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CHAPTER 16:
Quality-Based Production Process Management
(JIT, Backflush Costing, Activity-Based Costing, etc.)
Decision Making – Quality decisions should be made A. Prevention costs are associated with the design,
based on measurements. implementation and maintenance of the TQM
Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
102 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA
UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014
Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!
system. They are planned and incurred before actual D. External failure costs occur when the products or
operation, and can include: services fail to reach quality standards, but are not
Product Requirements – The setting detected until after the customer receives the item.
specifications for incoming materials, These can include:
processes, finished products/services. Repairs – Servicing of returned products or
Quality Planning – Creation of plans for at the customer site.
quality, reliability, operational, production Warranty Claims – Items are replaced or
and inspections. services re-performed under warranty.
Quality Assurance – The creation and Complaints – All work and costs associated
maintenance of the quality system. with dealing with customer’s complaints.
Training – The development, preparation Returns – Transportation, investigation and
and maintenance of processes. handling of returned items.
B. Appraisal costs are associated with the vendors ACTIVITY BASED COSTING SYSTEM
and customers evaluation of purchased materials
and services to ensure they are within specification. ☛BROAD AVERAGING OR “PEANUT-BUTTER
They can include:
COSTING”
Verification – Inspection of incoming
describes a costing approach that uses
material against agreed upon specifications.
broad averages for assigning (or spreading,
Quality Audits – Check that the quality
as in spreading peanut butter) the cost of
system is functioning correctly.
resources uniformly to cost objects when
Vendor Evaluation – Assessment and
the individual products or services, in fact,
approval of vendors.
use those resources in non-uniform ways.
Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
103 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA
UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014
Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!
Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
104 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA
UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014
Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!
4. Customer-level Activities – relate to specific Risk 320, 000 Patients served 1, 000
customers. management
5. Organization-level Activities – carried out The hospital provides service in three broad
regardless of which customers are served, categories. The services are listed below with their
which products are produced, how many volume measures for the activity centers.
batches are run, or how many units are Service Professional Square Number
made. Hours Feet of
Patients
☛STEPS FOR IMPLEMENTING ACTIVITY-BASED Surgery 6, 000 1, 200 200
COSTING: Housing 20, 000 12, 000 500
1. Define activities, activity cost pools, and patients
activity measures. Outpatient 4, 000 1, 800 300
2. Assign overhead costs to activity cost pools. care
3. Calculate activity rates.
4. Assign overhead costs to cost objects using
the activity rates and activity measures. REQUIRED:
5. Prepare management reports. Compute the allocation rates for each activity center
and determine the allocated activity center costs to
the three services provided by the hospital.
COMPREHENSIVE PROBLEM
Caleb Georgina Hospital (CGH) has found itself under SOLUTION:
increasing pressure to be accountable for the Professional Salaries: 900, 000 ÷ 30, 000 =30 per
charges it assesses its patients. Its current pricing hour
system is ad hoc, based on pricing norms for the Building Costs: 450, 000 ÷ 15, 000 =30 per sq. ft.
geographical area, and it only explicitly considers Risk Management: 320, 000 ÷ 1, 000 =320 per
direct costs for surgery, medication, and other patient
treatments. CGH’s controller has suggested that the
hospital try to improve its pricing policies by seeking Surgery (6, 000 × 30) + (1, 200 × 30) + (200 × 320) =
a tighter relationship between costs and pricing. This 280, 000
approach would make prices for services less Housing (20, 000 × 30) + (12, 000 × 30) + (500 ×
arbitrary. As a first step, the controller has 320) = 1, 120, 000
determined that most costs can be assigned to one Outpatient Care: (4, 000 × 30) + (1, 800 × 30) + (300
of three cost pools. The three cost pools follow along × 320) = 270, 000
with the estimated amounts and activity drivers.
Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
105 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA