– 207 –
Chapter 7
Measuring and
Managing Process
Performance
QUESTIONS
7-1 The throughput contribution is the difference between revenues and direct
materials for the quantity of product sold. Investments equal the materials
7-2 In process layouts, all similar equipment and functions are grouped together.
Process layouts typically occur in organizations in which production is done in
small batches of unique products. In process layouts, products are moved and
7-3 Group technology (also called cellular manufacturing) involves the
organization of a plant into a number of cells. Cells are often U-shaped, which
7-4 Lean manufacturing, derived from the Toyota Production System, is a
philosophy centered on producing the highest quality product with the lowest
level of waste and inefficiency. This approach views any resource spending
Atkinson, Solutions Manual t/a Management Accounting, 6E
– 208 –
7-6 Waste, rework and net cost of scrap are examples of internal failure costs.
7-7 Quality engineering, quality training, statistical process control and supplier
certification are examples of prevention costs.
(a) prevention costs—quality training, supplier certification and statistical
process control;
(b) appraisal costs—inspection and testing of incoming materials, process
control monitoring and product quality audits;
and scrap;
(d) external failure costs—product liability lawsuits, product recalls, and
warranty claims.
7-9 A JIT system is very different from a conventional manufacturing system. In a
minimized. The ultimate measure of success with JIT occurs when the
processing cycle efficiency ratio equals 1.
Under many conventional manufacturing systems, goods are produced to a
conventional work environment.
7-10 Under many conventional manufacturing systems, goods are produced to a
production schedule that may not be directly tied to when customers require the
goods. Goods are produced in batches to reduce setting up, moving, and
Chapter 7: Measuring and Managing Process Performance
– 209 –
wait while the designated employees process the entire batch before moving all
parts in the batch to the next station. If the rate at which each processing area
handles work is unbalanced—because one area is slower or has stopped
work even if the processing area that feeds them is shut down. Similarly, to
avoid idling the next processing station and suffering the resulting
recriminations, managers may store finished work that they can forward to
supply stations further down the line when their stations are shut down because
Because group technology (cellular manufacturing) and just-in-time production
reduce the production cycle time and focus on reducing waste by improving
7-12 The following three types of costs (only two are required for this question) are
incurred when implementing a group technology (cellular manufacturing)
layout:
1. Costs of moving machines
7-13 Financial benefits resulting from a shift to group technology (cellular
manufacturing), just-in-time production, or continuous quality improvements
may include the following (only two are required):
1. Increased sales because the short production cycle time enables a
– 210 –
2. Reduction in the number of workers needed to move materials from one
3. Reduced material waste because of reduced damage caused by materials
work-in-process inventory.
5. Reduced clerical costs for keeping inventory records.
6. Reduced financing costs of inventories
7-14 Kaizen costing is a method to reduce the cost of a product through small,
7-15 A cost variance investigation is undertaken under Kaizen costing in order to
7-16 The Kaizen costing system operates outside of the standard costing system
7-17 Benchmarking is a process in which organizations gather information concerning
the best practices of others in order to meet or exceed the benchmark. Products,
7-18 The five stages of benchmarking are: (1) internal study and preliminary
competitive analyses, (2) developing long-term commitment to the
7-19 The three broad classes of information on which firms interested in
benchmarking can focus are: (1) product—any type of product or service, (2)
Chapter 7: Measuring and Managing Process Performance
– 211 –
functions or process—all types of organizational activities from R&D,
7-20 The stage of the benchmarking process that is the most important for
7-21 The two general methods of information gathering and sharing when undertaking a
7-22 The three types of information gathering and sharing under the cooperative
7-23 A “benchmarking (performance) gap” is the difference between an
7-24 The additional cost of replacing a rejected unit that must be scrapped includes
all the incremental material and conversion costs already incurred on such a
7-25 Rework costs include direct rework labor, any additional direct materials used,
7-26 When evaluating the profit impact of an increase in the sales of a product, it is
important to evaluate the contribution margins on the increase in sales for that
Atkinson, Solutions Manual t/a Management Accounting, 6E
– 212 –
EXERCISES
