cost accounting test bank chapter 19

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Cost Accounting, 15e (Horngren/Datar/Rajan)

Chapter 19 Balanced Scorecard: Quality and Time

Objective 19.1

1) Which of the following is true of ISO 9000?

A) It is a quality management system comprising different process improvement such as six sigma and lean manufacturing.

B) It is mandatory for all listed companies in US to get ISO certified.

C) It helps companies monitor, document, and certify the elements of their production processes that lead to quality.

D) It is a disciplined, data-driven, and statistical approach to improve the quality of products or services by identifying and removing the causes of defects. Answer: C

Diff: 1

Objective: 1

AACSB: Analytical thinking

2) Conformance quality ________.

A) is the first step of a quality management system such as ISO 9000

B) is the performance of a product or service according to design and product specifications C) is making the product according to design, engineering, and manufacturing specifications D) focuses on how a product meets customer needs and wants Answer: B

Diff: 1

Objective: 1

AACSB: Analytical thinking

3) The costs of quality ________.

A) are the costs incurred to enhance large scale production

B) are the costs incurred to prevent the production of a low quality product C) are costs incurred to company due to defective and low quality product

D) include warranty costs, costs of normal spoilage, costs of abnormal spoilage, and scrap costs Answer: B

Diff: 2

Objective: 1

AACSB: Analytical thinking

4) Costs incurred in precluding the production of products that do not conform to specifications are ________.

A) prevention costs B) appraisal costs

C) internal failure costs D) external failure costs Answer: A

Diff: 2

Objective: 1

AACSB: Analytical thinking

5) Appraisal costs ________.

A) are costs incurred to prevent the production of products that do not conform to specifications

B) are costs incurred to detect which of the individual units of products do not conform to specifications C) are costs incurred on defective products before they are shipped to customers

D) are costs incurred on defective products after they have been shipped to customers Answer: B

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Costs incurred on defective products before being shipped to customers are ________. A) prevention costs B) appraisal costs

C) internal failure costs D) external failure costs Answer: C

Diff: 1

Objective: 1

AACSB: Analytical thinking

7) Design engineering is an example of ________. A) prevention costs B) appraisal costs

C) internal failure costs D) external failure costs Answer: A

Diff: 2

Objective: 1

AACSB: Analytical thinking

8) Spoilage is an example of ________. A) prevention costs B) appraisal costs

C) internal failure costs D) external failure costs Answer: C

Diff: 2

Objective: 1

AACSB: Analytical thinking

9) A liability claim is an example of ________. A) prevention costs B) appraisal costs

C) internal failure costs D) external failure costs Answer: D

Diff: 2

Objective: 1

AACSB: Application of knowledge

10) Process engineering is an example of ________. A) prevention costs B) appraisal costs

C) internal failure costs D) external failure costs Answer: A

Diff: 2

Objective: 1

AACSB: Application of knowledge

11) Product testing is an example of ________. A) prevention costs B) appraisal costs

C) internal failure costs D) external failure costs Answer: B

Diff: 2

Objective: 1

AACSB: Application of knowledge

Answer the following questions using the information below:

Monticello Corp manufactures expensive tables. Its varnishing department is fully automated and

requires substantial inspection to keep the machines operating properly. An improperly varnished table is very expensive to correct. Inspection hours for the 5,000 tables varnished in September totaled 1,500 hours by 8 employees. Eight quarts of varnish were used, on average, for each table. The standard amount of varnish per table is nine quarts. The cost of inspection for September was equal to the budgeted amount of $40,000.

12) The $40,000 represents a(n) ________. A) activity cost pool

B) possible cost allocation base C) internal failure cost

D) work-in-process control Answer: A

Diff: 2

Objective: 1

AACSB: Application of knowledge

13) What is the inspection cost per unit? A) $30.40 B) $8.00 C) $9.00 D) $4,750 Answer: B

Explanation: B) Rate per unit = $40,000/5,000 units = $8.00 per unit

Diff: 3

Objective: 1

AACSB: Application of knowledge

14) Which of the following is considered a cost of quality? A) external failure costs B) opportunity costs C) sunk costs

D) contingent liabilities Answer: A

Diff: 2

Objective: 1

AACSB: Analytical thinking

15) Which of the following is an opportunity cost? A) lost sales

B) cost of production C) marginal cost D) cost of sales Answer: A

Diff: 2

Objective: 1

AACSB: Application of knowledge

16) Which of the following is a financial measure of quality? A) operating income growth

B) percentage of highly satisfied customers

C) number of defective units shipped to customers as a percentage of total units shipped D) interest costs Answer: A

Diff: 2

Objective: 1

AACSB: Application of knowledge

17) One of the most direct financial measures of quality is the costs of quality. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

18) ISO 9000 developed by the International Organization for Standardization is a set of five international standards for quality management. Answer: TRUE

Diff: 2

Objective: 1

AACSB: Analytical thinking

19) Quality is defined as the total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

20) Conformance quality is the performance of a product or service relative to its design and product specifications. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

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

Explanation: This is an example of conformance quality failure.

Diff: 2

Objective: 1

AACSB: Analytical thinking

22) Costs of quality (COQ) reports usually consider opportunity costs. Answer: FALSE

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

Diff: 2

Objective: 1

AACSB: Analytical thinking

23) ISO 9000 are standards designed to encourage organizations to develop environmental management systems to reduce environmental costs. Answer: FALSE

Explanation: ISO 14000 are standards designed to encourage organizations to develop environmental management systems to reduce environmental costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

24) Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, opportunity costs, and sales costs. Answer: FALSE

Explanation: Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, internal failure costs, and external failure costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

25) Appraisal costs are costs incurred to preclude the production of products that do not conform to specifications. Answer: FALSE

Explanation: Prevention costs are costs incurred to preclude the production of products that do not conform to specifications.

Diff: 2

Objective: 1

AACSB: Analytical thinking

26) External failure costs are costs incurred on defective products after they have been shipped to customers.

