17th Global | Ch20 Balanced Scorecard & Quality

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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 20 Balanced Scorecard: Quality and Time

Objective 20.1

1) Which of the following is true of ISO 9000?

A) It is a quality management system comprising different process improvement such as six sigma and lean manufacturing.

B) It is mandatory for all listed companies in US to get ISO certified.

C) It helps companies monitor, document, and certify the elements of their production processes that lead to quality.

D) It is a disciplined, data-driven, and statistical approach to improve the quality of products or services by identifying and removing the causes of defects.

Diff: 1

Objective: 1

AACSB: Analytical thinking

2) Which of the following best describes conformance quality?

A) it is the first step of a quality management system such as ISO 9000

B) it is the performance of a product or service according to design and product specifications

C) it is making the product according to design, engineering, and manufacturing specifications

D) it focuses on how a product meets customer needs and wants

Diff: 1

Objective: 1

AACSB: Analytical thinking

3) The characteristics of a product or service meet the needs and wants of customers is most closely related to which of the following qualities?

A) conformance

B) design

C) performance

D) adaptation

Diff: 1

Objective: 1

AACSB: Analytical thinking

4) The costs of quality are the costs incurred:

A) to enhance large scale production

B) to prevent the production of a low quality product

C) due to defective and low quality product

D) because of warranties, normal spoilage, abnormal spoilage, and scrap

Diff: 2

Objective: 1

AACSB: Analytical thinking

5) Which of the following types of costs are incurred in precluding the production of products that do not conform to specifications?

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Which of the following describes appraisal costs?

A) they are incurred to prevent the production of products that do not conform to specifications

B) they are incurred to detect which of the individual units of products do not conform to specifications

C) they are incurred on defective products before they are shipped to customers

D) they are incurred on defective products after they have been shipped to customers

Diff: 2

Objective: 1

AACSB: Analytical thinking

7) Spoilage, rework, scrap, and machine repairs are all examples of:

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

Diff: 1

Objective: 1

AACSB: Analytical thinking

8) Process engineering is an example of:

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

9) Rework is an example of:

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

10) Warranty repair cost is an example of which of the following?

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

Diff: 2

Objective: 1

AACSB: Application of knowledge

11) Process engineering is an example of:

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

Diff: 2

Objective: 1

AACSB: Application of knowledge

12) Product testing is an example of:

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

Diff: 2

Objective: 1

AACSB: Application of knowledge

13) Monticello Corp manufactures expensive tables. Its varnishing department is fully automated and requires substantial inspection to keep the machines operating properly. An improperly varnished table is very expensive to correct. Inspection hours for the 6,000 tables varnished in September totaled 2,200 hours by 10 employees. Eight quarts of varnish were used, on average, for each table. The standard amount of varnish per table is nine quarts. The cost of inspection for September was equal to the budgeted amount of $40,500.

The $40,500 represents a(n):

A) activity cost pool

B) possible cost allocation base

C) internal failure cost

D) work-in-process control

Diff: 2

Objective: 1

AACSB: Application of knowledge

14) Monticello Corp manufactures expensive tables. Its varnishing department is fully automated and requires substantial inspection to keep the machines operating properly. An improperly varnished table is very expensive to correct. Inspection hours for the 5,400 tables varnished in September totaled 1,800 hours by 12 employees. Eight quarts of varnish were used, on average, for each table. The standard amount of varnish per table is nine quarts. The cost of inspection for September was equal to the budgeted amount of $40,200.

What is the inspection cost per unit? (Round the final answer to the nearest cent.)

A) $28.18

B) $7.44

C) $8.44

D) $21.13

Diff: 3

Objective: 1

AACSB: Application of knowledge

15) Which of the following is considered a cost of quality?

A) external failure costs

B) opportunity costs

C) sunk costs

D) contingent liabilities

Diff: 2

Objective: 1

AACSB: Analytical thinking

16) Which of the following is an opportunity cost?

A) lost sales

B) cost of production

C) marginal cost

D) cost of sales

Diff: 2

Objective: 1

AACSB: Application of knowledge

17) Which of the following is a financial measure of quality?

A) operating income growth

B) percentage of highly satisfied customers

C) number of defective units shipped to customers as a percentage of total units shipped

D) interest costs

Diff: 2

Objective: 1

AACSB: Application of knowledge

18) One of the most direct financial measures of quality is the costs of quality.

Diff: 1

Objective: 1

AACSB: Analytical thinking

19) ISO 9000 developed by the International Organization for Standardization is a set of five international standards for quality management.

Diff: 2

Objective: 1

AACSB: Analytical thinking

20) Quality is defined as the total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use.

Diff: 1

Objective: 1

AACSB: Analytical thinking

21) Conformance quality is the performance of a product or service relative to its design and product specifications.

Diff: 1

Objective: 1

AACSB: Analytical thinking

22) When Actual performance falls short of customer satisfaction, it is because of a design-quality failure.

Diff: 1

Objective: 1

AACSB: Analytical thinking

23) In the banking industry, depositing a customer's check into the wrong bank account is an example of quality of design failure.

Diff: 2

Objective: 1

AACSB: Analytical thinking

24) Costs of quality (COQ) reports usually consider opportunity costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

25) ISO 9000 are standards designed to encourage organizations to develop environmental management systems to reduce environmental costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

26) Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, opportunity costs, and sales costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

27) Appraisal costs are costs incurred to preclude the production of products that do not conform to specifications.

Diff: 2

Objective: 1

AACSB: Analytical thinking

28) External failure costs are costs incurred on defective products after they have been shipped to customers.

Diff: 2

Objective: 1

AACSB: Analytical thinking

29) When evaluating alternatives to improve quality, both the relevant benefits as well as the relevant costs should be considered.

Diff: 1

Objective: 1

AACSB: Analytical thinking

30) Prevention costs include inspection and product testing.

Diff: 2

Objective: 1

AACSB: Application of knowledge

31) Warranty costs is an example of external failure costs.

Diff: 2

Objective: 1

AACSB: Application of knowledge

32) What are ISO 9000 and ISO 14000?

ISO 14000, also developed by the International Organization for Standardization, are standards designed to encourage organizations to develop (1) environmental management systems to reduce environmental costs and (2) environmental auditing and performance-evaluation systems to review and monitor their progress toward their environmental goals.

Diff: 2

Objective: 1

AACSB: Analytical thinking

33) The two basic aspects of quality are quality of design and conformance quality. Define and give an example of each.

Conformance quality refers to the performance of a product or service according to design and product specifications. For example, if a photocopy machine constantly has paper jams or breaks down, it fails to satisfy conformance quality.

Diff: 1

Objective: 1

AACSB: Analytical thinking

34) Ply Corp manufactures doors. Classify each of the following quality costs as prevention costs, appraisal costs, internal failure costs, or external failure costs.

a. Retesting of reworked products

b. Downtime due to quality problems

c. Analysis of the cause of defects in production

d. Depreciation of test equipment

e. Warranty repairs

f. Lost sales arising from a reputation for poor quality

g. Quality circles

h. Rework direct manufacturing labor and overhead

i. Net cost of spoilage

j. Technical support provided to suppliers

k. Audits of the effectiveness of the quality system

l. Plant utilities in the inspection area

m. Reentering data because of keypunch errors

________ Prevention costs

________ Appraisal costs

________ Internal failure costs

________ External failure costs

g, j Prevention costs

d, l, k Appraisal costs

a, b, c, h, i, m Internal failure costs

e, f, External failure costs

Diff: 3

Objective: 1

AACSB: Application of knowledge

35) Dawn and Kim just bought a bed and breakfast inn at a very attractive price. The business had been doing poorly. Before they reopened the inn for business, they attended a seminar on operating a high quality business. Now that they are ready to open the inn, they need some advice on quality costs and management.

Required:

Identify four categories of quality costs. In addition, identify three items that would be classified in each of the categories.

Prevention: Hiring employees with good references

Training of owners and employees

Good security

Good reservation system

Purchasing quality furniture

Appraisal: Verifying accuracy of reservation and registration procedures

Inspecting rooms, facilities, building and grounds regularly

Observing activities of employees

Testing furniture and fixtures

Taste testing food

Internal failure: Recleaning rooms and facilities

Restocking rooms with linens, glasses, etc.

Out-of-stock supplies

Reinspection

Failure to bill on a timely basis

External failure: Responding to complaints about rooms and food

Responding to complaints about reservations

Emergency cleaning of rooms when not ready on time

Customer refunds because of unsatisfactory conditions

Opportunity cost of lost revenue resulting from unhappy customers

Diff: 3

Objective: 1

AACSB: Application of knowledge

36) Wilson's Language School manufactures CDs and DVDs to teach English as a Second Language. Wilson has just prepared a Cost of Quality Report, and the staff has noticed a decline in prevention costs as a percentage of total sales over a three-year period. What changes might Wilson expect to see in appraisal costs as a percentage of sales, internal failure costs as a percentage of sales, and external failure costs as a percentage of sales given this trend?

Diff: 3

Objective: 1

AACSB: Application of knowledge

37) A quality improvement program is very costly to implement across a large corporation. Why do they do it? Explain.

The corporation must consider four key cost of quality areas where costs are most likely to occur: (1) prevention costs - which arise when the product does not meet the specifications, (2) appraisal costs - incurred by actions which must be taken to detect which of the individual units of products do not conform with the specification(s), (3) internal failure costs - incurred on defective products before they are shipped to customers, and (4) external failure costs - incurred on defective products after they are shipped to customers.

Any company which does not invest in quality improvement by constantly reviewing, revising, and implementing procedures to maintain focus on the four key cost of quality areas will be almost certain to have lower profits, revenues, and market share.

Diff: 3

Objective: 1

AACSB: Analytical thinking

Objective 20.2

1) An example of a nonfinancial measure for customer satisfaction is:

A) number of defective units shipped as a percentage of total units shipped

B) the cost of warranty claims by customers

C) liability claims incurred to the company

D) rework costs due to inefficiency

Diff: 3

Objective: 2

AACSB: Analytical thinking

2) Which of the following is an example of a nonfinancial measure for customer satisfaction?

A) average manufacturing time for key products

B) contribution margin earned on popular products

C) on time delivery rates

D) time and effort spent on machine repairs

Diff: 3

Objective: 2

AACSB: Analytical thinking

3) Which of the following is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time?

A) control chart

B) Pareto diagram

C) cause-and-effect diagram

D) fishbone diagrams

Diff: 2

Objective: 2

AACSB: Analytical thinking

4) What is it that a statistical quality control chart does?

A) it shows a graph of a series of random events of a process

B) it plots each observation relative to specified ranges that represent the expected distribution

C) it plots control observations over various periods of time

D) it plots only those observations outside specified limits

Diff: 2

Objective: 2

AACSB: Analytical thinking

5) As per control charts, random variations would most likely occur when:

A) there is a sudden increase in production

B) chance fluctuations in the speed of equipment cause defective products to be produced

C) defective products are produced as a result of a systematic problem

D) chance fluctuations in the speed of the equipment cause defective products to be produced

Diff: 2

Objective: 2

AACSB: Analytical thinking

6) Which of the following is a chart which indicates how frequently each type of defect occurs?

A) control chart

B) Pareto diagram

C) scatter diagram

D) fishbone diagram

Diff: 2

Objective: 2

AACSB: Analytical thinking

7) An important difference between financial measures of quality and nonfinancial measures of quality is that:

A) financial measures of quality tend to be useful indicators of future long-term performance, while nonfinancial measures have more of a short-term focus

B) nonfinancial measures of quality tend to be useful indicators of future long-term performance, while financial measures of quality have more of a short-term focus

C) nonfinancial measures are generally too subjective to have any long-term value, while financial measures are too objective for taxation purposes

D) nonfinancial measures are generally too subjective to have any short-term value, while financial measures are too objective to have medium-term value

Diff: 3

Objective: 2

AACSB: Analytical thinking

8) Examples of nonfinancial measures of quality include the:

A) inspection costs incurred

B) number of customer complaints

C) design engineering costs

D) quality training costs

Diff: 2

Objective: 2

AACSB: Application of knowledge

9) Cause-and-effect diagrams are used in quality management systems to:

A) identify and respond to potential reasons of failure

B) indicate how frequently each type of failure occurs

C) distinguish random from nonrandom variations in an operating process

D) evaluate the tradeoffs among prevention costs, appraisal costs, and failure costs

Diff: 2

Objective: 2

AACSB: Application of knowledge

10) An illustration that resembles the bone structure of a fish and identifies potential reasons why a problem exists is called:

A) control chart

B) Pareto diagram

C) cause-and-effect diagram

D) time-series graphs

Diff: 2

Objective: 2

AACSB: Analytical thinking

11) When considering how well a company is doing keeping customers happy and understanding their needs and wants, financial and nonfinancial measures can be used.

Diff: 1

Objective: 2

AACSB: Analytical thinking

12) An example of a financial measure of customer satisfaction would be the percentage of defective products produced during a particular month.

Diff: 2

Objective: 2

AACSB: Application of knowledge

13) An on-time delivery rate is considered a nonfinancial measure of customer satisfaction.

Diff: 2

Objective: 2

AACSB: Application of knowledge

14) A control chart identifies potential causes of failures or defects.

Diff: 2

Objective: 2

AACSB: Analytical thinking

15) When using a control chart, the observations outside the upper and lower control limits are ordinarily regarded as nonrandom and worth investigating.

Diff: 2

Objective: 2

AACSB: Analytical thinking

16) The implication of controlling a process at a Six Sigma level is that the process produces only 3.4 defects per million products produced.

Diff: 2

Objective: 2

AACSB: Application of knowledge

17) A Pareto diagram is usually in a bar-chart format, that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent.

Diff: 1

Objective: 2

AACSB: Analytical thinking

18) If Six Sigma's goal is to get defect rates down to 3.4 defects per every 100,000 units produced.

Diff: 2

Objective: 2

AACSB: Analytical thinking

19) Percentage of reworked products is an example of a nonfinancial measure of internal business-process quality.

Diff: 2

Objective: 2

AACSB: Application of knowledge

20) Average delivery delays (difference between the scheduled delivery date and the date requested by the customer), is a measure of customer satisfaction.

Diff: 2

Objective: 2

AACSB: Application of knowledge

21) Experience and qualifications of design engineers could be a measure in the learning-and-growth perspective in the balanced scorecard of a manufacturer.

