Deck 19: Cost Management: Quality, Time, and the Theory of Constraints

Question 1

The costs relating to product testing are classified as prevention costs.

Answer 1

False

Question 2

An "economy of scale" function is an example of a linear cost function.

Answer 2

False

Question 3

The cumulative average-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture.

Answer 3

False

Question 4

A measurement of market share is considered a financial measure of customer satisfaction in a balanced scorecard.

Question 5

Costs of quality (COQ) reports usually do not consider opportunity costs.

Question 6

In the banking industry, depositing a customer's check into the wrong bank account is an example of quality of design failure.

Question 7

The number of defects in units shipped to customers as a percentage of total units shipped, is a non-financial measure.

Question 8

Design quality refers to the performance of a product or service relative to its design and product specification.

Question 9

A learning curve measures the effect of learning on efficiency.

Question 10

Conformance quality is the performance of a product or service relative to its design and product specifications.

Question 11

Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, inspection costs, and warranty costs.

Question 12

Plotting learning curve observations is helpful in selecting the appropriate learning curve model.

Question 13

When new products are introduced, learning-curve effects can have a major influence on production scheduling.

Question 14

In the incremental unit-time learning model, the incremental unit time decreases by a constant percentage each time the cumulative quantity of units produced is doubled.

Question 15

The International Standards Organization (ISO) certification registers companies that conform to a specific level of quality.

Question 16

Quality of design measures how closely the characteristics of products or services meet the needs and wants of customers.

Question 17

It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance.

Question 18

The incremental unit-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture.

Question 19

The costs relating to new materials testing are classified as appraisal costs.

Question 20

An example of a nonfinancial Balanced Scorecard measure concerning internal business processes would be the percentage of products that fail soon after delivery.

Question 21

A COQ report provides information on individual categories, but can not provide information on interdependencies across the four categories of quality costs.

Question 22

Appraisal costs include all of the following EXCEPT

A) inspection.
B) spoilage.
C) product testing.
D) process inspection.
E) depreciation on testing equipment.

Question 23

Internal failure costs include

A) field repairs.
B) rework.
C) liability claims
D) warranty expenses.
E) supplier evaluations.

Question 24

Costs incurred in detecting which of the individual units do not conform to specifications are called

A) correction costs.
B) external failure costs.
C) internal failure costs.
D) prevention costs.
E) appraisal costs.

Question 25

What is the time needed to produce the last unit when production doubles from 100 units to the 200 unit level, given that the incremental unit time learning model has a 60% learning curve, and the corresponding time at the 100 unit level of production is 4.0 minutes?

A) 8.0 minutes
B) 6.4 minutes
C) 4.0 minutes
D) 2.4 minutes
E) 1.6 minutes

Question 26

Costs incurred by a nonconforming product detected before it is shipped to customers are

A) prevention costs.
B) appraisal costs.
C) internal failure costs.
D) external failure costs.
E) design costs.

Question 27

Preventive equipment maintenance is an example of

A) prevention costs.
B) appraisal costs.
C) internal failure costs.
D) external failure costs.
E) rework costs.

Question 28

Warranty repair costs are

A) prevention costs.
B) appraisal costs.
C) an internal failure cost.
D) a marketing cost.
E) an external failure cost.

Question 29

A nonlinear cost function

A) has two constants and a single slope.
B) does not effectively describe the behaviour of costs all of the time.
C) never describes the behaviour of costs in relation to the cost driver.
D) always describes the behaviour of costs in relation to the cost drivers.
E) means the relevant range cannot be determined for that cost.

Question 30

External failure costs include all of the following EXCEPT

A) scrap.
B) customer support.
C) liability claims.
D) transportation costs.
E) warranty costs.

Question 31

A learning curve is a function that measures how labour-hours per unit decrease, as units of production increase.

Question 32

Quality of design measures

A) how closely the characteristics of products or services match the needs and wants of customers.
B) how closely the characteristics of products or services match the needs and wants of employees.
C) how closely the characteristics of products or services match the needs and wants of the Board of Directors.
D) how closely the characteristics of products or services match the needs and wants of competitors.
E) how closely the characteristics of products or services match the needs and wants of union representatives.