Answer: TRUE

Diff: 2

Objective: 1

AACSB: Analytical thinking

27) When evaluating alternatives to improve quality, both the relevant benefits as well as the relevant costs should be considered. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

28) Prevention costs include inspection and product testing. Answer: FALSE

Diff: 2

Objective: 1

AACSB: Application of knowledge

29) Warranty costs is an example of external failure costs. Answer: TRUE

Diff: 2

Objective: 1

AACSB: Application of knowledge

30) What are ISO 9000 and ISO 14000?

Answer: ISO 9000, developed by the International Organization for Standardization, is a set of five international standards for quality management adopted by more than 85 countries. The standards help companies monitor, document, and certify the elements of their production processes that lead to quality.

ISO 14000, also developed by the International Organization for Standardization, are standards designed to encourage organizations to develop (1) environmental management systems to reduce environmental costs and (2) environmental auditing and performance-evaluation systems to review and monitor their progress toward their environmental goals.

Diff: 2

Objective: 1

AACSB: Analytical thinking

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

Answer: Quality of design measures how closely the characteristics of products or services meet the needs and wants of customers. For example, customers of photocopying machines want copiers that combine copying, faxing, scanning, and electronic printing. If the photocopy machines fail to meet these customer needs, sales will fall.

Conformance quality refers to the performance of a product or service according to design and product specifications. For example, if a photocopy machine constantly has paper jams or breaks down, it fails to satisfy conformance quality.

Diff: 1

Objective: 1

AACSB: Analytical thinking

32) Ply Corp 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 labor 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

________ Prevention costs

________ Appraisal costs

________ Internal failure costs

________ External failure costs Answer:

g, j Prevention costs

d, l, k Appraisal costs

a, b, c, h, i, m Internal failure costs

e, f, External failure costs

Diff: 3

Objective: 1

AACSB: Application of knowledge

33) Dawn and Kim 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. Answer: Prevention: Hiring employees with good references Training of owners and employees Good security Good reservation system Purchasing quality furniture

Appraisal: Verifying accuracy of reservation and registration procedures Inspecting rooms, facilities, building and grounds regularly Observing activities of employees Testing furniture and fixtures Taste testing food

Internal failure: Recleaning rooms and facilities Restocking rooms with linens, glasses, etc. Out-of-stock supplies Reinspection Failure to bill on a timely basis

External failure: Responding to complaints about rooms and food Responding to complaints about reservations Emergency cleaning of rooms when not ready on time Customer refunds because of unsatisfactory conditions Opportunity cost of lost revenue resulting from unhappy customers

Diff: 3

Objective: 1

AACSB: Application of knowledge

34) 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?

Answer: Most likely, the decline in prevention costs as a percentage of sales over a three-year period would result in increased internal and external failure costs as a percentage of sales during this same period. The reduced prevention activities might result in more defective products. Appraisal costs as a percentage of sales might also rise as management attempts to compensate for the higher failure rates by increasing inspection and appraisal costs to prevent defects from reaching the final customer.

Diff: 3

Objective: 1

AACSB: Application of knowledge

35) A quality improvement program is very costly to implement across a large corporation. Why do they do it? Explain.

Answer: A focus on quality within an organization will have the long run benefit of reducing costs and increasing customer satisfaction. The corporation must consider four key cost of quality areas where costs are most likely to occur: (1) prevention costs - which arise when the product does not meet the specifications, (2) appraisal costs - incurred by actions which must be taken to detect which of the individual units of products do not

conform with the specification(s), (3) internal failure costs - incurred on defective products before they are shipped to customers, and (4) external failure costs - incurred on defective products after they are shipped to customers. Any company which does not invest in quality improvement by constantly reviewing, revising, and implementing procedures to maintain focus on the four key cost of quality areas will be almost certain to have lower profits, revenues, and market share.

Diff: 3

Objective: 1

AACSB: Analytical thinking

Objective 19.2

1) An example of a nonfinancial measure for customer satisfaction is ________. A) number of customer complaints B) warranty claims

C) liability claims incurred to the company D) rework costs due to inefficiency Answer: A

Diff: 3

Objective: 2

AACSB: Analytical thinking

2) An example of a nonfinancial measure for customer satisfaction is ________. A) average manufacturing time for key products B) contribution margin

C) percentage of products that fail soon after delivery D) time taken on machine repairs and costs incurred Answer: C

Diff: 3

Objective: 2

AACSB: Analytical thinking

3) 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 Answer: A

Diff: 2

Objective: 2

AACSB: Analytical thinking

4) 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 Answer: B

Diff: 2

Objective: 2

AACSB: Analytical thinking

5) As per control charts, nonrandom variations occurs when ________. A) there is a sudden increase in production

B) chance fluctuations in the speed of equipment cause defective products to be produced C) defective products are produced as a result of a systematic problem D) there is a sudden increase in sales Answer: C

Diff: 2

Objective: 2

AACSB: Analytical thinking

6) A tool which indicates how frequently each type of defect occurs is a ________. A) control chart B) Pareto diagram C) scatter diagram D) fishbone diagram Answer: B

Diff: 2

Objective: 2

AACSB: Analytical thinking

7) An important difference between financial measures of quality and nonfinancial measures of quality is that ________.

A) financial measures of quality tend to be useful indicators of future long-term performance, while nonfinancial measures have more of a short-term focus

B) nonfinancial measures of quality tend to be useful indicators of future long-term performance, while financial measures of quality have more of a short-term focus

C) nonfinancial measures are generally too subjective to have any long-term value, while financial measures are too objective for taxation purposes

D) nonfinancial measures are generally too subjective to have any short-term value, while financial measures are too objective to have medium-term value Answer: B

Diff: 3

Objective: 2

AACSB: Analytical thinking

8) Examples of nonfinancial measures of quality include the ________. A) inspection costs incurred

B) number of customer complaints C) design engineering costs D) quality training costs Answer: B

Diff: 2

Objective: 2

AACSB: Application of knowledge

9) Cause-and-effect diagrams are used in quality management systems to ________. A) identify and respond to potential reasons of failure B) indicate how frequently each type of failure occurs

C) distinguish random from nonrandom variations in an operating process

D) evaluate the tradeoffs among prevention costs, appraisal costs, and failure costs Answer: A

Diff: 2

Objective: 2

AACSB: Application of knowledge

10) A tool that distinguishes random from nonrandom variations in an operating process is a ________. A) control chart B) Pareto diagram

C) cause-and-effect diagram D) time-series graphs Answer: A

Diff: 2

Objective: 2

AACSB: Analytical thinking

11) When considering customer needs and wants, only financial measures can be used, since they are easily measured. Answer: FALSE

Explanation: When considering customer needs and wants, both financial as well as nonfinancial measures can be used.

