Using Accounting for Quality and Cost Management
Managers need good accounting information to be competitive in the new production environment:
  • In the new production environment, managers are concerned with staying competitive by
    1. improving quality and
    2. reducing costs.
  • Accounting information can help managers to assess the costs of quality and help them to find ways to cut costs.
Methods of improving quality:
  • Three methods managers use to identify quality problems are
    1. control charts,
    2. Pareto diagrams, and
    3. cause and effect analyses.
  • Knowing the four costs of quality–prevention, appraisal, internal failure, and external failure–helps managers minimize the cost of quality while providing high quality products to customers.
Developing quality-based performance measures:
  • Four such measures are:
    1. quality control,
    2. delivery performance,
    3. materials waste, and
    4. machine downtime.
  • Managers can use benchmarking to focus attention on measuring how well one is doing against levels of performance that may be found either inside or outside of the organization.
  • The balanced scorecard is a set of performance targets and results that show an organization’s performance in meeting its objectives relating to stakeholders.
Just-in-time Purchasing and Production:
  • Can reduce costs and improve quality.
  • JIT substantially reduces or eliminates the need for inventories and improves quality by eliminating buffer stocks in which quality problems can be hidden.
  • Using JIT, products must be produced properly the first time.
Comparing and contrasting accounting in just-in-time settings with accounting in traditional settings:
  • Just-in-time accounting procedures normally debit all costs directly to Cost of Goods Sold and bypass the usual inventory accounts.
  • When it is necessary to report inventories in the financial statements, the inventory amounts are “backed out” of the Cost of Goods Sold account.
Four steps in Activity-Based Costing:
  1. Identify the activities that consume resources.
  2. Identify the cost driver(s) associated with each activity.
  3. Compute a cost rate per cost driver unit.
  4. Assign costs to products by multiplying the cost driver rate times the volume of cost driver units consumed by the product.
Advantages and Disadvantages of Activity-Based Costing: 
  • Activity-based costing first assigns costs to activities, then to the products based on each product’s use of activities.
  • Activity-based costing is based on the premise: Products consume activities; activities consume resources.
  • Companies benefit from activity-based costing because managers have more detailed information about the cost of activities and better product cost information.
  • Disadvantages include the cost and difficulty of understanding more complex accounting methods.
Comparing product costs using activity-based costing with product costs using traditional costing methods:
  • In many companies, activity-based costing has revealed that low-volume, specialized products have been more costly than managers had realized when those products were costed using traditional methods.
Strategic and Behavioral Advantages of Activity-Based Management: 
  • By focusing attention on activities that cause costs, activity-based management helps managers eliminate activities that consume resources, thereby helping companies become more efficient and competitive.


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this page is maintained by Reed Fisher
last updated January 15, 2011