BEC QM Flashcards
Quality of conformance
Refers to the degree to which a product meets its design specifications and/or customer expectations. This is goal of Total Quality Management (TQM)
Quality of design
Meeting or exceeding the needs and wants of customers. 2nd goal of TQM
Cost of quality:
- Prevention cost- cost to make sure job done right the 1st time (training, engineering, control activities)
- Appraisal cost- testing and inspection costs
- Internal failure cost- costs incurred when substandard products are produced but discovered before shipment (scrap, rework, spoilage)
- External failure cost- products do not meet requirements and have reached customer (recalls, warranty, returns and allowances)
Total cost of quality=sum of all of these
Increased cost of prevention and appraisal=
Decreased cost of failure, increase in quality of conformance.
Throughput time (manufacturing cycle time)
Total time required for an item to make it’s way through the manufacturing system.
Which of the following types of performance measures integrates financial performance, internal operations, learning and growth, and customer satisfaction?
Balanced scorecard
Financial performance measures for balanced scorecard:
Gross profit margin, sales growth, profitability per job or product, stock price, achievement of cash flow goals, and any of the standard financial ratios (inventory turnover, return on investment, current ratio, etc.)
Customer performance measures for balanced scorecard:
Market share, product returns as a percentage of sales, number of new customers, sales trends
Internal business process measures for balanced scorecard:
Percentage of production downtime, delivery cycle time, manufacturing cycle time/throughput, manufacturing cycle efficiency, standard cost variances, product defect rate, amount of scrap and rework
Learning, innovation and growth measures for balanced scorecard:
Percentage of employees with professional certifications, hours of training per employee, number of new products developed, employee turnover, number of customer requests for specific designers
How is contribution margin (CM) different from gross margin (GM)?
CM equals sales less variable costs; GM equals sales less cost of goods sold.
Delivery cycle time
Time between order and delivery
Manufacturing cycle efficiency
Time required for nonvalue-added activities/total manufacturing time
Why is cost avoidance a faster way to increase profits than to increase revenue?
Increasing revenue often results in at least some proportional cost increases.
Types of risk:
- Strategic- occurs as a consequence of the specific and overall action plans to achieve the organization’s mission, controlled with forcasting, optimizing operating leverage (fixed vs. variable costs) and cost control
- Operational-short-term in nature and involves daily implementation issues, mitigated with EE training, customer credit checks, quality control
- Market risk- large-scale economic events or natural disasters that, to some extent, influence all companies, systematic risk, controlled with insurance and assessments of exposure to economic downturns
- Financial risk- interest rate, foreign exchange (hedging)
Pure risk
Possibility of either breaking even or losing but never profiting (insurance). All other risk is speculative risk.
What is the objective of the demand flow approach?
To link process flows and manage them based on customer demand.
What tools does Six Sigma commonly use to achieve quality control?
Tools common to TQM (e.g., control charts). Six Sigma is very similar to total quality management (TQM) and uses TQM tools such as control charts, run charts, pareto histograms, and Isikawa (fish-bone) diagrams.
Jago Co. has two products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity.
For short-run profit maximization, Jago should manufacture the product with the
Greater contribution margin per hour of manufacturing capacity in the short run, in the long run, the firm should expand to take advantage of the market for its products.
Theory of constraints
Identifies strategies to maximize income when the organization is faced with bottleneck operations. A bottleneck operation occurs when the work to be performed exceeds the capacity of the production facilities. Over the short run, revenue is maximized by maximizing the contribution margin of the constrained resource. NOTE: this is not overall contribution margin but contribution margin of constrained resource.
Lean manufacturing traits:
- Small batches of a high variety of unique products
- Automated or otherwise sophisticated machinery (multi-use equipment)
- Highly skilled labor (usually cross-trained).
- Smaller # of suppliers with increased quality expected
Thus, lean production blends the features of craft (small number of unique products) and mass (large # of standardized products) production processes.
Demand flow approach (demand flow technology, DFT)
Uses mathematical methods to link materials, time, and resources based on continuous flow planning. The objective is to link process flows and manage those flows based on customer demand.
Contribution margin per unit of constraining resource=
CM per unit x Amount of constraining resource per unit
Example: $1 CM x 72 lbs per hour can be processed vs. $.5 CM x 100 lbs per hour can be processed
In a process cost system, the application of factory overhead usually would be recorded as an increase in
Work-in-process inventory control. Journal entries to record the manufacturing cost are similar for job-order and process costing. When overhead is applied, it is debited to work in process.
