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Chapter 7: Measuring and Managing Process Performance

Chapter 7
Measuring and
Managing Process
Performance

QUESTIONS

7-8 Three examples of each of the following quality costs are:


(a) prevention costsquality training, supplier certification
and statistical process control;
(b) appraisal costsinspection and testing of incoming materials,
process control monitoring and product quality audits;
(c) internal failure costswaste, downtime due to defectives,
rework costs and scrap;
(d) external failure costsproduct liability lawsuits,
product recalls, and warranty claims.

7-13 Financial benefits resulting from a shift to group technology (cellular


manufacturing), just-in-time production, or continuous quality improvements may
include the following (only two are required):
1. Increased sales because the short production cycle time enables a company
to win customers by cutting the delivery time.
2. Reduction in the number of workers needed to move materials from one
area to another, due to close proximity of manufacturing processes and
reduction in work-in-process inventory levels.
3. Reduced material waste because of reduced damage caused by materials
handling. Lower work-in-process inventory levels also reduce the potential
for products to become obsolete.
4. Reduced cost of storage because less space is used to store the reduced
work-in-process inventory.
5. Reduced clerical costs for keeping inventory records.
6. Reduced financing costs of inventories
7. An improvement in quality because defective processes are detected much
faster before many defective items are produced.

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Atkinson, Solutions Manual t/a Management Accounting, 6E

7-30 As shown below, benefits from the switch to JIT operations are estimated to be $461,600:
Before the After the
Change Change Difference
Sales $1,000,000 $1,500,000 $500,000
Costs:
Direct material (250,000) (300,000) (50,000)
Direct labor (200,000) (225,000) (25,000)
Support (270,000) (255,000) 15,000
Inventory carrying costs (26,400) (4,800) 21,600
Profit $253,600 $715,200 $461,600

7-31 Inventory Costs


Direct material $300 60,000 units 2/12 = $3,000,000
Work in process ([$300 100%] + [$400 50%]) 60,000
units 2/12 = 5,000,000
Finished goods ($300 + $400) 60,000 units 1/12 = 3,500,000
Total $11,500,000
Inventory carrying cost 10%
Annual inventory carrying cost $1,150,000

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Chapter 7: Measuring and Managing Process Performance

PROBLEMS

7-33 Incremental costs:


Machine moving and reinstallation ($100,000)
Incremental benefits:
Increase in contribution margin
$200,000 0.31 = 62,000
Savings in inventory carrying costs
$200,000 0.25 0.15 = 7,500
Net benefit (loss) from a change in plant layout in year 1 $(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.

7-34 (a) PCE in minutes under the traditional system equals


[120/
(120 + 80 + 240 + 40)] = [120/480]
= 0.25.
PCE under the JIT system equals
[75/
(75 + 20 + 60 + 5)]
= [75/160]
= 0.47.

(b) Based on the calculations above, Walker Brothers should implement the
JIT system since the processing cycle efficiency is almost double that
of the traditional system (0.47 vs. 0.25).

235
Atkinson, Solutions Manual t/a Management Accounting, 6E

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


DM $ 0 $ 12 $ 0
DL 84 121 24
TDABC support 122 164 30
Total per valve $206 $297 $54 $ 557
Decrease in number of rejects 130
Savings from decrease in reject rate $72,410

Savings from reduction in inventory carrying cost:


($386,000 $270,000) 0.15 $17,400
Total savings $89,810

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