Diff: 1

Objective: 2

AACSB: Analytical thinking

12) An example of a financial measure of customer satisfaction would be the percentage of products that fail soon after delivery. Answer: FALSE

Explanation: Products that fail soon after delivery are an example of nonfinancial measure of customer satisfaction.

Diff: 2

Objective: 2

AACSB: Application of knowledge

13) An on-time delivery rate is considered a nonfinancial measure of customer satisfaction. Answer: TRUE

Diff: 2

Objective: 2

AACSB: Application of knowledge

14) A control chart identifies potential causes of failures or defects. Answer: FALSE

Explanation: A cause and effect chart identifies potential causes of failures or defects.

Diff: 2

Objective: 2

AACSB: Analytical thinking

15) When using a control chart, the observations outside the upper and lower control limits are ordinarily regarded as nonrandom and worth investigating. Answer: TRUE

Diff: 2

Objective: 2

AACSB: Analytical thinking

16) The implication of controlling a process at a Six Sigma level is that the process produces only 3.4 defects per million products produced. Answer: TRUE

Diff: 2

Objective: 2

AACSB: Application of knowledge

17) A Pareto diagram is usually in a bar-chart format, that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent. Answer: TRUE

Diff: 1

Objective: 2

AACSB: Analytical thinking

18) Six Sigma emphasizes incremental rather than dramatic or disruptive innovation. Answer: TRUE

Diff: 2

Objective: 2

AACSB: Analytical thinking

19) Percentage of reworked products is an example of a nonfinancial measure of internal business-process quality.

Answer: TRUE

Diff: 2

Objective: 2

AACSB: Application of knowledge

20) Discuss the methods used to identify quality problems. Answer:

1. A control chart is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time. Each observation is plotted relative to specified ranges that represent the limits within which observations are expected to fall. Observations that fall outside the control limits are regarded as nonrandom and worth investigating.

2. A Pareto diagram indicates how frequently each type of failure (defect) occurs. Observations outside control limits serve as inputs for Pareto diagrams.

3. A cause-and-effect diagram helps to identify potential causes of failures or defects. The\the diagram represents the problem being examined. The large \off the backbone represent the main categories of potential causes of failure.

Diff: 2

Objective: 2

AACSB: Analytical thinking

21) 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. Answer: Financial measures of quality are quantifiable. The business can calculate the costs of setting up quality control systems, the costs of noncompliance with quality in terms of the internal and external costs (rework, warranty costs, etc.), and estimate the revenues lost as a result of quality problems.

Nonfinancial measures of quality are useful indicators of future long-run performance. They are helpful in revealing future needs and preferences of customers and in indicating the specific areas that need improvement.

The use of one measure does not preclude the use of the other. Financial measures tend to be short term in nature (what is happening now). Nonfinancial measures tend to be long term and are useful in terms of estimating trends.

Financial performance measures are more readily available than nonfinancial measures, but they are no more important to the overall goals of the organization. By considering nonfinancial measures, the organization can improve operational control. Superior financial performance usually follows from superior nonfinancial performance.

Diff: 2

Objective: 2

AACSB: Analytical thinking

22) Komerica Corp is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For 2015, it has budgeted

$1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000.

Product Testing has proposed to management a change in the 2015 budget for a new method of testing products. If management decides to implement the new method, $2 per unit of appraisal costs will be saved, up to a level of 150,000 tests. No additional savings are expected past the 150,000 level. The new method involves $95,000 in training costs and $65,000 in yearly testing supplies.

Traditionally, 5% of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories.

Required:

a. What is the adjusted budget for appraisal costs, assuming the new method is implemented and 800,000 units are tested during the manufacturing process in 2015?

b. How much do internal failure costs change, assuming 500,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40%?

c. What would be the change in the external failure budget, assuming external failures are reduced by 60% and the same facts as in part (b)? Answer: a. Current Budget $ 800,000 Additions: Training $95,000 Additions: Supplies 65,000 160,000 Savings: 150,000 × $2 (300,000) Adjusted budget $ 660,000 b. Current budget $100 × 0.05 × 500,000 = $2,500,000 Savings rate × 0.40 Net savings (reduction in internal failure costs) $ 1,000,000 c. Current budget $120 × 0.01 × 500,000 = $600,000 Savings rate × 0.60 Net savings (reduction in external failure costs) $ 360,000 Diff: 3 Objective: 2

AACSB: Application of knowledge

23) Northern Corp 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, all were blaming each other for the decline. After much discussion and presenting 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? Answer: The causes may be the lack of customer satisfaction with sales staff (poor sales skills), delivery problems (delayed deliveries), accounting problems (poor billing and collection procedures), or poor returns and allowance policies.

The causes may be detected by comparing nonfinancial measures of the company with those found in the industry. These might include measures of the number of incorrect shipments or not on time; the number of customer complaints about certain areas (billing, shipping, etc.); response time to customer complaints; or a questionnaire about why former customers quit buying from the company.

Diff: 2

Objective: 2

AACSB: Application of knowledge

24) 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? Answer: The manager might begin by identifying \the methods of identifying quality problems. Statistical quality control helps to distinguish between random variation and nonrandom variation. A control chart of observations usually accompanies this. Another method is the use of a Pareto diagram. This indicates how frequently each type of failure occurs. Also, cause-and-effect diagrams help to identify potential causes of failure. A fishbone diagram is often used here to identify multiple causes of failure. Quality of design could potentially be the biggest problem.

Diff: 2

Objective: 2

AACSB: Application of knowledge

25) What are control charts and how can inferences be drawn from them?

Answer: A control chart is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time. These charts might indicate when a process is out of control by comparing observations to statistically determined upper and lower level control limits.

Each observation is plotted relative to specified ranges that represents the limits within which observations are expected to fall. Observations that fall outside the control limits are regarded as nonrandom and worth investigating.

