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Using an experienced coordinator
Training employees
Stage 3:
Identifying benchmarking partners
Size of partners
Stage 4:
Information gathering and sharing methods
Type of benchmarking information:
Method of information collection:
Unilateral
Determining performance measures
performance measures
Stage 5:
Taking action to meet or exceed the benchmark
Making comparisons of performance measures
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their observations of the facility and the people involved in the
discussing how one goes about determining the effects of management
accounting methods on organizations. Such a discussion could include
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CASES
7-54 (a) In the following diagram, “(v)” indicates activities that add value from
the customer’s perspective, and “(n)” indicates activities that do not.
Woodpoint Furniture Manufacturing Process Flow Chart
Order raw materials (n)
Assemble batch (v)
Place raw materials into storage (n)
(If a piece is defective , return it to
appropriate area for rework) (n)
Remove wood from storage (n)
Move batch to painting or staining area (n)
Move batch to saw area (n)
Store batch in painting or staining area (n)
Saw wood (v)
Paint or stain batch (v)
Move batch to sanding and planing area (n)
Move batch to assembly area (n)
Store batch in sanding and planing area (n)
Complete assembly (v)
Sand and plane required pieces (v)
Inspect batch (n)
(If a piece is damaged by planing or
sanding, reorder piece from saw area and
store remainder of batch) (n)
(If a product is defective, return it to
appropriate area for rework) (n)
Move batch to assembly area when all
planing and sanding is complete (n)
Package product(v)
Store batch in assembly area (n)
Move products into storage (n)
Ship product when ordered by a customer (v)
(b) The response must specify what Woodpoint Furniture Manufacturing’s
customers are likely to require. Presumably quality, cost, and service (in
terms of product features and cycle time to fill order) will be important.
defective pieces, number of missing pieces, and number of furniture
items that fail inspection.
Atkinson, Solutions Manual t/a Management Accounting, 6E
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7-55 (a) Before, producing a Louis Vuitton “Reade” tote bag required 20 to 30
workers who specialized in one skill, working 8 days. Now, producing
the bag requires just one day as 6 to 12 cross-trained employees work in
U-shaped clusters with sewing machines on one side and assembly areas
dramatically.
(b) According to Passariello (2006), Louis Vuitton is the world’s largest
luxury-goods company; its value proposition centers on “product design,
craftsmanship and image”. Customers were willing to pay high prices for
value proposition.
(c) Competitors such as Zara sell chic items that are less expensive than
Louis Vuitton’s. Moreover, Zara excels at speed to market; the company
can move from design to stocking the merchandise in stores in as little as
unexpectedly popular. Capell 2008).
In the face of this competition, Louis Vuitton’s value proposition has
changed. The company will remain a luxury-goods company, but now
views having desired products available in its stores as part of its value
(d) Important performance indicators for evaluating Louis Vuitton’s
manufacturing operations include defect rates, cycle time, and changes in
these two measures over time.
7-56 (a) According to Rockoff (2010), customers reported “foreign materials,
black or dark specks” in some medicines, and Johnson and Johnson
reported that some medicines “had higher concentrations of active
Chapter 7: Measuring and Managing Process Performance
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ingredient than specified, and some products may contain tiny metallic
particles left as a residue from the manufacturing process.” Further the
Singer (2010b) and Rockoff and Kamp (2010) report that Johnson &
Johnson (J&J) recalled their hip replacement implants because many of
the implants failed, requiring patients to undergo another hip–
(b) The external failure costs include lost sales due to loss of reputation and
concerns about quality, and the need to shut down the Fort Washington,
Pennsylvania plant. Singer (2010c) reports that J&J’s, “sales of over-the–
counter drugs and nutritional products in the United States plummeted to
drugs.
Other external failure costs include product liability lawsuits, the cost of
returned products, the cost of developing materials for recall web pages
of incoming materials, maintenance of test equipment, process control
monitoring and product quality audits.
