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I'm Larry Walther, and
this is principlesofaccounting.com, Chapter 19.
And this is our final module in the Job Costing and
Modern Cost Management System chapter.
And here we're going to look at modern management of costs and quality.
These are some concepts we're going to introduce,
some terms you might hear from time to time.
Fascinating areas for in-depth study.
We're just going to look at an introduction to this
particular set of material.
First of all, recognize that technologically advanced systems mean less
time needs to be spent on data capture, and
more time can be devoted to analyzing data and making sound business decisions.
Business success can be driven by a fixation on metrics such as quality,
employee involvement, customer satisfaction, and so forth.
Profit is not necessarily the objective, but
it is the result of focusing on these important business dimensions.
Kaizen is a term you might hear,
it's a Japanese term used to describe a blitz-like approach to study processes and
install efficiency within an organization.
It typically involves front-line employees who have their hands on on a daily basis.
And they're able to provide input on quick fixes and
suggestions related to business process improvement.
Strategic finance, managerial accounting, and engineering teams conduct focus groups
and learn from employees about how to develop solutions to business problems and
improve business efficiencies and processes.
Here's an example.
This is a manufacturing process, and at the start of production,
employees were working on the various goods.
And they processed them, and we got to the end of line one, and we came back around
over here to line two, and we processed it into the final packaging unit.
An employee said we're running into each other as we run our goods down the line,
and that's a long way to travel with our goods.
What if we just turn this around?
What if we start our production and
we reverse the order flow of the second manufacturing line and we drop down and
enter goods into the second, third, and fourth process and flow up to packaging?
We reduce the amount of time in inefficiency of moving goods
back and forth.
Very simple illustration of the point that people that are hands on on a daily
basis can probably be looking around going, you know there are ways to improve
our efficiency and generate cost savings and greater profitability through that.
A lean is another term.
Lean is an environment where waste has been trimmed.
It entails a focus on response time,
continuous improvement, inventory reduction, and
standardization, a place for everything and everything in its place.
So when you're using tooling, you're not, where did I lay this down last?
It's perhaps hanging on a particular spot on a wall that's marked and painted and
outlined to show exactly where that tool needs to be.
So it's just trying to drive in efficiency in the process.
Extensive in-depth studies are conducted to improve efficiency while adding
customer value.
There's truly a focus on customer quality and
customer satisfaction in a lean environment.
Automakers, for example, had at one time many options for a car, so
that each customer spent considerable time picking the options they wanted.
An order sheet was prepared.
And as the car was put through manufacturing, great attention had to be
paid to the fact that this customer wants an electric window and
this customer wants an electric door lock, but not both.
Well, maybe it's cheaper to simply start combining or bundling and saying look,
if you want the LT package, then you're going to get the electric windows, and
electric door locks, and so forth.
By having all products standardized in that grade of product,
we do away with the need for all of the detailed tracking.
It simplifies inventory management, reduces cost, and
probably delivers a better product to the customer at a lower price point.
Just in time is a term you might've heard.
It has to do with minimizing the amount of inventory you carry.
Maintaining raw material inventory entails considerable upfront
investment as well as the potential for damage and obsolescence.
With a just in time system, goods are scheduled to be received,
just as we need them.
It does require a reliable, complete logistics system.
If you don't receive a good that's expected to be delivered on schedule than
the whole production process can come to a halt, which is obviously very costly.
So strong information systems often link manufacturers directly with suppliers
in an automated procurement process in a true just in time inventory system.
Kanban is a Japanese term to signal that a particular inventory item is ready for
replenishment.
It could be as simple as if you have a basket and a 100 items of inventory,
when you reach 10 in stock you may wanna place another order.
And so as you work through, maybe when you reach for
the tenth item, a tag is already in the bin that says, we need to order.
And so go ahead and get the order system going.
Of course, you would probably do that electronically in some fashion, but
it's basically the signal for replenishment of inventory.
Total quality management is a key driver of customer satisfaction and
business success.
It incorporates detailed standards into processes.
The International Organization for
Standardization provides guidelines relating to processes that drive quality.
You may see a business saying that we're ISO certified.
That's what it relates to.
ISO certification is for
companies that have successfully demonstrated the integration of total
quality management standards throughout their entire organization.
Benchmarking is a term or process used where we compare products and
processes to world-class firms.
The best of class, what are they doing?
We wanna try to match that in terms of our results and our metrics.
Six sigma, finally,
is a disciplined approach designed to achieve nearly zero defects.
Sigma is a term that measures deviation from a norm in a statistical context.
Near zero defects would reflect a rate
that shows six standard deviations from the norm.
Defects relate not only to final products but also business processes.
And so as you drive toward a six sigma output, what you're saying is we wanna be
so far out in the tail with our error rate, that it's virtually near zero, or
just two, or three, or six errors per million units produced.
So, a six sigma environment is one that strives for virtual perfection in
all that is done and all that is accomplished, so you'll hear that term.
Defects can be very costly.
The reason we try to avoid them is so we don't have corrective action,
such as rework, warranty work, customer unhappiness, and things of this nature.
You may hear interest in the term black belt.
That's someone who's highly trained in six sigma.
It sounds like a karate terms or something, but that's been borrowed and
applied in the six sigma type environment.
So several companies are very proud of their six sigma record and have tried to
drive themselves to near perfection through these management processes.
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