Diff: 2

Objective: 2

AACSB: Application of knowledge

22) Discuss the methods used to identify quality problems.

1. A control chart is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time. Each observation is plotted relative to specified ranges that represent the limits within which observations are expected to fall. Observations that fall outside the control limits are regarded as nonrandom and worth investigating.

2. A Pareto diagram indicates how frequently each type of failure (defect) occurs. Observations outside control limits serve as inputs for Pareto diagrams.

3. A cause-and-effect diagram helps to identify potential causes of failures or defects. The"backbone" of the diagram represents the problem being examined. The large "bones" coming

off the backbone represent the main categories of potential causes of failure.

Diff: 2

Objective: 2

AACSB: Analytical thinking

23) A corporation can measure its quality performance by using financial or nonfinancial measures of quality. Discuss the merits of each method and whether the use of one precludes the use of the other.

Nonfinancial measures of quality are useful indicators of future long-run performance. They are helpful in revealing future needs and preferences of customers and in indicating the specific areas that need improvement.

The use of one measure does not preclude the use of the other. Financial measures tend to be short term in nature (what is happening now). Nonfinancial measures tend to be long term and are useful in terms of estimating trends.

Financial performance measures are more readily available than nonfinancial measures, but they are no more important to the overall goals of the organization. By considering nonfinancial measures, the organization can improve operational control. Superior financial performance usually follows from superior nonfinancial performance.

Diff: 2

Objective: 2

AACSB: Analytical thinking

24) Komerica Corp is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For 2018, it has budgeted $1,000,000 for prevention costs and $900,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000.

Product Testing has proposed to management a change in the 2018 budget for a new method of testing products. If management decides to implement the new method, $1.50 per unit of appraisal costs will be saved, up to a level of 150,000 tests. No additional savings are expected past the 150,000 level. The new method involves $95,000 in training costs and $65,000 in yearly testing supplies.

Traditionally, 5% of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories.

Required:

a. What is the adjusted budget for appraisal costs, assuming the new method is implemented and 800,000 units are tested during the manufacturing process in 2020?

b. How much do internal failure costs change, assuming 500,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40%?

c. What would be the change in the external failure budget, assuming external failures are reduced by 60% and the same facts as in part (b)?

a.

b.

c.

Diff: 3

Objective: 2

AACSB: Application of knowledge

25) Northern Corp is concerned about its declining sales, especially the reduction in the number of customers. For the last two years, its shirts have won industry awards for high quality and trend-setting styles. At the latest executive managers' meeting, all were blaming each other for the decline. After much discussion and presenting some fact-finding information, it was determined that sales relationships were the cause of most of the problems.

Required:

What may be some of the causes and how can the causes be detected if product quality is not an issue?

The causes may be detected by comparing nonfinancial measures of the company with those found in the industry. These might include measures of the number of incorrect shipments or not on time; the number of customer complaints about certain areas (billing, shipping, etc.); response time to customer complaints; or a questionnaire about why former customers quit buying from the company.

Diff: 2

Objective: 2

AACSB: Application of knowledge

26) Baby Care Products has just completed a very successful program of improving quality in its manufacturing operations. The next step is to improve the operations of its administrative functions, starting with the accounting information system. As the manager of the accounting operations, you are requested to begin a quality improvement program.

Required:

What are some possibilities of finding out about the current status of quality in the accounting system?

Diff: 2

Objective: 2

AACSB: Application of knowledge

27) What are control charts and how can inferences be drawn from them?

Each observation is plotted relative to specified ranges that represents the limits within which observations are expected to fall. Observations that fall outside the control limits are regarded as nonrandom and worth investigating.

Diff: 2

Objective: 2

AACSB: Application of knowledge

28) Discuss the means by which a company goes about evaluating and installing a new quality improvement program.

1. The managers will have previously identified the quality problems by using analytical tools such as control charts, pareto diagrams, and cause and effect diagrams. These tools analyze quality problems and help in improving quality.

2. The mangers will then develop various solution options for improvement and project how total costs and total revenues for the company will change under each alternative solution. Once having done this analysis, they will select and implement the optimal solution.

3. The managers will then establish and implement nonfinancial measures of internal business process quality in order to assure the ongoing success of the solution that has been put in place. These measures include percentage of defective products, percentage of reworked products, and others. Improving these measures will lead to greater customer satisfaction, lower costs of quality, and better financial performance.

4. The managers will then establish and implement measures of learning and growth perspective for quality improvements. These include such measures as employee turnover, employee training, and others. This will encourage a continual focus on quality within the corporation.

Diff: 3

Objective: 2

AACSB: Analytical thinking

Objective 20.3

1) Managers identify the relevant costs and benefits for each solution by focusing on:

A) the alternative solution that will derive maximum customer satisfaction

B) how total costs and total revenues will change under each alternative solution related to quality improvements

C) how the employees of a company would be able to implement a change

D) how long it will take for the improved program to be fully functional

Diff: 2

Objective: 3

AACSB: Analytical thinking

2) Premier Corp expects to spend $800,100 in 2020 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,800 in fixed appraisal costs and variable costs of $0.50 per materials units received. The new method involves $141,000 in training costs and an additional $150,100 in annual equipment rental.

Internal failure costs average $190 per failed unit of finished goods. During 2019, 4% of all completed items had to be reworked. External failure costs average $500 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.

What is the net effect on appraisal costs for 2020, assuming the new receiving method is implemented and that 800,100 material units are received?

A) $1,520 increase

B) $169,750 decrease

C) $291,100 decrease

D) $4,001 increase

Diff: 2

Objective: 3

AACSB: Application of knowledge

3) Premier Corp expects to spend $800,500 in 2020 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,500 in fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves $140,000 in training costs and an additional $150,300 in annual equipment rental.

Internal failure costs average $200 per failed unit of finished goods. During 2019, 4% of all completed items had to be reworked. External failure costs average $460 per failed unit. The company's average external failures are 2% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.

What would be the change in the external failure budget, if 600,500 units are used and assuming external failures are reduced by 12%?

A) $32,020 increase

B) $249,950 decrease

C) $662,952 decrease

D) $304,190 decrease

Diff: 3

Objective: 3

AACSB: Application of knowledge

4) LaCrosse Products has a budget of $902,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,200 in variable costs. The new method will require $40,300 in training costs and $110,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 158,000 units.

Appraisal costs for the year are budgeted at $609,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $18 per failed unit of finished goods. The internal failure rate is expected to be 2% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 2% of units sold. The new proposal will reduce this rate by 45%. Assume all units produced are sold and there are no ending inventories.

What is the net change in the budget for prevention costs if the procedures are automated in 2020? Will management agree with the changes?

A) $70,100 decrease, yes

B) $70,100 increase, yes

C) $150,300 increase, no

D) $80,200 decrease, yes

Diff: 3

Objective: 3

AACSB: Application of knowledge

5) LaCrosse Products has a budget of $910,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,800 in variable costs. The new method will require $40,600 in training costs and $104,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 151,000 units.

Appraisal costs for the year are budgeted at $608,000. The new prevention procedures will save appraisal costs of $50,900. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 2% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 2% of units sold. The new proposal will reduce this rate by 55%. Assume all units produced are sold and there are no ending inventories.

