

20. Identify the benefits that can result from reducing the setup time for a product.

Several benefits accrue from reduced setup time. First, reduced setup time allows a
company to produce in smaller batches, which in turn reduces the level of inventories. Second,
reduced setup time allows a company to spend more time producing goods and less time getting
ready to produce. Third, the ability to rapidly change from making one product to making another
allows the company to respond more quickly to customers. Finally, smaller batches make it easier
to spot manufacturing problems before they result in many defective units.
REFERENCES:

Cabrera, E.B., and Cabrera, G.A., (2019). Strategic Cost Management. 2019-2020 Edition. GIC
Enterprises & Co., Inc.

Diaz, E., (2014, August 19). What is your definition of Quality? https://www.gbnews.ch/what-
is your-definition-of-quality

Ahmed, L, (2014). Conformance Vs. Nonconformance.

https://www.projectmanagement.com/search?q=What+is+cost+of+conformance+Nonco
nformance

Kenton, W. (2020). Guide to Gap Analysis. https://www.investopedia.com/terms/g/gap-

analysis.asp