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Chapter 17 – The Management & Control of Quality
Reading 17-10: Keith T. Jones and Clement C. Chen, “The Pervasive Success of 6 Sigma at
Caterpillar: Accounting and Finance Efforts Are a Good Example,” by Strategic Finance (April
2010), pp. 29-33.
The increasingly competitive marketplace has for some time now made it necessary for organizations of
all types and sizes to reexamine their business processes—from engineering and production to marketing
and financial functions—in order to determine how they can improve them. As if it weren’t enough to
tackle everything once, continuous improvement has become the standard in today’s global, constantly
changing environment.
Discussion Questions
1. According to the article, what is the underlying logic or justification for the use of a tool such as
Six Sigma?
First, the underlying driving factor for attention to process and operational improvements is
competitive, world-wide pressures. Such pressures may call, in fact, for continuous-improvement
activities, total quality management (TQM) philosophy, etc.
Second, one might illustrate the underlying logic of (or rationale for) the application of tools such as
Six Sigma as follows:
1. Organizational outcomes are a function of processes (operating processes, customer-management
2. What characteristics of the roll-out of Six Sigma at Caterpillar stand out in your mind?
there was strong and consistent support of the effort by top management
the Six Sigma initiative was pervasive, in the sense that it applied to virtually every process of the
3. Provide a brief synopsis of the application of Six Sigma to the accounting/finance function at
Caterpillar.
Problem: the accounting/finance function at Caterpillar is divided into three primary areas of
responsibility: legal entity reporting (presumably, this includes external reporting and tax accounting),
regulatory (i.e., SEC) reporting, and internal (managerial) reporting. From a strategic perspective,
there was a perception that far too much time and expense was being spent on the first two functions
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Chapter 17 – The Management & Control of Quality
as compared to time spent on function #3. In the words of the authors, “far too much time was being
spent on generating reports and not enough time on generating insights from the numbers…
Importantly, business decisions could be less than optimal as a result.”
Solution: Caterpillar applied the Six Sigma methodology to change the basic focus of its
1. Greater uniformity of data used for decision-making and control across all levels of the
4. According to the article, what are some of the factors contributing to the long-term success of the
application of Six Sigma at Caterpillar? That is, “how do we change from building the house to
living in it?”
Continuing and visible support from top management
The “best people” of the organization are assigned to the most important process-
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Chapter 17 – The Management & Control of Quality
Reading 17-11: Manjunath H. S. Rao and Andrew Bargerstock, “Exploring the Role of Standard
Costing in Lean Manufacturing Enterprises: A Structuration Theory Approach,” by, Management
Accounting Quarterly (Fall 2011), pp. 47-60.
Do mature lean manufacturers continue to use standard costing and variance analysis? The authors
present a research protocol to determine if this is the case and how it compares to lean accounting theory.
Discussion Questions
1. According to the authors, what are the characteristics of production processes today that would
argue for a paradigmatic shift from traditional cost-information systems (such as those that rely on
the use of standard costing and associated variance analysis) to “accounting-for-lean” systems?
The motivation for change (and simplification) of cost accounting systems, from cost-based to value-
based systems, is directly related to changes in manufacturing/production processes. Traditional
Manufacturing processes have recently changed. These changes call into question the value of standard
cost systems for control purposes. Today, it is more likely to observe customized or made-to-order
output (given available computer and manufacturing technologies)—some characterize this as “batch
sizes of one.” Further, this manufacturing environment is characterized by an increased amount of
that have already occurred.” This, then, serves as an effective way to distinguish standard cost systems
from “accounting for lean” systems.
Finally, we reproduce here the following comments of the authors regarding the alleged benefits of
“accounting for lean” systems, from a control standpoint:
Measurements produced by these systems are superior to standard costing and variance analysis in
several ways because they:
Are developed by each work-cell team to support value-stream metrics
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Chapter 17 – The Management & Control of Quality
The instructor can make the point to students that change in management accounting systems is driven
by change in underlying business processes, including changes in production processes described
above.
2. This article provides a framework that might guide empirical research into the determinants of
cost-system preference. Specifically, they are interested in addressing the question: “Why do (some)
lean enterprises continue to use standard costing?” Provide an overview of the testable propositions
offered by the authors in terms of explaining this phenomenon.
The set of testing hypotheses (propositions) developed by the authors is presented in Table 1 (Elements
of Structural Dimensions and Propositions). The specific propositions are reproduced below:
1. In lean manufacturing organizations with a high level of inventory, as indicated by the number of
days’ inventory on hand, the probability of retention of standard costing will be high.
2. In lean manufacturing plants with “monument machines,” the probability of retaining standard
6. In lean manufacturing plants where the management accountants prepare specialized reports to
capture the financial impact of lean, the probability of retaining standard costing for reporting
3. Of what value or significance is the information presented in the Appendix to this article?
As indicated in the article, “Appendix 1 shows new accounts and journal entries that a lean
manufacturing plant may use to reflect the value-stream approach of lean accounting as opposed to the
cost-based approach of standard costing.”
The journal entries listed on the left-hand side of the Appendix parallel those presented in the textbook
in Chapters 14 and 15. We see that a standard cost system charges WIP inventory, Finished Goods
Inventory, and Cost of Goods Sold at standard manufacturing cost. Since actual costs are also recorded
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Chapter 17 – The Management & Control of Quality
As can be seen from the right-hand side of the Appendix, lean accounting is more simplified (hence
the name “lean accounting”). This approach is called the “value-based approach” and can be
contrasted with the cost-based approach illustrated on the left-hand side of the Appendix. Rather than
maintaining separate inventory accounts, the value-stream approach charges manufacturing cost to an
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