Diff: 2

Objective: 2

AACSB: Application of knowledge

26) Discuss the means by which a company goes about evaluating and installing a new quality improvement program. Answer:

1. The managers will have previously identified the quality problems by using analytical tools such as control charts, pareto diagrams, and cause and effect diagrams. These tools analyze quality problems and help in improving quality.

2. The mangers will then develop various solution options for improvement and project how total costs and total revenues for the company will change under each alternative solution. Once having done this analysis, they will select and implement the optimal solution.

3. The managers will then establish and implement nonfinancial measures of internal business process quality in order to assure the ongoing success of the solution that has been put in place. These measures include percentage of defective products, percentage of reworked products, and others. Improving these measures will lead to greater customer satisfaction, lower costs of quality, and better financial performance.

4. The managers will then establish and implement measures of learning and growth perspective for quality improvements. These include such measures as employee turnover, employee training, and others. This will encourage a continual focus on quality within the corporation.

Diff: 3

Objective: 2

AACSB: Analytical thinking

Objective 19.3

1) Managers identify the relevant costs and benefits for each solution by focusing on ________. A) the alternative solution that will derive maximum customer satisfaction

B) how total costs and total revenues will change under each alternative solution C) how the employees of a company would be able to implement a change D) how long it will take for the improved program to be fully functional Answer: B

Diff: 2

Objective: 3

AACSB: Analytical thinking

Answer the following questions using the information below:

Strykerz Corp expects to spend $800,000 in 2015 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,000 in fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves $140,000 in training costs and an additional $150,000 in annual equipment rental.

Internal failure costs average $160 per failed unit of finished goods. During 2014, 5% of all completed items had to be reworked. External failure costs average $400 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.

2) What is the net effect on appraisal costs for 2015, assuming the new receiving method is implemented and that 800,000 material units are received? A) $120,000 increase B) $170,000 decrease C) $190,000 decrease D) $400,000 increase Answer: B

Diff: 2

Objective: 3

AACSB: Application of knowledge

3) What would be the change in the external failure budget, if 600,000 units are used and assuming external failures are reduced by 10%. A) $40,000 increase B) $250,000 decrease C) $240,000 decrease D) $320,000 decrease Answer: C

Explanation: C)

External failure costs [(600,000) × 0.01 × $400 $2,400,000 10% reduction from new method × 0.10 Savings $ 240,000 Diff: 3

Objective: 3

AACSB: Application of knowledge

Answer the following questions using the information below:

LaCrosse Products has a budget of $900,000 in 2015 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,000 in variable costs. The new method will require $40,000 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 150,000 units.

Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 3% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories.

4) What is the net change in the budget for prevention costs if the procedures are automated in 2015? Will management agree with the changes? A) $60,000 decrease, yes B) $60,000 increase, yes C) $140,000 increase, no D) $80,000 decrease, yes Answer: B

Explanation: B) New costs: Training $40,000 New equipment 100,000 $140,000 Savings

Variable costs (80,000)

Net increase in budget $ 60,000 Diff: 3

Objective: 3

AACSB: Application of knowledge

5) How much will appraisal costs change assuming the new prevention methods reduce material failures by 40% in the appraisal phase? A) $140,000 decrease B) $60,000 increase C) $50,000 decrease D) $22,500 decrease Answer: C

Explanation: C) Savings in appraisal costs is $50,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

6) How much will internal failure costs change if the internal product failures are reduced by 1/3 with the new procedures? A) $22,500 decrease B) $67,500 decrease C) $500,000 decrease D) $750,000 decrease Answer: A

Explanation: A)

Internal failure rate (150,000 × 0.03) 4,500 Cost per unit × $15 Total $67,500 Savings rate × 1/3 Savings $22,500 Diff: 2

Objective: 3

AACSB: Application of knowledge

7) How much do external failure costs change if all changes are as anticipated with the new prevention procedures? Assume all units produced are sold and there are no ending inventories. A) $121,500 decrease B) $121,500 increase C) $243,000 decrease

D) None of these answers is correct. Answer: A

Explanation: A)

External failure costs (150,000 × 0.03 × $54)= $243,000 Savings rate × 0.50 Savings $121,500 Diff: 3

Objective: 3

AACSB: Application of knowledge

8) Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? A) $140,000 B) $(22,500) C) $(134,000) D) $(121,500) Answer: C

Explanation: C) Training Costs $40,000 Equipment Costs 100,000 140,000

Savings

Prevention $ (80,000) Appraisal (50,000) Internal failure costs (22,500) External failure costs (121,500) (274,000) Net Savings $( 134,000) Diff: 3

Objective: 3

AACSB: Application of knowledge

Answer the following questions using the information below:

Cysco Corp has a budget of $1,200,000 in 2015 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $100,000 in variable costs. The new method will require $50,000 in training costs and $140,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 200,000 units.

Appraisal costs for the year are budgeted at $500,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $30 per failed unit of finished goods. The internal failure rate is expected to be 5% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $50 per failed unit. The

company's average external failures average 2.5% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories.

9) What is the net change in the budget of prevention costs if the procedures are automated in 2015? Will management agree with the changes? A) $100,000 decrease, yes B) $90,000 decrease, yes C) $100,000 increase, no D) $90,000 increase, yes Answer: D

Explanation: D) New costs: Training $ 50,000 New equipment 140,000 $190,000 Savings (100,000) Net increase in budget $ 90,000 Diff: 2

Objective: 3

AACSB: Application of knowledge

10) How much will appraisal costs change assuming that the new prevention methods reduce material failures by 30% in the appraisal phase? A) $150,000 decrease B) $229,000 decrease C) $50,000 increase D) $50,000 decrease Answer: D

Explanation: D) The new prevention procedures will save appraisal costs of $50,000.

