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Chapter 17 - The Management and Control of Quality
17-46
17-46 Value-Stream Income Statement (20-30 Minutes)
The value stream income statement is shown below. Note that the temporary $28
million effect on income due to the decrease in inventory is separated so that the
company can adjust operating income and interpret the long-term operating income by
eliminating the temporary effect of the inventory decrease.
Chapter 17 - The Management and Control of Quality
17-47
PROBLEMS
17-47 Ethics (45-60 Minutes)
1. An examination of the IMA’s Statement of Ethical Professional Practice
(www.imanet.org; note—requires log-in name and password) suggests that Maria
Sanchez likely violated the following standards of ethical conduct when she asked
Mary Stein to suppress pertinent information.
Competence—Maria Sanchez, controller, has a responsibility to:
▪ Provide decision support information and recommendations that are accurate,
clear, concise, and timely.
standards and has a favorable impact on earnings, as requested by Jim March,
vice-president of manufacturing. Thus, the reported financial information with the
omission lacks relevance and reliability for decision-making. Management does not
have a clear solution to overcome the component failure.
Integrity—Sanchez has a responsibility to:
▪ Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of any
potential conflicts.
▪ Disclose deficiencies in information, in accordance with organization policy and/or
applicable law.
Chapter 17 - The Management and Control of Quality
17-48
17-47 (Continued)
The request by Sanchez is unethical because it would suppress information that
could influence an understanding of the results of operations by the company.
Also, by withholding information about the contingent liability, Sanchez is not
communicating information objectively.
2. Resolution of Ethical Conflict—the IMA Standards specify that when an individual
is faced with ethical issues, the individual should follow the policies established by
the organization to deal with (resolve) such conflicts. If these policies do not resolve
the ethical conflict, then the following courses of action are recommended:
▪ The individual should discuss the issue with his/her immediate supervisor (except
when it appears that the supervisor is involved). In this regard, Stein might want
to write a report that provides details regarding the issue, including the probable
possible courses of action.
▪ If, after exhausting all other options, the ethical conflict still exists, then Stein may
have no choice but to resign and to write an informative memorandum to the
appropriate organizational representative.
▪ Finally, Stein may want to contact a qualified attorney to more fully determine her
legal obligations and rights concerning this ethical conflict.
Chapter 17 - The Management and Control of Quality
17-50
17-48 (Continued)
Mean actual diameter, = 1.2756500
D2= (1.2756375 − 1.275000)2 = 0.00000040640625
2. Allowed tolerance:
Repair Cost = k × (Tolerance) 2
$50 = $192,000 × (Tolerance)2
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return to...”
while you are in the spreadsheet mode. The screen should then return you to the
Word document.
Pr. 17-48.xlsx
Chapter 17 - The Management and Control of Quality
17-51
17-49 Research Assignment, Strategy (60 Minutes)
1. As noted in the forward to the article (HBR, July-August, 2005, p. 107):
When the Gallup Organization applied Six Sigma principles to sales and
service groups at several companies, it learned how much performance
variation exists between seemingly similar work groups. Managing that
variability can raise overall performance by orders of magnitude and can
create organic growth.
In Chapter 17, we discuss the notion of improving quality through a reduction in
variation from standard. However, this discussion was made solely within the context
of a manufacturing setting. Thus, in that context, students come to realize that quality
can be measured by the extent to which there is variation in product specifications.
The overall purpose of the cited HBR article is to extend student thinking by applying
the manufacturing-based notion of process variation to the management of human
capital. As such, the discussion pertains (as illustrated by the above quote) to sales
and customer-service groups within organizations.
2. Six Sigma, as developed and applied in a manufacturing setting, focuses on
underlying engineering (or economic) relationships and in this sense is considered
data-driven, rational, and analytical. In short, typical Six-Sigma implementations
require the use of rigorous analytical standards; the goal is to refine and continuously
coined by the authors to describe the quality-improvement approach they developed.
Notably, rather than focusing on the management of physical processes, Human
Sigma represents a way to manage the employee-customer encounter.
3. The authors propose that a single overall metric, called the “Human Sigma score,”
which combines two performance indicators—employee and customer engagement.
(The particulars regarding this metric are provided on page 114 of the article.) At its
Chapter 17 - The Management and Control of Quality
17-52
17-49 (Continued)
The authors hypothesize that emotional attachment, both from customers and from
employees, is an important leading indicator (or predictor) of financial performance.
They state (p. 110) that “Performance metrics that acknowledge the importance of
emotional engagement—on the part of both employees and customers—provide
much stronger links to desired financial and operational outcomes.”
To support this claim, they provide data from a large retail bank in the U.S. Data from
both employee and customer engagement metrics (i.e., the components of the
Human Sigma score) are, on average, 3.4 times more effective financially than units
ranked in the bottom half on both metrics. Those business units ranked relatively high
on one but not both of these dimensions on average were only about half as effective
as those units scoring high on both dimensions.
4. The authors offer (pp. 113-114) three suggestions for how to manage and reduce
customer and employee engagement at the local level (i.e., at the level where
performance variation occurs):
a) Centralize Responsibility for Human Sigma—based on the preceding arguments,
customer and employee engagement need to be managed “holistically,” not
the management of employee and customer engagement.
c) Overhaul HR Practices—in some cases, the authors argue that more substantive
(transformational) interventions regarding the overall management process may be
needed. This would be the case if the organization as a whole is experiencing
relatively low Human Sigma scores or if parts of the organization are consistently
generating low HS scores.