Question 33

Prevention costs include all of the following EXCEPT

A) quality engineering.
B) design engineering.
C) product testing.
D) supplier evaluations.
E) statistical process control.

Question 34

Supplier evaluations are an example of

A) appraisal costs.
B) prevention costs.
C) internal failure costs.
D) design costs.
E) external failure costs.

Question 35

Which of the following are typically not included in COQ reports?

A) lost contribution margin from lost sales due to poor quality
B) lost production that results from poor quality
C) lower prices that result from poor quality
D) allocation bases
E) lost contribution margin from lost sales and/or from lost production, nor lower prices that result form poor quality

Question 36

Costs of quality include all of the following EXCEPT

A) correction costs.
B) external failure costs.
C) internal failure costs.
D) prevention costs.
E) appraisal costs.

Question 37

An example of a nonfinancial measure for customer satisfaction is

A) delivery delay.
B) employee turnover.
C) number of defects on the production line.
D) process yield.
E) number of employees trained.

Question 38

Try-Us-First Motors manufactures and sells off-road vehicles. The September sales were $6,000,000. Monthly design costs are $112,000 and rework is running at $75,000 per month. Its painting department is fully automated and requires substantial inspection to keep the machines operating properly. An improperly painted vehicle is very expensive to correct, and inspection hours for the 8,000 vehicles painted in September totaled 2,000 hours by 14 employees, who earn an average of $28 an hour. Ten litres of paint were used on average for each vehicle. The standard amount of paint per vehicle is nine litres. The cost of inspection for September was equal to the budgeted amount of $56,000. What are appraisal costs as a percentage of sales?

A) 0.93%
B) 1.25%
C) 1.87%
D) 2.20%
E) 2.80%

Question 39

An example of a nonfinancial measure for customer satisfaction is

A) Average manufacturing time for for key products.
B) Contribution margin.
C) Percentage of products that fail soon after delivery.
D) Number of employees trained on managing bottleneck operations.
E) Number of units reworked.

Question 40

Conformance quality is

A) the performance of a product or service according to design and production specifications.
B) the performance of a product or service according to design and customer specifications.
C) the performance of a product or service according to competitor information.
D) the performance of a product or service according to design specifications.
E) the performance of a product or service according to employee specifications.

Question 41

A corporation can measure its quality performance by using financial or nonfinancial measures of quality. Discuss the merits of each method and whether the use of one precludes the use of the other.

Question 42

Cari and Jereme just bought a bed and breakfast inn at a very attractive price. The business had been doing poorly. Before they reopened the inn for business, they attended a seminar on operating a high quality business. Now that they are ready to open the inn, they need some advice on quality costs and management.
Required:
Identify four categories of quality costs. In addition, identify three items that would be classified in each of the categories.

Question 43

The Door Company manufactures doors. Classify each of the following quality costs as prevention costs, appraisal costs, internal failure costs, or external failure costs.
a. Retesting of reworked products
b. Downtime due to quality problems
c. Analysis of the cause of defects in production
d. Depreciation of test equipment
e. Warranty repairs
f. Lost sales arising from a reputation for poor quality
g. Quality circles
h. Rework direct manufacturing labour and overhead
i. Net cost of spoilage
j. Technical support provided to suppliers
k. Audits of the effectiveness of the quality system
l. Plant utilities in the inspection area
m. Reentering data because of keypunch errors

Question 44

To complete the first setup on a new machine took an employee 200 minutes. Using an 80% cumulative average-time learning curve indicates that the second setup on the new machine is expected to take

A) 160 minutes.
B) 120 minutes.
C) 80 minutes.
D) 60 minutes.
E) 128 minutes.

Question 45

To complete the first setup on a new machine took an employee 200 minutes. Using an 80% incremental unit-time learning curve indicates that the second setup on the new machine is expected to take

A) 160 minutes.
B) 120 minutes.
C) 80 minutes.
D) 60 minutes.
E) 128 minutes.

Question 46

Define cost of quality (COQ), list the four categories, and provide an example of each.

Question 47

When an average unit of time declines by a constant percentage each time that the cumulative quantity of units produced is doubled, it is known as

A) cumulative average time.
B) incremental unit time.
C) last unit time.
D) relative unit time.
E) cumulative unit time.