Kimes (2010) provides an in-depth description of how quality problems
Atkinson, Solutions Manual t/a Management Accounting, 6E
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References
2010), pages 100–108.
Rockoff, J. D. “FDA Widens Probe of J&J‘s McNeil Unit; Inquiry Follows
Street Journal (Online) (August 26, 2010).
Singer, N. “Maker of Tylenol Explains Actions Taken to Alleviate Musty
January 11, 2011 at
Singer, N. “Johnson & Johnson Recalls Hip Implants,” The New York Times
(August 26, 2010).
Singer, N. “Tylenol Recalls Erode Johnson & Johnson Sales,” The New York
Times (October 19, 2010).
7-57 (a) Costs in the following items are relevant to Polley’s decision: 1, 2, 3, 4,
more sensitive to such marketing than are business customers.
(c) For operations with potential environmental pollution, prevention can
involve efforts to ensure pollution does not occur. Prevention efforts
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acceptable limits or workers are following prescribed procedures for
dealing with pollution or hazardous wastes. Internal failures are failures
(accidental spillages or leakages of hazardous wastes, or illegal levels of
quality framework for manufacturing operations, environmental
pollution external failures are often the most costly to the firm. If
prevention efforts are feasible, attention should be focused on
7-58 (a) The company may be monitoring the amount of time spent talking to
customers, and if it is monitoring the content of the calls, the company
may be evaluating how polite the CS representatives are. There are many
(b) The customer is likely thinking about measures or issues such as the
following:
Time from the first phone call to CS until the TV is repaired and
returned
Number of phone calls required
Time per phone call
Atkinson, Solutions Manual t/a Management Accounting, 6E
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call and less delay. For example, if a customer knows that the request is
for warranty repair, he or she could be allowed to deal with WD directly
turnaround.
(d) RS3 can clearly learn from RS4’s approach of diagnosing the problem
shortly after the TV arrives in the shop. This allows the shop to order
timely basis.
7-59 Total net annual benefit from the new machine:
Increase in contribution margin
Decrease in inventory carrying costs
Less increase in lease costs
Net annual benefit from new machine
a [($56–$32) 48,000]–[(56–$42) 36,000] = $648,000
b Inventory levels with the old machine:
Raw materials
36,000 $12 4/12 = $144,000
Work-in-process
36,000 $25 3/12 = $225,000
Finished goods
36,000 $46 2/12 = $276,000
$645,000
Inventory levels with the new machine
Raw materials
48,000 $11 1.5/12 = $ 66,000
Work-in-process
48,000 $20 1.5/12 = $120,000
Finished goods
48,000 $36 1/12 = $144,000
$330,000
Change in annual inventory carrying costs:
c $900,000–$490,000 = $410,000 increase
Chapter 7: Measuring and Managing Process Performance
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the new machine.
(c) A manager evaluated on the basis of net income may decide not to
replace the existing machinery if there is considerable uncertainty about
the projections for increased sales or reduced costs, given the relatively
Rossman’s income over the long-run.
7-60 Precision Systems1
This case study illustrates that quality cost information can play an important
role in alerting top management about the importance of quality improvement
Although the actual case takes place quite some time ago, the need for
improvement in nonmanufacturing processes remains pervasive. We still
The required questions are designed to acquaint students with some of the
terminology of “cost of quality” and some aspects of conducting a cost of
• Prevention (prevention of poor quality, or quality assurance);
• Appraisal (inspection and testing);
• Internal failure (costs such as rework or scrappage for nonconforming
Volume 12. Adapted with permission.
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This case focuses on prevention activities (see question (f)), as well as internal
Suggested Solutions to Required Questions
cost figures captured the attention of top management. Other responses
might include the following: (1) It made order entry aware of the dollar
impact of its errors; (2) It provided a means of prioritizing quality
improvement efforts.
will receive the invoice. Customer support will contact the customer to
arrange installation and will be available to answer questions over the
phone.