How much will appraisal costs change assuming the new prevention methods reduce material failures by 30% in the appraisal phase?

A) $144,600 decrease

B) $63,800 increase

C) $50,900 decrease

D) $15,100 decrease

Diff: 2

Objective: 3

AACSB: Application of knowledge

6) LaCrosse Products has a budget of $904,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,100 in variable costs. The new method will require $41,000 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 151,000 units.

Appraisal costs for the year are budgeted at $610,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $14 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $60 per failed unit. The company's average external failures average 4% of units sold. The new proposal will reduce this rate by 55%. Assume all units produced are sold and there are no ending inventories.

How much will internal failure costs change if the internal product failures are reduced by 1/3 with the new procedures? (Do not round intermediate calculations.)

A) $28,187 decrease

B) $33,159 decrease

C) $510,000 decrease

D) $761,000 decrease

Diff: 2

Objective: 3

AACSB: Application of knowledge

7) LaCrosse Products has a budget of $900,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,600 in variable costs. The new method will require $40,300 in training costs and $103,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 158,000 units.

Appraisal costs for the year are budgeted at $603,000. The new prevention procedures will save appraisal costs of $50,800. Internal failure costs average $18 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $52 per failed unit. The company's average external failures average 4% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories.

How much do external failure costs change if all changes are as anticipated with the new prevention procedures? Assume all units produced are sold and there are no ending inventories.

A) $164,320 decrease

B) $164,320 increase

C) $328,640 decrease

D) None of these answers is correct.

Diff: 3

Objective: 3

AACSB: Application of knowledge

8) LaCrosse Products has a budget of $902,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $81,000 in variable costs. The new method will require $40,200 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 155,000 units.

Appraisal costs for the year are budgeted at $604,000. The new prevention procedures will save appraisal costs of $50,200. Internal failure costs average $18 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $52 per failed unit. The company's average external failures average 4% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories.

Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? (Note: numbers shown as (negatives) represent net savings and positive numbers represent net cost.)

A) $140,200

B) $(37,200)

C) $(189,400)

D) $(161,200)

Diff: 3

Objective: 3

AACSB: Application of knowledge

9) Cysco Corp has a budget of $1,206,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $103,000 in variable costs. The new method will require $50,400 in training costs and $145,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 209,000 units.

Appraisal costs for the year are budgeted at $503,000. The new prevention procedures will save appraisal costs of $50,200. Internal failure costs average $40 per failed unit of finished goods. The internal failure rate is expected to be 5% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $52 per failed unit. The company's average external failures average 3.9% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories.

What is the net change in the budget of prevention costs if the procedures are automated in 2020? Will management agree with the changes?

A) $103,000 decrease, yes

B) $92,400 decrease, yes

C) $103,000 increase, no

D) $92,400 increase, yes

Diff: 2

Objective: 3

AACSB: Application of knowledge

10) Cysco Corp has a budget of $1,203,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $109,000 in variable costs. The new method will require $50,500 in training costs and $146,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 208,000 units.

Appraisal costs for the year are budgeted at $504,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $40 per failed unit of finished goods. The internal failure rate is expected to be 6% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $60 per failed unit. The company's average external failures average 2.7% of units sold. The new proposal will reduce this rate to 2%. Assume all units produced are sold and there are no ending inventories.

How much will appraisal costs change assuming that the new prevention methods reduce material failures by 40% in the appraisal phase?

A) $159,500 decrease

B) $310,791 decrease

C) $50,000 increase

D) $50,000 decrease

Diff: 2

Objective: 3

AACSB: Application of knowledge

11) Cysco Corp has a budget of $1,210,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $104,000 in variable costs. The new method will require $50,800 in training costs and $149,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 201,000 units.

Appraisal costs for the year are budgeted at $505,000. The new prevention procedures will save appraisal costs of $50,500. Internal failure costs average $32 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $56 per failed unit. The company's average external failures average 2.8% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories.

How much will internal failure costs change if the internal product failures are reduced by 45% with the new procedures?

A) $147,200 decrease

B) $124,080 decrease

C) $115,776 decrease

D) $81,950 increase

Diff: 3

Objective: 3

AACSB: Application of knowledge

12) Cysco Corp has a budget of $1,204,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $107,000 in variable costs. The new method will require $51,000 in training costs and $140,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 204,000 units.

Appraisal costs for the year are budgeted at $500,000. The new prevention procedures will save appraisal costs of $50,100. Internal failure costs average $38 per failed unit of finished goods. The internal failure rate is expected to be 6% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $60 per failed unit. The company's average external failures average 3.3% of units sold. The new proposal will reduce this rate to 2%. Assume all units produced are sold and there are no ending inventories.

How much do external failure costs change if all the changes are as the new prevention procedures anticipated? Assume all units produced are sold and there are no ending inventories.

A) $294,272 decrease

B) $159,120 decrease

C) $244,800 decrease

D) $330,480 decrease

Diff: 3

Objective: 3

AACSB: Application of knowledge

13) Cysco Corp has a budget of $1,206,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $104,000 in variable costs. The new method will require $50,600 in training costs and $145,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 200,000 units.

Appraisal costs for the year are budgeted at $505,000. The new prevention procedures will save appraisal costs of $50,300. Internal failure costs average $38 per failed unit of finished goods. The internal failure rate is expected to be 6% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 3.5% of units sold. The new proposal will reduce this rate to 2%. Assume all units produced are sold and there are no ending inventories.

Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? Assume that internal product failures are reduced by 35% with the new procedures.

A) $259,200

B) $(280,300)

C) $(249,000)

D) $(252,500)

Diff: 3

Objective: 3

AACSB: Application of knowledge

14) Relevant-cost and relevant-revenue analysis uses the allocated costs as the base for calculating the costs of a quality improvement program.

Diff: 2

Objective: 3

AACSB: Analytical thinking

15) Relevant benefits of increasing quality might include cost savings from less rework, customer support, and repairs.

Diff: 2

Objective: 3

AACSB: Analytical thinking

16) Premier Corp expects to spend $808,000 in 2020 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,200 in fixed appraisal costs and variable costs of $0.70 per unit of finished product. The new method involves $144,000 in training costs and an additional $150,000 in annual equipment rental.

Internal failure costs average $180 per failed unit of finished goods. During 2014, 5% of all completed items had to be reworked. External failure costs average $420 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.

How much will external failure costs change assuming 804,000 units of materials are received and that product failures with customers are cut in half with the new receiving method?

A) $28,280 increase

B) $1,688,400 decrease

C) $1,013,040 decrease

D) $3,376,800 decrease

Diff: 3

Objective: 3

AACSB: Application of knowledge

17) In successful quality programs, companies decrease costs of quality and, in particular, internal and external failure costs as a percentage of revenues.

Diff: 2

Objective: 3

AACSB: Analytical thinking

18) The financial cost of quality measures serves as a common denominator for evaluating trade-offs among prevention costs and failure costs.

Diff: 2

Objective: 3

AACSB: Analytical thinking

19) Cost of Quality (COQ) reports provide more insight about quality improvements and allow managers to compare trends over time.

Diff: 2

Objective: 3

AACSB: Analytical thinking

20) Cost of quality financial measures will usually deteriorate when nonfinancial measures of quality are emphasized and improved.