Diff: 2

Objective: 3

AACSB: Application of knowledge

11) How much will internal failure costs change if the internal product failures are reduced by 40% with the new procedures? A) $138,000 decrease B) $126,000 decrease C) $120,000 decrease D) $84,000 increase Answer: C

Explanation: C)

Internal failure rate (200,000 × 0.05) 10,000 Cost per unit × $30 Total $300,000 Savings rate × 0.40 Savings $120,000 Diff: 3

Objective: 3

AACSB: Application of knowledge

12) How much do external failure costs change if all the changes are as the new prevention procedures anticipated? Assume all units produced are sold and there are no ending inventories. A) $126,000 decrease B) $150,000 decrease C) $100,000 decrease D) $122,400 decrease Answer: B

Diff: 3

Objective: 3

AACSB: Application of knowledge

13) Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? A) $185,200 B) $(230,000) C) $(234,000) D) $(250,000) Answer: B

Explanation: B)

Prevention changes, net $ 90,000 Appraisal changes, net (50,000) Internal failure changes, net (120,000) External failure changes, net (150,000) Net of all changes $ (230,000) Diff: 3

Objective: 3

AACSB: Application of knowledge

14) Relevant-cost and relevant-revenue analysis uses the allocated costs as the base for calculating the costs of a quality improvement program. Answer: FALSE

Explanation: Allocated costs are usually ignored in calculating the costs of a quality improvement program.

Diff: 2

Objective: 3

AACSB: Analytical thinking

15) Strykerz Corp expects to spend $800,000 in 2015 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,000 in fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves $140,000 in training costs and an additional $150,000 in annual equipment rental.

How much will external failure costs change assuming 800,000 units of materials are received and that product failures with customers are cut in half with the new receiving method? A) $20,000 increase B) $400,000 decrease C) $640,000 decrease D) $800,000 decrease Answer: B

Explanation: B)

External failure ((800,000/4) × 1% × $400) $800,000 Failure reduction of 50% × 0.50 Savings $400,000 Diff: 3

Objective: 3

AACSB: Application of knowledge

16) In successful quality programs, companies decrease costs of quality and, in particular, internal and external failure costs as a percentage of revenues. Answer: TRUE

Diff: 2

Objective: 3

AACSB: Analytical thinking

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

Diff: 2

Objective: 3

AACSB: Analytical thinking

18) COQ reports provide more insight about quality improvements and allow managers to compare trends over time. Answer: TRUE

Diff: 2

Objective: 3

AACSB: Analytical thinking

19) Cost of quality financial measures will usually deteriorate when nonfinancial measures of quality are emphasized and improved. Answer: FALSE

Explanation: Financial cost of quality measures and nonfinancial measures complement each other.

Diff: 2

Objective: 3

AACSB: Analytical thinking

20) Venlaz Corp makes small motorcycles. The monthly demand ranges from 80 to 100 motorcycles. The average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle takes approximately 1.5 hours.

If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter will take 1 hour to make. To offset approaching production capacity, expanding the assembly line is possible. This will decrease manufacturing time for all products by 20%. However, this will increase the costs of cycles from $400 to $500 and scooters from $200 to $240. The change will also cause increases in prices from $700 to $750 for cycles and from $450 to $500 for scooters.

Required:

a. What is the average waiting time for cycles if they are the only item manufactured?

b. What are the average waiting times if both cycles and scooters are produced and the assembly line is not enlarged?

c. What are the average waiting times if both cycles and scooters are produced and the assembly line is enlarged?

d. What is the expected monthly margin without scooters if the company sells all 92 cycles it manufactures?

e. What are the expected monthly contribution margins if scooters are made with the current assembly line and with the new assembly line? Assume average sales and that sales equal production.

f. What action do you recommend?

Answer:

a. Waiting time = [92 × (1.5)2] / {[2 × [300 hr. a month - (92 × 1.5)]} = 0.639 hours

b. WT = (92 × (1.5)2) + (20 × 1) / {2 × [300 - (92 × 1.5) - (20 × 1)]} = 227/284 = 0.799 hours

c. WT = (92 × (1.2)2) + (20 × (0.8)2) / {2 × [300 - (92 × 1.2) - (20 × 0.8)]} = 145.28/347.2 = 0.418 hours

d. Expected monthly margin without scooters: Motorcycle sales (92 × $700) $64,400 Manufacturing costs (92 × $400) 36,800 Expected margin $27,600 e. Without changing assembly line: Motorcycle sales (92 × $700) $64,400 Scooter sales (20 × $450) 9,000 Total expected sales 73,400 Manufacturing costs: Motorcycles (92 × $400) $36,800 Scooters (20 × $200) 4,000 40,800 Expected margin $32,600 With new assembly line: Motorcycle sales (92 × $750) $69,000 Scooter sales (20 × $500) 10,000 Total expected sales 79,000 Manufacturing costs: Motorcycles (92 × $500) $46,000 Scooters (20 × $240) 4,800 50,800 Expected margin $28,200 f. Unless there are critical customer relation problems with a slower response time, the scooters should be added without changing the assembly line. The expected margin is $4,400 higher without the new assembly line ($32,600 - $28,200).

Diff: 3

Objective: 3

AACSB: Application of knowledge

Objective 19.4

1) Which of the following is an advantage of COQ measures?

A) They help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs.

B) They detect and provide immediate short-run feedback on whether quality-improvement efforts are succeeding.

C) They forecast customer satisfaction and employee satisfaction, which are useful indicators of long-run performance.

D) They direct attention to financial processes that help managers identify the precise problem areas that need improvement. Answer: A

Diff: 3

Objective: 4

AACSB: Analytical thinking

2) Which of the following is an advantage of nonfinancial measures of quality?

A) They help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs.

B) They detect and provide immediate short-run feedback on whether quality-improvement efforts are succeeding.

C) They focus managers' attention on how poor quality affects operating income.

D) They direct attention to financial processes that help managers identify the precise problem areas that need improvement. Answer: B

Diff: 3

Objective: 4

AACSB: Analytical thinking

3) Which of the following true of nonfinancial measures of quality?

A) They direct attention to financial processes that help managers identify the precise problem areas that need improvement.

B) They focus managers' attention on how poor quality affects operating income.

C) They assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction.

D) They provide immediate short-run feedback on whether quality-improvement efforts are succeeding. Answer: D

Diff: 2

Objective: 4

AACSB: Analytical thinking

4) An advantage of nonfinancial measures of quality include that they ________. A) focus managers' attention on how poor quality affects operating income

B) assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction

C) are useful indicators of future long-run performance D) use certain statistical measures to justify their data Answer: C

Diff: 2

Objective: 4

AACSB: Analytical thinking

5) Which of the following is true of COQ measures?