7-27 A grocery store is organized using a process layout—similar foods are grouped
together to make it easier for customers to find what they want. A grocery store
7-28 Prevention costs are incurred to ensure that companies produce products
according to quality standards. Prevention costs include quality engineering,
result of defects is an example of an internal failure cost. External failure costs
are incurred when a customer in the field detects a problem with a product or
7-30 As shown below, benefits from the switch to JIT operations are estimated to be
$461,600:
Before the
Change
After the
Change
Difference
Sales
$1,000,000
$1,500,000
$500,000
Costs:
Direct material
(250,000)
(300,000)
(50,000)
Direct labor
(200,000)
(225,000)
(25,000)
Support
(270,000)
(255,000)
15,000
Inventory carrying costs
(26,400)
(4,800)
21,600
Profit
$253,600
$715,200
$461,600
Chapter 7: Measuring and Managing Process Performance
– 213 –
Inventory Costs
Direct material
$300 × 60,000 units × 2/12 =
$3,000,000
Work in process
([$300 × 100%] + [$400 × 50%]) ×
60,000 units × 2/12 =
5,000,000
Finished goods
($300 + $400) × 60,000 units × 1/12 =
3,500,000
Total
$11,500,000
Inventory carrying
cost
10%
Annual inventory
carrying cost
$1,150,000
PROBLEMS
are in activity-based costing. Proponents of activity-based costing take a long–
term perspective in which managers can alter capacity resources. Therefore, it
is viewed as beneficial to produce accurate cost information by tying actual
Incremental costs:
Machine moving and reinstallation
($100,000)
Incremental benefits:
Increase in contribution margin
$200,000 0.31 =
62,000
Savings in inventory carrying costs
$200,000 0.25 0.15 =
7,500
Net benefit (loss) from a change in plant layout in year 1
$(30,500)
The proposed change in plant layout should not be implemented because its
costs are greater than its benefits, if only one year’s benefits are considered.
– 214 –
7-34 (a) PCE in minutes under the traditional system equals [120/(120 + 80 + 240
the traditional system (0.47 vs. 0.25).
7-35 Group technology (cellular manufacturing) refers to the organization of the
plant into a number of cells so that within each cell, all machines required to
manufacture a group of similar products are arranged in close proximity to each
workers are doing. Group technology (cellular manufacturing) layouts reduce
costs and quality problems associated with conventional manufacturing and
produce in batches, therefore, processing systems must be reliable. A just–in–
time production system is based on the elimination of all nonvalue-added
activities such as materials movement, storage, rework, and waiting times in
order to reduce cost and time. It is an approach to continuous improvement and
low as possible; the number of failures, whether these are material, people, or
machine failures, with a goal of zero; moving with a goal of zero; and the
amount of storing activities with a goal of zero. The ultimate measure of
Chapter 7: Measuring and Managing Process Performance
– 215 –
The group technology (cellular manufacturing) approach is not inconsistent
with the philosophy of JIT as group technology (cellular manufacturing) also
Decrease in number of rejects: (0.064 – 0.051) 10,000 = 130
Rejected valves are returned to the initial production stage to be melted and
recast. The company recovers the brass but not any finishing materials. Rework
7-37 Before the rearrangement, PCE in minutes for Whisper Voice Systems equals
[70/(70 + 45 + 55 + 30)] = 70/200 = 0.35. After the rearrangement, PCE in minutes
equals [30/(30 + 10 + 20 + 15)] = 30/75 = 0.40. The percentage improvement in
Rework costs
Casting
Finishing
Inspection
DM
$ 0
$ 12
$ 0
DL
84
121
24
TDABC support
122
164
30
Total per valve
$206
$297
$54
$ 557
Decrease in number of rejects
130
Savings from decrease in reject rate
$72,410
Savings from reduction in inventory carrying cost:
($386,000 – $270,000) 0.15
$17,400
Total savings
$89,810
– 216 –
7-38 (a) The approach used at McDonalds in which customers wait in several lines is
consistent with the push or conventional manufacturing approach. As one
comes into McDonalds it is clear that they have been, and are building
inventory in each of the specific bins that they use for, let’s say, Big Macs,
quickly due to the inventory of sandwiches always on hand. On the other
hand, Wendy’s uses more of a pull or JIT system. As you enter into
Wendy’s, notice that you cannot really observe any sandwich inventory
building up. The idea in forming one line is that each person has the
problems that arise with batch production.
(b) From a customer’s perspective, it does depend on what one favors. If a
customer goes to a fast food restaurant, his or her goal is to get food quickly.
On any particular day, the customer may be in a great hurry and wish to run
hamburgers over another’s.
From management’s perspective, apart from taste, competing in selling
hamburgers may depend on other variables such as the speed with which an
order is filled versus tailoring the production process to individual taste. The