Diff: 2

Objective: 3

AACSB: Analytical thinking

21) Light Green Company's management are evaluating two quality improvement alternatives that will result in increased sales.

Alternative A

Further inspection and testing will cost $550,000 resulting in higher quality and total savings attributed to rework, customer service, repairs, and warranty claims of $2,000,000

Alternative B

Redesign of the product will cost $700,000 resulting in total savings attributed to rework, customer service, repairs, and warranty claims of $2,600,000

The sales projects show the following:

Alternative A: total contribution margin from additional sales of $1,400,000 and

Alternative B: total contribution margin from additional sales of $1,700,000.

Should the decision be in favor or alternative A or B and why? Support your decision with numbers.

Diff: 2

Objective: 3

AACSB: Analytical thinking

Objective 20.4

1) Which of the following is an advantage of COQ measures?

A) They help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs.

B) They detect and provide immediate short-run feedback on whether quality-improvement efforts are succeeding.

C) They forecast customer satisfaction and employee satisfaction, which are useful indicators of long-run performance.

D) They direct attention to financial processes that help managers identify the precise problem areas that need improvement.

Diff: 3

Objective: 4

AACSB: Analytical thinking

2) Which of the following is an advantage of nonfinancial measures of quality?

A) They help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs.

B) They detect and provide immediate short-run feedback on whether quality-improvement efforts are succeeding.

C) They focus managers' attention on how poor quality affects operating income.

D) They direct attention to financial processes that help managers identify the precise problem areas that need improvement.

Diff: 3

Objective: 4

AACSB: Analytical thinking

3) Which of the following true of nonfinancial measures of quality?

A) They direct attention to financial processes that help managers identify the precise problem areas that need improvement.

B) They focus managers' attention on how poor quality affects operating income.

C) They assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction.

D) They provide immediate short-run feedback on whether quality-improvement efforts are succeeding.

Diff: 2

Objective: 4

AACSB: Analytical thinking

4) An advantage of nonfinancial measures of quality include that they:

A) focus managers' attention on how poor quality affects operating income

B) assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction

C) are useful indicators of future long-run performance

D) use certain statistical measures to justify their data

Diff: 2

Objective: 4

AACSB: Analytical thinking

5) Which of the following is true of COQ measures?

A) They forecast customer satisfaction and employee satisfaction, which are useful indicators of long-run performance.

B) They help managers evaluate costs and benefits of incurring prevention and appraisal costs

C) They direct attention to financial processes that help managers identify the precise problem areas that need improvement.

D) They provide immediate short-run feedback on whether quality-improvement efforts are succeeding.

Diff: 2

Objective: 4

AACSB: Analytical thinking

6) Without financial quality measures:

A) customer satisfaction and employee satisfaction cannot be measured

B) the short-run effectiveness of nonfinancial quality measures is questionable

C) cost-benefit analysis is not possible

D) quality problems might not be identified until it is too late

Diff: 3

Objective: 4

AACSB: Analytical thinking

7) Without nonfinancial quality measures:

A) the operating income cannot be improved

B) the short-run effectiveness of financial quality measures is questionable

C) the precise problem areas that need improvement cannot be identified

D) quality problems might not be identified until it is too late

Diff: 3

Objective: 4

AACSB: Analytical thinking

8) COQ measures include:

A) prevention costs

B) cores that rate service

C) customer service indicators

D) nonfinancial metrics

Diff: 1

Objective: 4

AACSB: Analytical thinking

9) COQ measures such as measures of customer satisfaction and employee satisfaction are useful indicators of long-run performance.

Diff: 1

Objective: 4

AACSB: Analytical thinking

10) Total costs of quality help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs.

Diff: 1

Objective: 4

AACSB: Analytical thinking

11) Distribution of questionnaires to customers regarding product quality and improving the product on certain key areas based on the inferences drawn from the questionnaires is an example of a nonfinancial measure of quality.

Diff: 2

Objective: 4

AACSB: Analytical thinking

12) A disadvantage of COQ financial measures is that they are inconsistent with the attention-directing role of management accounting.

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 20.5

1) The amount of time from when a customer places an order for a product to when the product or service is delivered to the customer is referred to as:

A) manufacturing lead time

B) delivery time

C) customer-response time

D) a time driver

Diff: 2

Objective: 5

AACSB: Analytical thinking

2) Which of the following correctly describes customer-response time?

A) the amount of time from when an order is ready to start on the production line to when the product or service is delivered to the customer

B) the amount of time it takes to deliver a completed order to a customer

C) the amount of time from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer

D) the amount of time from when an order is ready to start on the production line to when it becomes a finished good

Diff: 3

Objective: 5

AACSB: Analytical thinking

3) The amount of time from when an order is ready to start on the production line to when it becomes a finished good is referred to as:

A) manufacturing time

B) time driver

C) customer-response time

D) delivery time

Diff: 2

Objective: 5

AACSB: Analytical thinking

4) Which of the following correctly describes manufacturing cycle time?

A) the amount of time it takes from when an order is ready to start on the production line to when the product or service is delivered to the customer

B) the amount of time it takes to deliver a completed order to a customer plus its waiting time

C) the amount of time it takes from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer

D) the amount of time it takes from when an order is ready to start on the production line to when it becomes a finished good plus its waiting time

Diff: 3

Objective: 5

AACSB: Analytical thinking

5) Which of the following is the mathematical expression for calculating manufacturing cycle efficiency (MCE)?

A) MCE = Manufacturing cycle time ÷ Value-added manufacturing time

B) MCE = Manufacturing time ÷ Value-added manufacturing time

C) MCE = Value-added manufacturing time ÷ Manufacturing cycle time

D) MCE = Value-added manufacturing time ÷ Manufacturing time

Diff: 2

Objective: 5

AACSB: Analytical thinking

6) Any factor where a change in the factor causes a change in the speed with which an activity is undertaken is referred to as:

A) a time driver

B) a cost driver

C) manufacturing lead time

D) customer-response time

Diff: 2

Objective: 5

AACSB: Analytical thinking

7) Which of the following is true of a bottleneck?

A) It occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it.

B) It occurs in an operation when there is excess capacity to complete the work given.

C) It is the uncertainty about when customers will order products or services.

D) It is the time taken by a manufacturing department to produce a finished product.

Diff: 1

Objective: 5

AACSB: Analytical thinking

8) The time it takes the marketing department to specify to the manufacturing department the exact requirements of the customer's order is referred as:

A) receipt time

B) waiting time

C) delivery time

D) manufacturing cycle time

Diff: 2

Objective: 5

AACSB: Analytical thinking

9) Customer response time comprises of:

A) manufacturing cycle time and delivery time only

B) receipt time and manufacturing cycle time only

C) receipt time, manufacturing cycle time, and delivery time

D) manufacturing time and delivery time only

Diff: 2

Objective: 5

AACSB: Analytical thinking

10) The time from which a machine is setup for order till the product becomes a manufactured good is:

A) waiting time

B) manufacturing time

C) manufacturing cycle time

D) customer-response time

Diff: 1

Objective: 5

AACSB: Analytical thinking

11) The time from which a machine setup begins for an order until the product is delivered to the customer is the:

A) delivery time only

B) manufacturing time plus the waiting time

C) manufacturing time plus the delivery time

D) customer-response time minus the receipt time

Diff: 1

Objective: 5

AACSB: Analytical thinking

12) Tony placed an order for a customized watch. The customer response time is 36 hours, its receipt time is 5 hours, and manufacturing cycle time is 22 hours. Calculate the delivery time of the product.