A) They forecast customer satisfaction and employee satisfaction, which are useful indicators of long-run performance.

B) They focus managers' attention on how poor quality affects operating income.

C) They direct attention to financial processes that help managers identify the precise problem areas that need improvement.

D) They provide immediate short-run feedback on whether quality-improvement efforts are succeeding. Answer: B

Diff: 2

Objective: 4

AACSB: Analytical thinking

6) Without financial quality measures, ________.

A) customer satisfaction and employee satisfaction cannot be measured

B) the short-run effectiveness of nonfinancial quality measures is questionable C) cost-benefit analysis is not possible

D) quality problems might not be identified until it is too late Answer: C

Diff: 3

Objective: 4

AACSB: Analytical thinking

7) Without nonfinancial quality measures, ________. A) the operating income cannot be improved

B) the short-run effectiveness of financial quality measures is questionable C) the precise problem areas that need improvement cannot be identified D) quality problems might not be identified until it is too late Answer: D

Diff: 3

Objective: 4

AACSB: Analytical thinking

8) COQ measures such as measures of customer satisfaction and employee satisfaction are useful indicators of long-run performance. Answer: FALSE

Explanation: Nonfinancial measures such as measures of customer satisfaction and employee satisfaction are useful indicators of long-run performance.

Diff: 1

Objective: 4

AACSB: Analytical thinking

9) Total costs of quality help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs. Answer: TRUE

Diff: 1

Objective: 4

AACSB: Analytical thinking

10) Distribution of questionnaires to customers regarding product quality and improving the product on certain key areas based on the inferences drawn from the questionnaires is an example of a nonfinancial measure of quality. Answer: TRUE

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 19.5

1) The amount of time from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer is referred to as ________. A) manufacturing lead time B) delivery time

C) customer-response time D) a time driver Answer: C

Diff: 2

Objective: 5

AACSB: Analytical thinking

2) Customer-response time is ________.

A) the amount of time from when an order is ready to start on the production line to when the product or service is delivered to the customer

B) the amount of time it takes to deliver a completed order to a customer

C) the amount of time from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer

D) the amount of time from when an order is ready to start on the production line to when it becomes a finished good Answer: C

Diff: 3

Objective: 5

AACSB: Analytical thinking

3) The amount of time from when an order is ready to start on the production line to when it becomes a finished good is referred to as ________. A) manufacturing time B) time driver

C) customer-response time D) delivery time Answer: A

Diff: 2

Objective: 5

AACSB: Analytical thinking

4) Manufacturing cycle time is ________.

A) the amount of time it takes from when an order is ready to start on the production line to when the product or service is delivered to the customer

B) the amount of time it takes to deliver a completed order to a customer plus its waiting time

C) the amount of time it takes from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer

D) the amount of time it takes from when an order is ready to start on the production line to when it becomes a finished good plus its waiting time Answer: D

Diff: 3

Objective: 5

AACSB: Analytical thinking

5) Which of the following is the mathematical expression for calculating manufacturing cycle efficiency(MCE)?

A) MCE = Manufacturing cycle time ÷ Value-added manufacturing time B) MCE = Manufacturing time ÷ Value-added manufacturing time C) MCE = Value-added manufacturing time ÷ Manufacturing cycle time D) MCE = Value-added manufacturing time ÷ Manufacturing time Answer: C

Diff: 2

Objective: 5

AACSB: Analytical thinking

6) Any factor where a change in the factor causes a change in the speed with which an activity is undertaken is referred to as ________. A) a time driver B) a cost driver

C) manufacturing lead time D) customer-response time Answer: A

Diff: 2

Objective: 5

AACSB: Analytical thinking

7) Which of the following is true of a bottleneck?

A) It occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it.

B) It occurs in an operation when there is excess capacity to complete the work given. C) It is the uncertainty about when customers will order products or services.

D) It is the time taken by a manufacturing department to produce a finished product. Answer: A

Diff: 1

Objective: 5

AACSB: Analytical thinking

8) The time it takes the marketing department to specify to the manufacturing department the exact requirements of the customer's order is referred as ________. A) receipt time B) waiting time C) delivery time

D) manufacturing cycle time Answer: A

Diff: 2

Objective: 5

AACSB: Analytical thinking

9) Customer response time comprises of ________. A) manufacturing cycle time and delivery time only B) receipt time and manufacturing cycle time only

C) receipt time, manufacturing cycle time, and delivery time D) manufacturing time and delivery time only Answer: C

Diff: 2

Objective: 5

AACSB: Analytical thinking

10) The time from which a machine is setup for order till the product becomes a manufactured good is ________.

A) waiting time

B) manufacturing time

C) manufacturing cycle time D) customer-response time Answer: B

Diff: 1

Objective: 5

AACSB: Analytical thinking

11) The time from which a machine setup begins for an order until the product is delivered to the customer is the ________. A) delivery time only

B) manufacturing time plus the waiting time C) manufacturing time plus the delivery time

D) customer-response time minus the receipt time Answer: C

Diff: 1

Objective: 5

AACSB: Analytical thinking

12) Tony placed an order for a customized watch. The customer response time is 36 hours, its receipt time is 8 hours, and manufacturing cycle time is 24 hours. Calculate the delivery time of the product. A) 12 hours B) 4 hours C) 16 hours D) 2 hours Answer: B

Explanation: B) Delivery time = 36 - 8 - 24 = 4 hours.

Diff: 2

Objective: 5

AACSB: Application of knowledge

13) Zenich Corp manufactures laptops. The waiting time is 60 minutes before the start of production and the manufacturing lead time is 150 minutes per laptop. What is its manufacturing cycle efficiency? A) 40% B) 70% C) 60% D) 66.67% Answer: C

Explanation: C) Manufacturing time for value added = 150 - 60 = 90 minutes Manufacturing cycle efficiency = 90 / 150 = 60%

Diff: 2

Objective: 5

AACSB: Application of knowledge

14) Ventaz Corp manufactures keyboards. The manufacturing cycle efficiency is 40%. What is its manufacturing time for value added if the manufacturing lead time is 120 minutes per keyboard? A) 38.50 minutes B) 60.00 minutes C) 48.00 minutes D) 54.00 minutes Answer: C

Explanation: C) Manufacturing time for value added = 40% × 120 = 48 minutes.