In a traditional job order cost system, the issue of indirect materials to a production department increases
Factory overhead control, The issuance (use in production) of indirect materials results in a debit (increase) to factory overhead control. This account accumulates actual overhead cost incurrence. Actual overhead is not debited to work in process. Rather, work in process is debited to factory overhead applied.
Fundamental cost classifications:
- Product costs- generally attach to physical product units and are expensed in the period in which the goods are sold (COGS). Product costs are also known as inventoriable costs or manufacturing costs.
- Period costs- Cannot be matched with specific revenues (i.e., accountant’s salary) and are expensed in the period incurred. These costs are also called selling and administrative costs.
Direct costs
Direct material and direct labor
Indirect costs
Factory overhead (fixed and variable)
Prime costs
Direct materials and direct labor
Conversion costs
Direct labor and factory overhead (cost to convert)
Steps to overhead allocation (applied overhead)- VERY IMPORTANT THREE STEP PROCESS
- Estimated total overhead costs/estimated volume activity= overhead allocation rate, determined at beginning of period, ALWAYS based on current capacity
- Overhead allocation rate x units used in production (ie direct labor hours or machine hours)= applied overhead, applied throughout the year
- At the end of the year, close out over/underapplied overhead to COGS
Applied overhead is charged to WIP:
DR: Work in Process
CR: Factory overhead applied
Actual overhead is charged to Factory Overhead Control account:
DR: Factory overhead control - utility expense
CR: Accounts Payable
Overapplied factory overhead
When more overhead costs are applied to products than are actually incurred. When the accounts are closed at the end of the period, overapplied overhead reduces Cost of Goods Sold.
DR: Factory overhead applied
CR: Factory overhead control
CR: COGS
Underapplied factory overhead
DR: Facotry overhead applied
DR: COGS
CR: Factory overhead control
Types of overhead:
Estimated- estimated total overhead for budgeting, used to calculate overhead allocation base
Applied- based on allocation base, amount applied based on allocation base and actual units of allocation base consumed (ex. DLH)
Actual- actual overhead costs incurred
Spoilage costs:
- Normal spoilage- inventoriable product cost (debited to finished goods)
- Abnormal spoilage- separated and deducted as a period expense
- Scrap- that is sold for immaterial amount decreases COGS, treated as other sales if amt is material
Schedule of Cost of Goods Manufactured: IMPORTANT
Beginning value WIP \+Total manufacturing costs (Direct labor & materials, overhead) =WIP available -Ending WIP =Cost of goods manufactured
Schedule of Cost of Goods Sold: IMPORTANT
Beginning Finished Goods \+Cost of goods manufactured =GAFS -Ending Finished Goods =COGS
Schedule of Direct Materials Inventory:
Beginning Direct Materials Inventory \+Purchases =Direct Materials available -Ending Inventory Direct Materials =Direct materials used
Fixed vs. variable cost behavior
Fixed costs per unit vary and in TOTAL stay the same.
Variable costs per unit stay the same and TOTAL vary.
High-low method
Calculates variable costs since any change in costs due to production volume are variable costs.
- Calculate difference in cost between highest and lowest production volumes.
- Calculate difference in volume.
- Divide cost by volume=variable cost per unit
- Using this variable cost per unit, multiple by quantity given to determine fixed costs
Absorption costing
Assigns all 3 factors of production (direct materials and labor and fixed and variable overhead to inventory (product costs)
Variable (Direct) costing
Assigns only variable manufacturing overhead, direct material and labor to inventory. These are considered product costs while fixed manufacturing overhead is a period cost. Variable selling admin costs are always period costs.
Absorption costing income statement
Sales
-Variable manufacturing costs (for units sold)
-Fixed manufacturing costs (for units sold)
=GROSS MARGIN
-Variable selling/admin (for units sold)
-Fixed selling/admin (total)
=Operating income
Variable costing income statement
Sales
-Variable manufacturing costs (for units sold)
-Variable selling/admin (for units sold)
=CONTRIBUTION MARGIN
-Fixed manufacturing costs (for units sold)
-Fixed selling/admin (total cost)
=Operating income
Inventory valuation comparing absorption and variable costing.
Inventory valuation will ALWAYS be higher with absorption costing b/c fixed costs are only considered when item sold, not in total.
When the # of units sold=# units produced, absorption costing and direct costing = same income, when this is not the case, calculate difference with formula:
Ending inventory units x fixed costs per unit - beginning inventory units x fixed cost per unit
Known as Income Reconciliation rule, tested widely on CPA
Units sold > Units produced
Absorption costing income < Direct costing income
Units sold < Units produced
Absorption costing income > Direct costing income
