This document discusses various topics related to quality, time, and the balanced scorecard including: 1. Defining quality and measuring it using financial, customer, internal, and learning & growth perspectives. 2. Operational measures of time such as customer-response time and on-time performance. Common time drivers like uncertainty in customer orders and limited capacity bottlenecks. 3. Applying the balanced scorecard and time-related measures to quality including financial measures like revenue losses from delays and non-financial measures like customer-response time. The theory of constraints for managing bottleneck operations is also covered.

1. Week 7
Chapter 19 (I)
Balanced Scorecard:
Quality
1

2. Big Picture
2

3. Big Picture
Activity-Based versus Strategic-Based Responsibility Accounting
3
Responsibility
Accounting
Financial-based
centers (Cost,
Revenue, Profit,
Investment)
Strategy-based
Responsibility accounting system translates the
strategy of the organization into operational
objectives and measures
Which one is bottom up/top down?
Activity-based
AB system adds a process perspective to the
financial perspective of the functional-based
responsibility accounting system.

4. 1. Familiarization
2. Learning Objectives
3. Game Objectives
17 Quarters
Highest profit
Diary One-Page
summary of
learning
Chapter
12 14 19
Accounting Customer Internal
Strategy  
Systems
Thinking

Measurement   
4

5. 5
Week 7-8 Learning Outcome Summary
 Introduction
 Quality-Definition
 Quality-Measurement
 Learning objective 1: Explain the four cost categories in a costs-of-
quality program
 Learning objective 2: Develop Nonfinancial measures and methods to
improve quality
 Learning objective 3: Use cost of quality measures to make decisions
 Learning objective 4: Use financial and nonfinancial measures to
evaluate quality
 Time-related Measurement
 Learning objective 5: Describe customer-response time and on-time
performance
 Learning objective 6: Describe why delay occurs and their costs
 Learning objective 7: Use financial and nonfinancial measures of time
 Learning objective 8: Theory of Constraints
Introduction Quality-Definition Quality-Measurement
BSC Time-Related
Measures
Theory of ConstraintsTime-related Measures

6. Competing
on
Quality
6

7. 7
 Define it
 Product quality dimensions
 Design
 Conformance
 Service quality
 Measure it
 Financial
 Customer
 Internal
 Learning and Growth
 Use it
Competing on Quality
Introduction Quality-Definition Quality-Measurement
BSC Time-Related
Measures
Theory of ConstraintsTime-related Measures

8. 8

9. Week 8
Chapter 19 (II)
Balanced Scorecard:
Time
9

10. 10
Week 7-8 Learning Outcome Summary
 Introduction
 Quality-Definition
 Quality-Measurement
 Learning objective 1: Explain the four cost categories in a costs-of-
quality program
 Learning objective 2: Develop Nonfinancial measures and methods to
improve quality
 Learning objective 3: Use cost of quality measures to make decisions
 Learning objective 4: Use financial and nonfinancial measures to
evaluate quality
 Time-related Measurement
 Learning objective 5: Describe customer-response time and on-time
performance
 Learning objective 6: Describe why delay occurs and their costs
 Learning objective 7: Use financial and nonfinancial measures of time
 Learning objective 8: Theory of Constraint
Introduction Quality-Definition Quality-Measurement
BSC Time-Related
Measures
Theory of ConstraintsTime-related Measures

11. 11
What is the Cost of Time?
VF Corporation Example
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

12. 12
Time as a Competitive Element
Factors affecting Cost Management
 Time is the crucial element in all phases of
the _____ chain.
 Decreasing non-__________ time appears
to go hand-in-hand with increasing quality.
Significance – How long does it take to make a car?
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

13. 13
Time as a Competitive Element
Factors affecting Cost Management
 Time is the crucial element in all phases of
the value chain.
 Decreasing non-value-added time appears to
go hand-in-hand with increasing quality.
Significance – How long does it take to make a car?
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

14. 14
Car Manufacturing
 GERMANY: VW aims for 30% reduced manufacturing time on next
Polo
 4 April 2006| Source: just-auto.com editorial team
 Volkswagen engineers are aiming to reduce manufacturing time by
30% on the next Polo (due 2008), to reduce costs, according to auto
motor and sport magazine.
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

15. 15
Car Manufacturing
 How long to make a car?
 10 hours
 15 hours
 18 hours
 24 hours (One day)
 36 hours
 48 hours (Two days)
 60 hours
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints
LUCY CHOCOLATE FACTORY
https://www.youtube.com/watch?v=8NPzLBSBzPI

16. 16
 Companies view time as a driver of strategy
 Operational measures of time: how quickly firms respond to
customers’ demand for their products and services, and their reliability
in meeting scheduled delivery dates
Time as a Competitive Tool
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints
Learning Outcome 5:
Describe customer-response
time
… time between receipt of
customer order and product
delivery
and on-time performance
… delivery of product at the
time it is scheduled
And why delays occur
…uncertainty about the timing
of customer orders and limited
capacity. (P767)
Learning Outcome 6:
Determine the costs of delays
…lower revenues and higher
inventory carrying costs.(P771)
5

17. 17
Why Quality and Time?
Time based competition
Time Drivers
-Customer demand
(when?)
-Production uncertainty
(bottlenecks)
Activity Bottlenecks
- BSC Time-Related
Measures
- Relevant costs = Direct
materials
- MA1  relevant costs =
future and variable
Measures
-Customer delivery
-Customer Response time
(CRT)
-RT + PT+DT
Managing
Expectations (SCA)
- Marketing
- Promises on delivery
time and service
standards
Action
- Increase capacity
- Outsource
- Marketing
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

18. 18
1. Customer-Response Time – how long it takes from the time a
customer places an order for a product or service to be delivered to
the customer
2. On-Time Performance – delivering a product or service by the
time it was scheduled to be delivered
Two Operational Measures of Time
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

19. Example: Customer-Response Time
19
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

20. Time Driver
20
 Time Driver is any factor in which a change in the factor causes a
change in the speed of an activity
 Two Time Drivers:
 Uncertainty about when customers will order products and services
 Bottlenecks due to limited capacity. A bottleneck occurs in an operation
when the work to be performed approaches or exceeds the capacity
available to do it
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

21. Exercise : Waiting time, banks
• Regal bank has a small branch in Orillia, Canada.
• The counter is staffed by one teller.
• The counter is open for five hours (300 minutes) each day (the operating capacity).
• It takes 5 minute to serve a customer (service time).
• The Orillia branch expects to serve 40 customers each day.
(Note that the number of customers corresponds to the number of orders in the chapter discussion.)
21
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

22. Exercise : Waiting time, banks
1. Using the formula on page 635, calculate how long,
on average, a customer will wait in line before being served.
2. How long, on average, will a customer wait in line if the branch expects to serve 50
customers each day?
3. The bank is considering ways to reduce waiting time. How long will customers have
to wait, on average, if the time to serve a customer is reduced to four minutes and
the bank expects to serve 50 customers each day?
22
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

23. Solutions
=
=
23
1.If the branch expects to receive 40 customers each day and it takes 5
minutes to serve a customer, the average time that a customer will wait in
line before being served is:
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

24. 1.If the branch expects to receive 40 customers each day and it takes 5 minutes
to serve a customer, the average time that a customer will wait in line before
being served is:
Solutions
=
5)](40[3002
](5)[40 2


)200300(2
)2540(


1002
000,1
200
000,1
== = 5 minutes
24
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customeraserve
taken toTime
customersof
numberAverage
openiscounter
timeAvailable
2
customeraserve
taken toTime
customersof
numberAverage
2
=
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

25. Solutions
25
2. If the branch expects to receive 50 customers each day and the time
taken to serve a customer is 5 minutes, the average time that a customer
will wait in line before being served is:
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

