Revisiting Traditional Cost Accounting

Quality Improvement Quality Measures As companies adopt new manufacturing practices to achieve TQC, they will need to devise measures to motivate and evaluate their TQC objectives.Traditional cost accounting measures, such as variances on labor, material, and overhead, will not motivate and evaluate a company's performance in achieving quality goals. For example, many operating managers have been motivated by their cost accounting system to increase output to absorb overhead and thereby avoid unfavorable volume variances. This tendency is reinforced by local efficiency measures, such as the ratio of earned hours to total hours, for workers and machines. This measure encourages keeping workers and machines busy, but frequently little attention is paid at the time of production as to whether the units produced meet specifications. As long as aggregate activity the total standard direct labor-hours of units produced) is high enough to absorb, or overrecover period overhead, and worker and machine efficiency measures are high, the manufacturing manager receives good feedback from the traditional cost accounting system. Several companies have found they must shut off the "efficiency" or volume variances computed by their traditional financial accounting systems if they are to motivate quality production. The purchase-price variance is another traditional cost accounting measure that provides disincentives to zero defect performance. Some purchasing managers have shifted to lower-quality suppliers in order to achieve favorable performance on their purchase-price variance measure. Companies committed to a TQC program recognize that suppliers should not be chosen based on quoting the lowest price. Rather, long-term relationships with suppliers have to be forged to reduce the "total cost of ownership" of purchased parts and materials. The total cost of ownership includes not only the actual purchase price but also the cost of scheduling, receiving, inspecting, and using purchased parts and materials. One company categorized its vendors into two categories: • Good Vendors: Deliver on time, right quantity Part requires no incoming inspection Fair price, terms Willing to work together to solve problems • Bad Vendors: Deliver late or early, wrong quantity Part requires incoming inspection Price, terms not acceptable Not willing to work together to solve problems It then announced: All bad vendors have until October to become good vendors. At that time, we will terminate all bad vendors if at all possible. As another example of a dysfunctional cost accounting procedure, standardcost systems, designed to accumulate costs forinancial reporting purposes, estimate normal scrap allowances so that production costs can be spread to the good units produced. Process-costing chapters in traditional cost accounting textbooks provide extensive instruction on how to allocate the "units lost units cost" to the remaining good items. The new manufacturing environment does not want to budget for or allocate the costs of defective items. It demands that we make the costs of defects and yields below 100% more visible so that engineers, operations managers, and workers can attempt to continually reduce the incidence of defective production and low yields. Thus, standards for internal control purposes should be computed based on zero defects and 100% yields, with any deviations flagged as an opportunity for improvement in future periods. Beyond disconnecting several of the dysfunctional measures currently computed and reported by traditional standard-cost systems, new meas-ures, primarily nonfinancial, will need to become part of the periodic reports for motivation, control, and performance measurement.