A) 14 hours

B) 9 hours

C) 17 hours

D) 4.5 hours

Diff: 2

Objective: 5

AACSB: Application of knowledge

13) Zenich Corp manufactures laptops. The waiting time is 60 minutes before the start of production and the manufacturing lead time is 158 minutes per laptop. What is its manufacturing cycle efficiency? (Round to the nearest whole percent.)

A) 38%

B) 82%

C) 62%

D) 61%

Diff: 2

Objective: 5

AACSB: Application of knowledge

14) Ventaz Corp manufactures keyboards. The manufacturing cycle efficiency is 40%. What is its manufacturing time for value added if the manufacturing lead time is 134 minutes per keyboard?

A) 42.88 minutes

B) 67.00 minutes

C) 53.60 minutes

D) 60.30 minutes

Diff: 2

Objective: 5

AACSB: Application of knowledge

15) Ventaz Corp manufactures keyboards. The manufacturing cycle efficiency is 65%. What is its waiting time if the manufacturing lead time is 122 minutes per keyboard?

A) 31.72 minutes

B) 39.65 minutes

C) 48.80 minutes

D) 42.70 minutes.

Diff: 2

Objective: 5

AACSB: Application of knowledge

16) Alex is injured and rushed to Care Hospitals for treatment. He spent 64 minutes at the hospital out of which he filled a form for 18 minutes, stood in the queue for 16 minutes, doctor treated him for 21 minutes, and payment time was 9 minutes. What is the service cycle efficiency for his visit?

A) 18.75%

B) 14.06%

C) 67.19%

D) 32.81%

Diff: 3

Objective: 5

AACSB: Application of knowledge

17) In the formula for calculating the average waiting time, the squared manufacturing time indicates:

A) that the shorter the manufacturing time, the greater the chance that the machine will remain idle in the process

B) that the shorter the manufacturing time, the greater the chance that the machine will be in use when an order arrives

C) the disproportionately large impact the manufacturing time has on the waiting time

D) a measure of the unused capacity or cushion

Diff: 3

Objective: 5

AACSB: Application of knowledge

18) A patient had a 1:00 pm appointment with a doctor and leaves the office to go home at 2:00 pm. The patient spends 5 minutes filling out insurance forms, 25 minutes alone in the examination room, and 18 minutes with the nurse and doctor. What is the service cycle efficiency ratio?

A) 0.30

B) 0.67

C) 0.70

D) 1.0

Diff: 3

Objective: 5

AACSB: Application of knowledge

19) Ventaz Corp manufactures small windows for back yard sheds. Historically, its demand has ranged from 30 to 50 windows per day with an average of 40. Alex is the one production worker and he works eight hours a day, five days a week. Each order is one window and each window takes 11 minutes.

What is the average waiting time in minutes?

A) 12.10

B) 121.00

C) 60.50

D) 20.00

Diff: 3

Objective: 5

AACSB: Application of knowledge

20) Ventaz Corp manufactures small windows for back yard sheds. Historically, its demand has ranged from 30 to 50 windows per day with an average of 43. Alex is one of the production workers and he works eight hours a day, five days a week. Each order is one window and each window takes 6 minutes.

What is the cycle time for an order?

A) 6 minutes per window

B) 21.60 minutes per window

C) 9.49 minutes per window

D) 300.00 minutes per window

Diff: 3

Objective: 5

AACSB: Application of knowledge

21) Ventaz Corp manufactures small windows for back yard sheds. Historically, its demand has ranged from 30 to 50 windows per day with an average of 44. Alex is the one production worker and he works eight hours a day, five days a week. Each order is one window and each window takes 8 minutes. Alex plans to add doors to its product line and anticipates that they will average 2 doors per day. Each door takes 38 minutes.

What is the average waiting time, in minutes, if Alex continues to be the only worker?

A) 33 minutes

B) 28 minutes

C) 55 minutes

D) 219 minutes

Diff: 3

Objective: 6

AACSB: Application of knowledge

22) The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 310 to 560 small tools per day with an average of 435. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 1 minute to retrieve from the bins.

What is the average waiting time, in minutes? (Round the final answer to the first decimal place.)

A) 1.0

B) 3.8

C) 4.8

D) 5.8

Diff: 3

Objective: 5

AACSB: Application of knowledge

23) The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 320 to 500 small tools per day with an average of 410. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 1 minute to retrieve from the bins.

What is the cycle time for an order? (Round the final answer to the first decimal place.)

A) 1.0 minutes per tool

B) 1.9 minutes per tool

C) 2.9 minutes per tool

D) 3.9 minutes per tool

Diff: 3

Objective: 5

AACSB: Application of knowledge

24) The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 290 to 410 small tools per day with an average of 350. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 1 minute to retrieve from the bins.

Diane has been asked to consider plans to add the retrieval of larger tooling fixtures to her duties. She anticipates that there would be an average of 14 tooling fixtures per day requested. Each tooling fixture would take Diane 6 minutes to retrieve.

What is the average waiting time, in minutes, if Diane continues to be the only worker that would retrieve the small tools as well as the larger tooling fixtures?

A) 0.30 minutes

B) 4.60 minutes

C) 9.28 minutes

D) 92.00 minutes

Diff: 3

Objective: 5

AACSB: Application of knowledge

25) Two common operational measures of time are customer-response time and on-time performance.

Diff: 2

Objective: 5

AACSB: Analytical thinking

26) Customer response time is the time it takes from the time a customer places an order for a product or service to the time the product or service is delivered to the customer.

Diff: 2

Objective: 5

AACSB: Analytical thinking

27) Manufacturing lead time is the sum of waiting time and manufacturing time for an order.

Diff: 2

Objective: 5

AACSB: Analytical thinking

28) A time driver is any factor that causes a change in the speed of an activity when the factor changes.

Diff: 1

Objective: 5

AACSB: Analytical thinking

29) The average waiting time is the average amount of time an order will wait at the company's shipping office before it is sent to the customer.

Diff: 2

Objective: 5

AACSB: Analytical thinking

30) Manufacturing Cycle Efficiency (MCE) = Value-added Manufacturing Time divided by Manufacturing Cycle Time.

Diff: 2

Objective: 5

AACSB: Analytical thinking

31) Identifying and minimizing the sources of non-value-added manufacturing time increases a firm's responsiveness to its customers and reduces its costs.

Diff: 1

Objective: 5

AACSB: Analytical thinking

32) Norton's Convenience store has a variable demand (number of customers purchasing per day.) The daily demand ranges from 270 to 330 customers a day who average purchasing 5 items each. The average daily demand is 300 customers. The convenience store currently operates 12 hours a day. Each order takes approximately 2 minutes.