Diff: 2

Objective: 5

AACSB: Application of knowledge

15) Ventaz Corp manufactures glasses. The manufacturing cycle efficiency is 70%. What is its waiting time if the manufacturing lead time is 120 minutes per keyboard? A) 38.00 minutes B) 42.00 minutes C) 48.00 minutes D) 36.00 minutes. Answer: D

Diff: 2

Objective: 5

AACSB: Application of knowledge

16) Alex is injured and rushed to Care Hospitals for treatment. He spent 45 minutes at the hospital out of which he filled a form for 15 minutes, stood in the queue for 10 minutes, doctor treated him for 15 minutes, and payment time was 5 minutes. What is the service cycle efficiency for his visit? A) 18.50% B) 11.11% C) 66.67% D) 33.33% Answer: D

Diff: 3

Objective: 5

AACSB: Application of knowledge

17) In the formula for calculating the average waiting time, the squared manufacturing time indicates ________.

A) that the shorter the manufacturing time, the greater the chance that the machine will remain idle in the process

B) that the shorter the manufacturing time, the greater the chance that the machine will be in use when an order arrives

C) the disproportionately large impact the manufacturing time has on the waiting time D) a measure of the unused capacity or cushion Answer: C

Diff: 3

Objective: 5

AACSB: Application of knowledge

18) For a fast-food restaurant, the average waiting time can be formulated as ________. A) B) C) D)

Answer: A

Diff: 3

Objective: 5

AACSB: Application of knowledge

Answer the following questions using the information below:

Ventaz Corp has a variable demand. Historically, its demand has ranged from 30 to 50 windows per day with an average of 40. Alex works eight hours a day, five days a week. Each order is one window and each window takes 11 minutes.

19) What is the average waiting time in minutes? A) 12.00 B) 55.50 C) 60.50 D) 20.00 Answer: C

Diff: 3

Objective: 5

AACSB: Application of knowledge

20) What is the cycle time for an order? A) 11 minutes per window B) 66 minutes per window C) 71.50 minutes per window D) 69.50 minutes per window Answer: C

Explanation: C) Cycle time = waiting time + manufacturing time = 60.50 + 11 = 71.50

Diff: 3

Objective: 5

AACSB: Application of knowledge

21) Alex plans to add doors to its product line and anticipates that they will average 3 doors per day. Each door takes 10 minutes to install.

What is the average waiting time, in minutes, if Alex continues to be the only worker? A) 237.0 minutes B) 337.0 minutes C) 257.0 minutes D) 720.0 minutes Answer: C

Explanation: C) WT =

Diff: 3

Objective: 5

AACSB: Application of knowledge

= 5,140/20 = 257 minutes

Answer the following questions using the information below:

The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 300 to 500 small tools per day with an average of 400. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 1 minute to retrieve from the bins.

22) What is the average waiting time, in minutes? A) 1.0 B) 1.5 C) 2.5 D) 3.5

Answer: C

Explanation: C) Waiting minutes = [400 × (12)] / [2 × [480 minutes per day - (400 × 1)] = 2.5 minutes

Diff: 3

Objective: 5

AACSB: Application of knowledge

23) What is the cycle time for an order? A) 1 minutes per tool B) 1.5 minutes per tool C) 2.5 minutes per tool D) 3.5 minutes per tool Answer: D

Diff: 3

Objective: 5

AACSB: Application of knowledge

24) Diane has been asked to consider plans to add the retrieval of larger tooling fixtures to her duties. She anticipates that there would be an average of 12 tooling fixtures per day requested. Each tooling fixture would take Diane 4 minutes to retrieve.

What is the average waiting time, in minutes, if Diane continues to be the only worker that would retrieve the small tools as well as the larger tooling fixtures? A) 3.50 minutes B) 7.00 minutes C) 9.25 minutes D) 64.00 minutes Answer: C

Explanation: C) WT =

Diff: 3

Objective: 5

AACSB: Application of knowledge

= 592/64 = 9.25 minutes

25) Two common operational measures of time are customer-response time and on-time performance. Answer: TRUE

Diff: 2

Objective: 5

AACSB: Analytical thinking

26) Customer response time is the time it takes from the time a customer places an order for a product or service to the time the product or service is delivered to the customer. Answer: TRUE

Diff: 2

Objective: 5

AACSB: Analytical thinking

27) Manufacturing lead time is the sum of waiting time and manufacturing time for an order. Answer: TRUE

Diff: 2

Objective: 5

AACSB: Analytical thinking

28) A time driver is any factor that causes a change in the speed of an activity when the factor changes. Answer: TRUE

Diff: 1

Objective: 5

AACSB: Analytical thinking

29) The average waiting time is the average amount of time an order will wait at the company's shipping office before it is sent to the customer. Answer: FALSE

Explanation: The average waiting time is the average amount of time that an order will wait in line before it is set up and processed.

Diff: 2

Objective: 5

AACSB: Analytical thinking

30) Manufacturing Cycle Efficiency (MCE) = Value-added Manufacturing Time divided by Manufacturing Cycle Time. Answer: TRUE

Diff: 2

Objective: 5

AACSB: Analytical thinking

31) Identifying and minimizing the sources of non-value-added manufacturing time increases a firm's responsiveness to its customers and reduces its costs. Answer: TRUE

Diff: 1

Objective: 5

AACSB: Analytical thinking

32) Norton's Convenience store has a variable demand. The daily demand ranges from 270 to 330

customers a day who average purchasing 5 items each. The average daily demand is 300 customers. The convenience store currently operates 12 hours a day. Each order takes approximately 2 minutes.