26. 2. If the branch expects to receive 50 customers each day and the time
taken to serve a customer is 5 minutes, the average time that a customer
will wait in line before being served is:
)]550(300[2
])5(50[ 2


=
)250300(2
)2550(


502
2550


100
250,1
Solutions
= 12.5 minutes
=
= =
26
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

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customeraserve
taken toTime
customersof
numberAverage
openiscounter
timeAvailable
2
customeraserve
taken toTime
customersof
numberAverage
2

27. Solutions
27
3. If the branch expects to serve 50 customers each day and the time taken
to serve a customer is 4 minutes, the average time that a customer will wait
in line before being served is:
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

28. 3. If the branch expects to serve 50 customers each day and the time taken to
serve a customer is 4 minutes, the average time that a customer will wait in line
before being served is:
= 4 minutes
)]450(300[2
])4(50[ 2


)200300(2
)1650(


1002
1650


=
=
Solutions
28
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

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
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customeraserve
taken toTime
customersof
numberAverage
openiscounter
timeAvailable
2
customeraserve
taken toTime
customersof
numberAverage
2

29. Four Steps in Managing Bottleneck Operations
1. Recognize that the bottleneck operation determines throughput
contribution of the entire system
2. Identify the bottleneck operation by identifying operations with large
quantities of inventory waiting to be worked on
3. Keep the bottleneck operation busy and subordinate all non-bottleneck
operations to the bottleneck operation
4. Take actions to increase the efficiency and capacity of the bottleneck
operation. The outcome is to increase the difference between throughput
contribution and the incremental costs of increasing efficiency and
capacity
29
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures

30. Methods to Relieve Bottlenecks
 Eliminate idle time at the bottleneck operation
 Process only those parts or products that increase throughput
contribution, not parts or products that will remain in finished goods
or spare parts inventories
 Shift products that do not have to be made on the bottleneck
operation to non-bottleneck processes, or to outside processing
facilities
30
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures

31. 31
The Balanced Scorecard and Time-Related Measures
Financial Measures
• Revenue losses or price discounts attributable to delays
• Carrying costs of inventories
• Throughput contribution minus operating costs
Customer Measures
• Customer-response time
• On-time performance
Internal Business Process Measures
• Average manufacturing time for key products
• Idle time at bottleneck operations
• Defective units produced at bottleneck operations
• Average reduction in setup time and processing time at
• bottleneck operations
Learning and Growth Measures
• Employee satisfaction
• Number of employees trained in managing bottleneck operations
Time-related Measures Theory of ConstraintsQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Learning Outcome 5:
Learning Outcome 7:
Use financial and nonfinancial
measures of time…nonfinancial
measures are leading indicators
of future financial effects of
delays (P772)
7

32. 32
 The Theory of Constraints (TOC) describes methods to maximize operating income
when faced with some bottleneck and some non-bottleneck operations
 TOC focuses on a short-run time horizon and assumes that operating costs are
fixed costs
 Throughput Contribution equals revenues minus the direct material cost of the
goods sold
Theory of Constraints and Throughput Contribution
Analysis
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Learning Outcome 8:
Apply the three measures in
the theory of constrains
… throughput contribution,
investments, and operating
costs
8

33. 33
Where does TOC fit into executing strategy?
Time based competition
Time Drivers
-Customer demand
(when?)
-Production uncertainty
(bottlenecks)
Activity Bottlenecks
- BSC Time-Related Measures
- MAII TOC  relevant costs =
Direct materials
- MAI  relevant costs = future
costs and variable costs
Measures
-Customer delivery
-Customer Response time
(CRT)
-RT + PT+DT
Managing
Expectations (SCA)
- Marketing
- Promises on delivery
time and service
standards
Action
- Increase capacity
- Outsource
- Marketing
Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Theory of Constraints