Required:

a. What is the average customer waiting time, in minutes?

b. What is the cycle time for an order?

c. Norton has decided that the waiting time is too long and has increased the hours the store is open to 15 hours. What is the waiting time now?

a. Waiting minutes = [300 × (2) 2]/{2 × [720 minutes per day - (300 × 2)]} = 5 minutes

b. Cycle time = waiting time + processing time = 5 + 2 = 7 minutes

c. Waiting minutes = [300 × (2) 2] / {2 × [900 minutes per day - 300 × 2)]} = 2 minutes

Diff: 3

Objective: 5

AACSB: Application of knowledge

33) Brown Laundry has a variable demand. The daily demand ranges from 100 to 140 customers a day with an average of 5 items. The average daily demand is 110 customers. The laundry operates 10 hours a day. Each order takes approximately 5 minutes.

Required:

a. What is the average customer waiting time, in minutes?

b. What is the cycle time for an order?

c. The manager has decided that the waiting time is too long and has increased the workday to 11 hours. What is the waiting time now? Will the customers be any happier?

a. Waiting minutes = [110 × (5) 2]/{2 × [600 minutes per day - (110 × 5)]} = 27.5 minutes

b. Cycle time = waiting time + processing time = 27.5 + 5 = 32.5 minutes

c. Waiting minutes = [110 × (5) 2] / {2 × [660 minutes per day - (110 × 5)]} = 12.5 minutes

The customers are probably not much happier unless they change the time when they stop by the laundry. If the customers now fill the 11-hour day, the new reduced waiting time will be a definite improvement.

Diff: 2

Objective: 5

AACSB: Application of knowledge

34) Please briefly explain the following time concepts that occur in a manufacturing company and its operations:

Receipt time:

Waiting time:

Manufacturing cycle:

Delivery time:

Customer response time:

Waiting time: the time between the order received by the manufacturing area and the start of the machine setup to start the manufacturing process.

Manufacturing cycle: the waiting time (see above) plus the manufacturing time. Manufacturing time is the time between the machine setup for the manufacturing process and when the product becomes a finished good.

Delivery time: the time between when the product becomes a finished good and when it is delivered to the customer.

Customer response time: the amount of time that transpires between when the company receives the customer order (customer places the order) and when the customer receives the product.

Diff: 2

Objective: 5

AACSB: Application of knowledge

35) Acme Janitor Service has always taken pride in the fact that it had one of the highest customer response times in the home cleaning service industry. However, as the products manufactured for this industry have become more complex, the company's customer response time has declined.

Required:

Why do you think that response time declined if all other quality factors have remained the same?

Diff: 2

Objective: 5

AACSB: Application of knowledge

36) Venlaz Corp makes small motorcycles. The monthly demand ranges from 80 to 100 motorcycles. The average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle takes approximately 1.5 hours.

If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter will take 1 hour to make. To offset approaching production capacity, expanding the assembly line is possible. This will decrease manufacturing time for all products by 20%. However, this will increase the costs of cycles from $400 to $500 and scooters from $200 to $240. The change will also cause increases in prices from $700 to $750 for cycles and from $450 to $500 for scooters.

Required:

a. What is the average waiting time for cycles if they are the only item manufactured?

b. What are the average waiting times if both cycles and scooters are produced and the assembly line is not enlarged?

c. What are the average waiting times if both cycles and scooters are produced and the assembly line is enlarged?

d. What is the expected monthly margin without scooters if the company sells all 92 cycles it manufactures?

e. What are the expected monthly contribution margins if scooters are made with the current assembly line and with the new assembly line? Assume average sales and that sales equal production.

f. What action do you recommend?

a. Waiting time = [92 × (1.5)2] / {[2 × [300 hr. a month - (92 × 1.5)]} = 0.639 hours

b. WT = (92 × (1.5)2) + (20 × 1) / {2 × [300 - (92 × 1.5) - (20 × 1)]} = 227/284 = 0.799 hours

c. WT = (92 × (1.2)2) + (20 × (0.8)2) / {2 × [300 - (92 × 1.2) - (20 × 0.8)]} = 145.28/347.2 = 0.418 hours

d. Expected monthly margin without scooters:

e. Without changing assembly line:

With new assembly line:

f. Unless there are critical customer relation problems with a slower response time, the scooters should be added without changing the assembly line. The expected margin is $4,400 higher without the new assembly line ($32,600 - $28,200).

Diff: 3

Objective: 3

AACSB: Application of knowledge

Objective 20.6

1) Which of the following reduces manufacturing cycle times and delays?

A) increasing the capacity of a bottleneck resource

B) selling of an existing equipment to save up on depreciation costs

C) increasing the time it takes for setups and processing

D) outsourcing the job to a third party

Diff: 2

Objective: 6

AACSB: Application of knowledge

2) Inventory carrying costs equal the:

A) opportunity costs of the investment tied up in inventory and the cost of manufacturing of goods

B) costs of storage only

C) opportunity costs of the investment tied up in inventory and the relevant costs of storage

D) historical costs and the relevant costs of storage

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) Which of the following is a storage cost?

A) labor cost

B) materials handling

C) direct material

D) overhead cost

Diff: 2

Objective: 6

AACSB: Application of knowledge

4) When manufacturing cycle increases:

A) sunk costs will decrease

B) opportunity costs will increase

C) opportunity costs will decrease

D) inventory carrying costs will increase

Diff: 2

Objective: 6

AACSB: Application of knowledge

5) Longer manufacturing cycle times can result in:

A) lower revenues and higher inventory carrying costs

B) higher opportunity costs and low profit margins

C) lower opportunity costs and high profit margins

D) higher revenues and lower inventory carrying costs

Diff: 2

Objective: 6

AACSB: Application of knowledge

6) Tran-North American Industries Inc. is looking at a change in its manufacturing process that will cause manufacturing cycle time to increase from 250 hours to 425 hours. The increase in the manufacturing time will result in an estimated loss in revenues of $12,000. Carrying costs are estimated at $1.50 per hour and the controller estimates that 48 orders for raw materials are expected for the year. What is the expected change in revenues as a result of the increase in manufacturing cycle time? (Round the final answer to the nearest whole dollar.)

A) $24,600

B) $30,600

C) $12,000

D) $6,000

Diff: 3

Objective: 6

AACSB: Analytical thinking

7) Speedy Dress Manufacturing has two workstations, cutting and finishing. The cutting station is limited by the speed of operating the cutting machine. Finishing is limited by the speed of the workers. Finishing normally waits for work from cutting. Each department works an eight-hour day. If cutting begins work two hours earlier than finishing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but also it increases finished units produced each day by 270 units. All units produced can be sold even though the change increases inventory stock by 20% from 480 units. The cost of operating the cutting department two more hours each day is $1,450. The contribution margin of the finished products is $12 each. Inventory carrying costs are $0.90 per unit per day.

What is the change in the daily contribution margin if the change is made?

A) $1,251

B) $1,293

C) $1,704

D) $725

Diff: 3

Objective: 6

AACSB: Application of knowledge

8) Captain Carl's Seascapes produces sea pictures for sale through catalogs. The company has two workstations, photo production and framing. The photo production station is limited by the speed of operating the photo development machine. Framing is limited by the speed of the employees. Framing normally waits for work from photo production. Each department works an eight-hour day. If Captain Carl's Seascapes adds an earlier half shift so that photo production begins work four hours earlier than framing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but it also increases finished units produced each day by 290 units. All units produced can be sold. The cost of operating the photo production department four more hours each day is $1,310. The contribution margin of the finished products is $16 each.