Required:

a. What is the average customer waiting time, in minutes?

b. What is the cycle time for an order?

c. Norton has decided that the waiting time is too long and has increased the hours the store is open to 15 hours. What is the waiting time now? Answer:

a. Waiting minutes = [300 × (2) 2]/{2 × [720 minutes per day - (300 × 2)]} = 5 minutes

b. Cycle time = waiting time + processing time = 5 + 2 = 7 minutes

c. Waiting minutes = [300 × (2) 2] / {2 × [900 minutes per day - 300 × 2)]} = 2 minutes

Diff: 3

Objective: 5

AACSB: Application of knowledge

33) Brown Laundry has a variable demand. The daily demand ranges from 100 to 140 customers a day with an average of 5 items. The average daily demand is 110 customers. The laundry operates 10 hours a day. Each order takes approximately 5 minutes.

Required:

a. What is the average customer waiting time, in minutes?

b. What is the cycle time for an order?

c. The manager has decided that the waiting time is too long and has increased the workday to 11 hours. What is the waiting time now? Will the customers be any happier? Answer:

a. Waiting minutes = [110 × (5) 2]/{2 × [600 minutes per day - (110 × 5)]} = 27.5 minutes

b. Cycle time = waiting time + processing time = 27.5 + 5 = 32.5 minutes

c. Waiting minutes = [110 × (5) 2] / {2 × [660 minutes per day - (110 × 5)]} = 12.5 minutes

The customers are probably not much happier unless they change the time when they stop by the laundry. If the customers now fill the 11-hour day, the new reduced waiting time will be a definite improvement.

Diff: 2

Objective: 5

AACSB: Application of knowledge

34) Acme Janitor Service has always taken pride in the fact that it had one of the highest customer

response times in the home cleaning service industry. However, as the products manufactured for this industry have become more complex, the company's customer response time has declined.

Required:

Why do you think that response time declined if all other quality factors have remained the same? Answer: If quality production was one of the other control factors, and the products became more

complex, it probably takes more time to inspect and verify the quality of the finished products. Therefore, to maintain the same level of quality, additional time had to be put into the product cycle.

Diff: 2

Objective: 5

AACSB: Application of knowledge

Objective 19.6

1) Which of the following reduces manufacturing cycle times and delays? A) increasing the capacity of a bottleneck resource

B) selling of an existing equipment to save up on depreciation costs C) increasing the time it takes for setups and processing D) outsourcing the job to a third party Answer: A

Diff: 2

Objective: 6

AACSB: Application of knowledge

2) Inventory carrying costs equal the ________.

A) opportunity costs of the investment tied up in inventory and the cost of manufacturing of goods B) costs of storage only

C) opportunity costs of the investment tied up in inventory and the relevant costs of storage D) historical costs and the relevant costs of storage Answer: C

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) Which of the following is a storage cost? A) labor cost B) deterioration C) direct material D) overhead cost Answer: B

Diff: 2

Objective: 6

AACSB: Application of knowledge

4) When manufacturing cycle increases, ________. A) sunk costs will decrease

B) opportunity costs will increase C) opportunity costs will decrease

D) inventory carrying costs will increase Answer: D

Diff: 2

Objective: 6

AACSB: Application of knowledge

5) Longer manufacturing cycle times results in ________. A) lower revenues and higher inventory carrying costs B) higher opportunity costs and low profit margins C) lower opportunity costs and high profit margins D) higher revenues and lower inventory carrying costs Answer: A

Diff: 2

Objective: 6

AACSB: Application of knowledge

Answer the following questions using the information below:

Speedy Dress Manufacturing has two workstations, cutting and finishing. The cutting station is limited by the speed of operating the cutting machine. Finishing is limited by the speed of the workers. Finishing normally waits for work from cutting. Each department works an eight-hour day. If cutting begins work two hours earlier than finishing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but also it increases finished units produced each day by 160 units. All units produced can be sold even though the change increases inventory stock by 20% from 400 units. The cost of operating the cutting department two more hours each day is $1,600. The contribution margin of the finished products is $6 each. Inventory carrying costs are $0.40 per unit per day.

6) What is the total production per day if the change is made? A) 6400 units B) 800 units C) 880 units D) 1600 units Answer: B

Explanation: B) Units per hour = 160/2 = 80 units per day Total production = 80 × 10 = 800 units

Diff: 1

Objective: 6

AACSB: Application of knowledge

7) What is the change in the daily contribution margin if the change is made? A) $(608) B) $(634) C) $(672) D) $800 Answer: C

Explanation: C) Units per hour = 160/2 = 80 units per day Total production =80 × 10 = 800 units

Total contribution margin (160 × $6) $ 960 Carrying cost (80 units × $0.40) (32) Increased costs (1,600) Net change in contribution margin $ (672) Diff: 3

Objective: 6

AACSB: Application of knowledge

Answer the following questions using the information below:

Captain Carl's Seascapes produces sea pictures for sale through catalogs. The company has two

workstations, photo production and framing. The photo production station is limited by the speed of operating the photo development machine. Framing is limited by the speed of the employees. Framing normally waits for work from photo production. Each department works an eight-hour day. If Captain Carl's Seascapes adds an earlier half shift so that photo production begins work four hours earlier than framing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but it also increases finished units produced each day by 200 units. All units produced can be sold. The cost of operating the photo production department four more hours each day is $1,250. The contribution margin of the finished products is $10 each.

8) What is the total production per day if the change is made? A) 50 units B) 200 units C) 400 units D) 600 units Answer: D

Explanation: D) Units per hour = 200/4= 50 units per hour Total production = 50 × 12 = 600 units per day

Diff: 1

Objective: 6

AACSB: Application of knowledge

9) What is the change in the daily contribution margin if the change is made? A) $250 B) $750 C) $2,000 D) $800

Answer: B

Diff: 3

Objective: 6

AACSB: Application of knowledge

10) The manufacturing cycle including related delays can be reduced by ________. A) batching similar jobs together for processing B) decreasing the capacity of a bottleneck resource C) not setting up flexible manufacturing systems D) increasing the time for setups and processing Answer: A

Diff: 2

Objective: 6

AACSB: Analytical thinking

11) Manufacturing cycle times affect both revenues and costs. Answer: TRUE

Diff: 1

Objective: 6

AACSB: Analytical thinking

12) Longer manufacturing cycle times increase the inventory carrying costs and decrease revenues. Answer: TRUE

Diff: 2

Objective: 6

AACSB: Application of knowledge

13) Increasing the capacity of a bottleneck resource increases manufacturing cycle times and delays. Answer: FALSE