The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.
| Decision | Guidelines |
| Four cost categories in a costs-of-quality program are prevention costs (costs incurred to prevent the production of products that do not conform to specifications), appraisal costs (costs incurred to detect which of the individual units of products do not conform to specifications), internal failure costs (costs incurred on defective products before they are shipped to customers), and external failure costs (costs incurred on defective products after they are shipped to customers). |
| Nonfinancial quality measures managers can use include customer satisfaction measures such as the number of customer complaints and percentage of defective units shipped to customers, internal-business-process measures such as the percentage of defective and reworked products, and learning-and-growth measures such as the percentage of employees trained in and empowered to use quality principles. Three methods to identify quality problems and to improve quality are (a) control charts to distinguish random from nonrandom variations in an operating process; (b) Pareto diagrams to indicate how frequently each type of failure occurs; and (c) cause-and-effect diagrams to identify and respond to potential causes of failure. |
| The relevant costs of quality-improvement programs are the expected incremental costs to implement the program. The relevant benefits are the cost savings and the estimated increase in contribution margin from the higher revenues expected from quality improvements. |
| Financial measures help managers evaluate the tradeoffs among prevention costs, appraisal costs, and failure costs. Nonfinancial measures identify problem areas that need improvement and serve as indicators of future financial performance. |
| Customer-response time is how long 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. Delays occur because of (a) uncertainty about when customers will order products or services and (b) bottlenecks due to limited capacity. Bottlenecks are operations at which the work to be performed approaches or exceeds available capacity. |
| Relevant revenues and costs of delays include lower revenues as a result of delays and higher inventory carrying costs. |
| Examples of financial and nonfinancial measures managers can use in the balanced scorecard to evaluate a company’s performance related to time are revenue losses from delays, customer-response time, on-time performance, average manufacturing cycle time, and number of employees trained to manage bottleneck operations. |