Question 48

The two basic aspects of quality are quality of design and conformance quality. Define and give an
example of each.

Question 49

Compare financial and nonfinancial performance, and explain why planning and control systems should consider both.

Question 50

Nidek manufactures sportswear. Classify each of the following quality costs as prevention, appraisal, internal failure or external failure.
a. Disposal of spoiled work in process
b. Downtime due to quality problems
c. Expediting work to meet delivery schedule
d. Field testing
e. Maintaining a complaint department
f. Product liability
g. Quality training
h. Reinspection
i. Rework direct manufacturing labour and overhead
j. Scrap
k. Testing and inspecting of machinery
l. Testing and inspecting of direct materials
m. Utilities in inspection area of plant
n. Warranty repairs

Question 51

Andrew Pallet Co., Inc. manufactures pallets for various manufacturing companies. Each new employee takes 10 hours to make the first pallet and 8 hours to make the second. The manufacturing overhead charge per hour is $80.
Required:
a. What is the learning curve percentage assuming the cumulative average method?
b. What is the time needed to build 8 pallets by a new employee using the cumulative average-time method? Assume the rate of learning factor is -0.1520.
c. What is the time needed to produce the 16th pallet by a new employee using the incremental unit-time method? Assume the rate of learning factor is -0.3219.

Question 52

Vestor Ltd. has estimated a 90% incremental unit time learning curve applies to labour time to manufacture its new product. The first unit took 18 hours. If Vestor's estimates are correct, how many hours will be used to manufacture 4 total units?

A) 14.58 hours
B) 64.80 hours
C) 72.00 hours
D) 64.01 hours
E) 58.32 hours

Question 53

Carl Clarkson and Lenny Lenid have been assigned to review the costs of quality at the Sprotton Chemicals Ltd. for the month of September. All amounts are in thousands (000's).
Some information from a competitor, Sheltonville Industries, has been leaked. You learn that Sheltonville's costs of quality (as a percentage of total costs of quality) is 15% on external failure, 20% on internal failure, 35% on appraisal and the rest on prevention.
Required:
a. Prepare a cost of quality report for September for the Sprotton Chemicals including calculations of each cost category as a percentage of total costs of quality.
b. Compare Sprotton's approach to quality management to Sheltonville's. Comment on your findings. (What are the implications of the differences?)

Question 54

Each time Maiertree Care hires a new employee it must wait for some period of time before the employee can meet production standards. Management is unsure of the learning curve in its operations but it knows the first job by a new employee averages 60 hours and the second job averages 48 hours. Assume all jobs to be equal in size.
Required:
a. What is the learning curve percentage, assuming the cumulative average-time method?
b. What is the time for a new employee to build 16 units with this learning curve using the cumulative average-time method? Assume the rate of learning factor is -0.1520.

Question 55

Harry's Picture manufactures various picture frames. Each new employee takes 5 hours to make the first picture frame and 4 hours to make the second. The manufacturing overhead charge per hour is $20.
Required:
a. What is the learning-curve percentage, assuming the cumulative average method?
b. What is the time needed to build 8 picture frames by a new employee using the cumulative average-time method? Assume the rate of learning factor is -0.1520.
c. What is the time needed to produce the 16th frame by a new employee using the incremental unit-time method? Assume the rate of learning factor is -0.3219.

Question 56

Joe's Copy Centre hires a new employee. Joe knows he has to be patient with the employee until the employee gains enough experience to meet production standards. Joe is unsure of the learning curve in his operation, but he knows the first job by a new employee averages 40 minutes and the second job averages 32 minutes. Assume all jobs to be equal in size.
Required:
a. What is the learning-curve percentage, assuming the cumulative average-time method?
b. What is the time for a new employee to do 32 jobs with this learning curve using the cumulative average-time method? You may use an index of -0.1520.

Question 57

An experience curve

A) is a narrower application of the learning curve.
B) measures the decline in cost per unit as production decreases for various value-chain functions such as marketing as production increases.
C) only measures the decline in labour-hours per unit as units produced increases.
D) measures the increase in cost per unit as productivity increases.
E) measures the increase in labour-hours per unit as units produced increases.

Question 58

Discuss how a manufacturer of personal computers such as Dell Computer can benefit from the introduction of a quality improvement program.

Question 59

Vestor Ltd. has estimated a 90% cumulative average-time learning curve applies to labour time to manufacture its new product. The first unit took 18 hours. If Vestor's estimates are correct, how many hours will be used to manufacture 4 total units?

A) 14.58 hours
B) 64.80 hours
C) 72.00 hours
D) 64.01 hours
E) 58.32 hours

Question 60

A learning curve is a function

A) that measures the decline in labour-hours per unit due to workers becoming better at a job.
B) that increases at a greater rate as workers become more familiar with their tasks.
C) where unit costs increase as productivity increases.
D) that is linear.
E) that measures productivity improvements from new technology.

Question 61

Most companies do not measure the financial cost of design quality.

Question 62

When using a control chart, a manager does not investigate the activity when

A) most observations are outside the preset range.
B) all observations are outside the preset range.
C) all observations are within the range of preset standard deviations.
D) most observations are within the range of 2 standard deviations.
E) all observations are determined to be non-random.

Question 63

Discuss the methods used to identify quality problems.

Question 64

A control chart identifies potential causes of failures or defects.

Question 65

Baby Care Products has just completed a very successful program of improving quality in its manufacturing operations. The next step is to improve the operations of its administrative functions, starting with the accounting information system. As the manager of the accounting operations, you are requested to begin a quality improvement program.
Required:
What are some possibilities of finding out about the current status of quality in the accounting system?

Question 66

Three tools used to detect quality problems include control charts, Pareto charts, and cause and effect diagrams. Briefly explain each of these tools.

Question 67

When using a control chart, the observations outside the upper and lower product specification limits are ordinarily regarded as nonrandom and worth investigating.

Question 68

The financial cost of quality measures serves as a common denominator for evaluating trade-offs among prevention costs and failure costs.

Question 69

A Pareto Diagram is usually in a bar-chart format, and it shows how often a particular problem has occurred.

Question 70

Wilson's Language School manufactures CDs and DVDs to teach English as a Second Language. Wilson has just prepared a Cost of Quality Report, and the staff has noticed a decline in prevention costs as a percentage of total sales over a three-year period. What changes might Wilson expect to see in appraisal costs as a percentage of sales, internal failure costs as a percentage of sales, and external failure costs as a percentage of sales given this trend?

Question 71

Lost contribution margin can result from either internal or external failure.

Question 72

A graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time is a

A) control chart.
B) Pareto diagram.
C) cause-and-effect diagram.
D) fishbone diagrams.
E) learning curve.

Question 73

Statistical quality control includes a control chart that

A) graphs a series of random events of a process.
B) plots each observation relative to specified ranges that represent the expected distribution.
C) plots control observations over various periods of time.
D) plots only those observations outside specified limits.
E) plots only those observations within one standard deviation from the mean.

Question 74

Which of the following does NOT pertain to control charts?

A) They plot a series of successive observations of a particular step, procedure, or operation.
B) They plot each observation relative to specified ranges that represent the expected distribution.
C) They are used in statistical quality control.
D) They plot only those observations outside specified limits.
E) They plot each observation relative to specified ranges that represent the expected distribution, but only those observations outside specified limits.

Question 75

The Brick Shirt House is concerned about its declining sales, especially the reduction in the number of customers. For the last two years its shirts have won industry awards for high quality and trend-setting styles. At the latest executive managers' meeting everyone was blaming everyone else for the decline. After much discussion, and the presenting of some fact-finding information, it was determined that sales relationships were the cause of most of the problems.
Required:
What may be some of the causes and how can the causes be detected if product quality is not an issue?

Question 76

A cause-and-effect diagram is used to help identify potential causes of failure or defects.

Question 77

Allocated cost amounts are an important determinant of the costs of a quality improvement program.

Question 78

In order for management to initiate quality improvement programs and projects, a complete cost-benefit analysis (including a projection of how the improvement will incrementally affect total costs and total revenues) is necessary.

Question 79

Which of the following indicates how frequently each type of failure occurs?

A) cause-and-effect diagram
B) control chart
C) frequency chart
D) Pareto diagram
E) both frequency charts and Pareto diagrams

Question 80

The number of defects shipped to customers as a percentage of total units shipped is a type of nonfinancial quality measure.