17-53
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
17-50 Cost-of-Quality (COQ) Analysis; Nonfinancial Measures (45–60 Minutes)
1. and 2. Cost-of-Quality (COQ) Report
Duncan Materials Company
Cost of Quality (COQ) Report
2013 and 2014
17-54
17-50 (Continued)
3. From 2013 to 2014, Duncan’s total cost of quality (COQ) has decreased from
23% of sales to 11% of sales. Part of the decrease in COQ as a percentage of
sales is the higher sales in 2014 compared to 2013. However, even without the
4. To complement the COQ data, the company may want to collect both internal
and external nonfinancial measures of quality, such as the following:
Internal Measures of Quality
▪ The number of defects per period
▪ Process yield (ratio of good output to total output)
▪ Percentage first-pass yield
date to the total units shipped)
▪ Surveys of customer satisfaction
Chapter 17 - The Management and Control of Quality
17-55
5. As should be obvious from an examination of Exhibit 17.3, there is a role for
both financial and nonfinancial quality data (metrics) in a comprehensive
framework for managing and controlling quality. COQ (i.e., financial) data are
reported only periodically. As such, they are likely of greater interest/value to
managers. After all, these are the individuals who ultimately have responsibility
over financial performance and who make spending and investment decisions
regarding quality costs.
Operating personnel, on the other hand, are likely to find nonfinancial quality
data to be more useful. For one thing, such data are expressed in terms that
are understandable/comprehensible to operating personnel. For another thing,
Chapter 17 - The Management and Control of Quality
17-56
17-51 Cost-of-Quality (COQ) Analysis—Spreadsheet Application (60 Minutes)
1-4: Cost of Quality (COQ)—Excel-Generated Report
Duncan Materials Company
Cost of Quality (COQ) Report
2013 and 2014
Chapter 17 - The Management and Control of Quality
17-51 (Continued-1)
5. Data for Trend Analysis (2013 and 2014 Category Results)
Duncan Materials Company
Cost of Quality (COQ)—Trend Analysis
2013 and 2014
2013 2014
Prevention Costs 1.47% 2.83%
Appraisal Costs 6.37% 2.16%
Internal Failure Costs 6.20% 2.88%
External Failure Costs 9.20% 3.04%
Total COQ 23.23% 10.91%
6. Bar Chart: COQ Report, 2013 and 2014
COQ Categories:
1 = Prevention Costs 4 = External Failure Costs
2 = Appraisal Costs 5 = Total COQ
3 = Internal Failure Costs
17-58
17-51 (Continued-2)
7. Sensitivity Analysis
Duncan Materials Company
Cost-of-Quality (COQ) Report
Sensitivity Analysis
2014
2014–Revised
Amount
Cost as a
% of Sales
Amount
Cost as a
% of Sales
Sales
$18,750
$19,6881
Prevention costs
$530
2.83%
$5622
2.85%
Appraisal costs
405
2.16%
405
2.06%
Internal Failure Cost
540
2.88%
2163
1.10%
External Failure Cost
570
3.04%
2854
1.45%
Total COQ
$2,045
10.91%
$1,468
7.46%
Notes:
11.05 × $18,750 30.40 × $540
21.06 × $530 40.50 × $570
Note: An Excel spreadsheet solution file for this Problem is embedded in this
document. You can open the spreadsheet “object” that follows by doing the
following:
1. Right click anywhere in the worksheets below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return to...”
while you are in the spreadsheet mode. The screen should then return you to
the Word document.
Pr. 17-50.xlsx
Pr. 17-51.xlsx
Chapter 17 - The Management and Control of Quality
17-59
17-52 Ethics (45-50 Minutes)
1. COQ provides a general, comprehensive framework for reporting quality-related
costs using a four-category approach: prevention costs, detection/appraisal costs,
internal failure costs, and external failure costs. Thus, the COQ framework can
theoretically be applied to the management and control of environmental-related
quality costs. That is, it is theoretically possible for an organization to prepare a
Cost of Environmental Quality Report. Such a report would likely be of use to
managers for many of the same reasons that managers see value in a COQ
report:
▪ A Cost of Environmental Quality Report brings together environmental quality
spending trade-offs across categories (e.g., do investments in the prevention
area result in decreased environmental failure costs?).
2. Several Standards from the IMA’s Statement of Ethical Professional Practice
(www.imaorg.net; note—login name and password are needed) relate to the
ethical situation faced by Williams. The crux of the matter, however, is that
Williams has an ethical responsibility to take some action in the matter of
GroChem, Inc. and the dumping of toxic wastes. Specific Standards that relate to
the present context are as follows:
Competence—management accountants have a responsibility to perform their
professional duties in accordance with relevant laws and regulations.
Confidentiality—in general, management accountants are required to keep
internal controls, in conformance with organization policy and/or applicable laws.
17-60
17-52 (Continued)
3. In accordance with the IMA Standards, the first alternative (seeking the advice of
her boss) is appropriate. To resolve an ethical conflict, the IMA Standards specify
stage. Basically, the IMA Standards specify that Williams should report the
conflict to successively higher levels within the organization and turn only to the
Board of Directors if the problem is not resolved at lower levels.
4. Jan Williams should follow the established policy of the organization bearing on
the resolution of such conflict. If these policies do not resolve the ethical conflict,
Williams should report the problem to successively higher levels of management,
up to the Board of Directors, until it is satisfactorily resolved. There is no