34. Exercise : Theory of constraints, throughput
contribution, relevant costs
The Mayfield Corporation manufactures filing cabinets in two operations:
machining and finishing. It provides the following information.
Each cabinet sells for $72 and has direct material costs of $32 incurred at the start of
the machining operation. Mayfield has no other variable costs. Mayfield can sell
whatever output it produces.
Machining Finishing
Annual capacity 100,000 units 80,000 units
Annual production 80,000 units 80,000 units
Fixed operating costs $640,000 $400,000
(excluding direct materials)
Fixed operating costs per unit produced
($640,000 ÷ 80,000; $400,000 ÷ 80,000) $8 per unit $5 per unit
34
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Price
$72

35. 35
 Which operation is a bottleneck operation
 What is the throughput contribution per unit?
1. $72-$32 = $40 per unit
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Price
$72
Exercise : Theory of constraints, throughput
contribution, relevant costs

36. 1. A new machine (cost $30,000) can increase throughput by 1000 units –
1. What is the benefit?
2. What is the cost?
3. Should Mayfield acquire the machine? Should Mayfield acquire the
machine?
Increase in throughput contribution ($72 – $32)  1,000 $40,000
Incremental costs of the jigs and tools 30,000
Net benefit of investing in jigs and tools $10,000
36
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Price
$72
Exercise : Theory of constraints, throughput
contribution, relevant costs

37. 3. An outside contractor offers to do the finishing operation for 12,000 units at
$10 per unit, double the $5 per unit that it costs Mayfield to do the finishing
in-house. Should Mayfield accept the subcontractor’s offer? Show your
calculations.
37
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Price
$72
Exercise : Theory of constraints, throughput
contribution, relevant costs

38. 38
3. An outside contractor offers to do the finishing operation for 12,000 units at
$10 per unit…
Finishing is a bottleneck operation.
Therefore, getting an outside contractor to produce 12,000 units
will increase throughput contribution.
Increase in throughput contribution ($72 – $32)  12,000 $480,000
Incremental contracting costs $10  12,000 $120,000
Net benefit of contracting 12,000 units of finishing $360,000
Mayfield should contract with an outside contractor to do 12,000 units of finishing at $10 per unit
because the benefit of higher throughput contribution of $480,000 exceeds the cost of $120,000.
The fact that the cost of $10 per unit is double Mayfield's finishing cost of $5 per unit is irrelevant.
Solutions
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures

39. 4. The Hunt Corporation offers to machine 4,000 units at $4 per unit, half the
$8 per unit that it costs Mayfield to do the machining in – house. Should
Mayfield accept Hunt’s offer? Show your calculations.
39
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures
Exercise : Theory of constraints, throughput
contribution, relevant costs

40. 40
4. The Hunt Corporation offers to machine 4,000 units at $4 per unit…
 Operating costs in the Machining Department of $640,000,
 or $8 per unit, are fixed costs. Mayfield will not save any of these
 costs by subcontracting machining of 4,000 units to Hunt Corporation.
 Total costs will be greater by $16,000 ($4 per unit ´ 4,000 units) under the
subcontracting alternative. Machining more filing cabinets will not increase throughput
contribution, which is constrained by the finishing capacity.
 Mayfield should not accept Hunt's offer. The fact that Hunt's costs of machining per
unit are half of what it costs Mayfield in-house is irrelevant.
Solutions
Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition
BSC Time-Related
Measures

41. 41
Summary
 Introduction
 Quality-Definition
 Quality-Measurement
 Learning objective 1: Explain the four cost categories in a costs-of-
quality program
 Learning objective 2: Develop Nonfinancial measures and methods to
improve quality
 Learning objective 3: Use cost of quality measures to make decisions
 Learning objective 4: Use financial and nonfinancial measures to
evaluate quality
 Time-related Measurement
 Learning objective 5: Describe customer-response time and on-time
performance
 Learning objective 6: Describe why delay occurs and their costs
 Learning objective 7: Use financial and nonfinancial measures of time
 Learning objective 8: Theory of Constraints
Introduction Quality-Definition Quality-Measurement
BSC Time-Related
Measures
Theory of ConstraintsTime-related Measures