What is the total production per day if the change is made?

A) 72.5 units

B) 290 units

C) 580 units

D) 870 units

Diff: 1

Objective: 6

AACSB: Application of knowledge

9) Captain Carl's Seascapes produces framed sea pictures for sale through catalogs. The company has two workstations, photo production and framing. The photo production station is limited by the speed of operating the photo development machine. Framing is limited by the speed of the employees. Framing normally waits for work from photo production. Each department works an eight-hour day. If Captain Carl's Seascapes adds an earlier half shift so that photo production begins work four hours earlier than framing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but it also increases finished units produced each day by 200 units. All units produced can be sold. The cost of operating the photo production department four more hours each day is $1,340. The contribution margin of the finished products is $26 each.

What is the change in the daily contribution margin if the change is made?

A) $250

B) $3,860

C) $5,200

D) $200

Diff: 3

Objective: 6

AACSB: Application of knowledge

10) The manufacturing cycle including related delays can be reduced by:

A) batching similar jobs together for processing

B) decreasing the capacity of a bottleneck resource

C) not setting up flexible manufacturing systems

D) increasing the time for setups and processing

Diff: 2

Objective: 6

AACSB: Analytical thinking

11) Manufacturing cycle times affect both revenues and costs.

Diff: 1

Objective: 6

AACSB: Analytical thinking

12) In a relevant revenue and cost analysis, the time factor must be considered as the choice of an alternative can impact manufacturing lead times and other time factors which in turn can impact relevant revenues and relevant costs.

Diff: 2

Objective: 6

AACSB: Application of knowledge

13) Longer manufacturing cycle times increase the inventory carrying costs and decrease revenues.

Diff: 2

Objective: 6

AACSB: Application of knowledge

14) Increasing the capacity of a bottleneck resource increases manufacturing cycle times and delays.

Diff: 2

Objective: 6

AACSB: Application of knowledge

15) One way to increase capacity is to reduce the time it takes for setups and processing.

Diff: 1

Objective: 6

AACSB: Analytical thinking

16) One of the ways to increase capacity is to invest in new equipment, such as flexible manufacturing systems that can be programmed to switch quickly from producing one product to producing another.

Diff: 2

Objective: 6

AACSB: Analytical thinking

17) Businesses are achieving sustained competitive advantage better management of time. Management are making decisions faster, developing new products faster, and converting customer orders into deliveries sooner than the competition. On the other hand, decisions that will result in a significant increase in average manufacturing cycle time could affect revenues and expenses. Explain the impact an increase in average manufacturing cycle time would have on operating income and do the same for a decrease in manufacturing cycle time.

Diff: 2

Objective: 6

AACSB: Analytical thinking

18) Brix, Inc., prepares frozen food for fast-food restaurants. It has two workstations, cooking and assembly. The cooking station is limited by the cooking time of the food. Assembly is limited by the speed of the workers. Assembly normally waits on food from cooking. Because the demand has increased in recent months to 2,800 dozen units, management is considering adding another cooking station or else having the cooks start to work earlier. The monthly cost of operating the cooking station one more hour each day is $2,400. The cost of adding another cooking station would add an average of $10 per hour. The current operating hours total eight hours a day, 22 days a month. The contribution margin of the finished products is currently $8 per dozen. Inventory carrying costs average $2.00 per dozen per month. Either the extra hour or the new cooking station would increase production by 20 dozen a day, with a long-run increase of 80 dozen units in finished goods inventory to 280 dozen.

Required:

a. What is the total production per month if the change is made?

b. What is the increase in the expected monthly product contribution for each of the possible changes? Assume long-run production equals sales.

a. Total dozen per month = 2,800 + (22 × 20) = 3,240

b.

Diff: 3

Objective: 6

AACSB: Application of knowledge

Objective 20.7

1) Which of the following is an internal-business-process measure to study the output during bottleneck situations?

A) manufacturing cycle efficiency for key processes

B) carrying cost of inventories

C) number of employees trained to manage bottlenecks

D) customer-response time

Diff: 2

Objective: 7

AACSB: Application of knowledge

2) Which of the following is a learning-and-growth measure to study the output during bottleneck situations?

A) manufacturing cycle efficiency for key processes

B) carrying cost of inventories

C) number of employees trained to manage bottlenecks

D) improve customer-response time during bottlenecks

Diff: 2

Objective: 7

AACSB: Application of knowledge

3) Which of the following is NOT true regarding balanced scorecard measures?

A) both financial and nonfinancial measures help managers manage performance along the time dimension

B) nonfinancial measures help managers evaluate goal achievement regarding manufacturing cycle time

C) the balanced scorecard does not help highlight linkages across the financial and nonfinancial perspectives of the balance scorecard

D) revenue and cost measures help managers evaluate the financial effects of increases and decreases in nonfinancial measures

Diff: 2

Objective: 7

AACSB: Application of knowledge

4) Which of the following measures (2 for each choice) would be part of a company's balance scorecard financial perspectives/measures related to time?

A) Revenue losses from delays and customer delays reported in hours.

B) Average time to produce key products and the period's increase or decrease in carrying costs.

C) Price increases from rapid deliveries and the period's reduction in carrying costs.

D) Employee satisfaction survey results and carrying cost of inventory for the period.

Diff: 2

Objective: 7

AACSB: Application of knowledge

5) Managers looking to reduce defective units produced at bottleneck operations would most likely be monitoring internal-business-process measures on the balanced scorecard.

Diff: 1

Objective: 7

AACSB: Analytical thinking

6) Nonfinancial measures are ineffective at helping managers evaluate how well they have done on goals such as improving manufacturing cycle times and customer response times.

Diff: 1

Objective: 7

AACSB: Analytical thinking

7) The last step of the five-step decision making process is implementing the decision, evaluating performance, and learning. How can a balanced scorecard play a role in helping to assure this final step will be successful?

Using the balanced scorecard and tracking changes in the time-based measures can assess whether or not the financial performance of the company is meeting or exceeding the company's goals.

If the goals are not being met, then decisions and plans can be modified as required to meet the goals.

The balanced scorecard is used to track the financial, customer, internal business processes, and learning and growth measures of the company.

Since there are cause-and-effect linkages and relationships among many of the various measures within the financial and nonfinancial scorecard categories, it is very beneficial for the managers to keep abreast of the measures and how they are changing over time so that a timely response can be made to avert problems as soon as possible.

Diff: 3

Objective: 7

AACSB: Analytical thinking

8) A machine has been identified as a bottleneck and the source of the constraint for a manufacturing company that has multiple products and multiple machines. Discuss ways the company can overcome the bottleneck.

a. Eliminating idle time at the bottleneck operation. Extra staffing at the bottleneck would be a possibility, particularly if numerous manual type tasks were involved.

b. Concentrate on processing those parts or products that increase throughput contribution, not parts or products that remain in finished goods or spare parts inventories.

c. Shift a part of the products produced at the bottleneck machine to other machines or outsource part of the production.

d. Solicit the opinions of the factory workers for ideas as to how the design of the manufacturing process can be simplified.

e. Improve the quality of the production process. Poor quality is especially costly at a bottleneck operation.

Diff: 3

Objective: 7

AACSB: Application of knowledge