Standard Costs and the Balanced Scorecard

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Standard Costs and the Balanced Scorecard
Chapter 10
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Standard Costs
Standard Costs are
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Standard Costs
Standard
Amount
DirectMaterial
DirectLabor
ManufacturingOverhead
Type of Product Cost
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Setting Standard Costs

• Accountants, engineers, personnel
  administrators, and production managers combine
  efforts to set standards based on experience and
  expectations.

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Setting Standard Costs
Engineer
ManagerialAccountant
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Setting Standard Costs
Productionmanager
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Setting Standard Costs
I agree. Ideal standards, based on
perfection,are unattainable anddiscourage
mostemployees.
Human ResourcesManager
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Note

• The argument that ideal standards are
  discouraging has been persuasive for many years.
  So normal defects and waste were built into the
  standards.
• In recent years, TQM and other initiatives have
  sought to eliminate all defects and waste.
• Ideal standards, that allow for no waste, have
  become more popular.
• The emphasis is on improvement over time, not
  attaining the ideal standards right now.

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Setting Direct Material Standards
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Setting Direct Labor Standards
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Setting Variable Overhead Standards
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Standard Cost Card Variable Production Cost
A standard cost card for one unit of product
might look like this
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Standards vs. Budgets
Are standards the same as budgets? A budget is
set for total costs.
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Standard Cost Variances
Standard
Cost
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Standard Cost Variances
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Variance Analysis Cycle
Prepare standard cost performance report
Begin
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Standard Cost Variances
Standard Cost Variances
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A General Model for Variance Analysis
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
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A General Model for Variance Analysis
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
Price Variance
Quantity Variance
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A General Model for Variance Analysis
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
Price Variance
Quantity Variance
AQ(AP - SP) SP(AQ
- SQ) AQ Actual Quantity SP
Standard Price AP Actual Price
SQ Standard Quantity
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Standard Costs
Lets use the general model to calculate standard
cost variances for direct material.
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Material VariancesExample

• Glacier Peak Outfitters has the following
  direct material standard for the fiberfill in its
  mountain parka.
• 0.1 kg. of fiberfill per parka at 5.00 per kg.
• Last month 210 kgs of fiberfill were purchased
  and used to make 2,000 parkas. The material cost
  a total of 1,029.

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Material VariancesSummary
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
210 kgs. 210 kgs.
200 kgs.

4.90 per kg. 5.00 per
kg. 5.00 per kg. 1,029
1,050
1,000
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Material VariancesSummary
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
210 kgs. 210 kgs.
200 kgs.

4.90 per kg. 5.00 per
kg. 5.00 per kg. 1,029
1,050
1,000
Price variance21 favorable
Quantity variance50 unfavorable
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Material VariancesSummary
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
210 kgs. 210 kgs.
200 kgs.

4.90 per kg. 5.00 per
kg. 5.00 per kg. 1,029
1,050
1,000
Price variance21 favorable
Quantity variance50 unfavorable
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Note Using the formulas

• Materials price variance
• MPV AQ (AP - SP)
• 210 kgs (4.90/kg - 5.00/kg)
• 210 kgs (-0.10/kg)
• 21 F
• Materials quantity variance
• MQV SP (AQ - SQ)
• 5.00/kg (210 kgs-(0.1 kg/parka? 2,000
  parkas))
• 5.00/kg (210 kgs - 200 kgs)
• 5.00/kg (10 kgs)
• 50 U

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Quick Check ?

• Suppose only 190 kgs of fiberfill were used to
  make 2,000 parkas. What is the materials
  quantity variance? Remember that the standards
  call for 0.1 kg of fiberfill per parka at a cost
  of 5 per kg of fiberfill.
• a. 50 F
• b. 50 U
• c. 100 F
• d. 100 U

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Quick Check ?

• Suppose only 190 kgs of fiberfill were used to
  make 2,000 parkas. What is the materials
  quantity variance? Remember that the standards
  call for 0.1 kg of fiberfill per parka at a cost
  of 5 per kg of fiberfill.
• a. 50 F
• b. 50 U
• c. 100 F
• d. 100 U

MQV SP (AQ - SQ) 5.00/kg (190
kgs-(0.1 kg/parka? 2,000 parkas))
5.00/kg (190 kgs - 200 kgs) 5.00/kg
(-10 kgs) 50 F
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Quick Check ?

• If the material quantity standard specifies
  exactly how much material should be in the final
  product without any wastage, is a favorable (F)
  materials quantity variance a good thing?
• a. Yes
• b. No

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Quick Check ?

• If the material quantity standard specifies
  exactly how much material should be in the final
  product without any wastage, is a favorable (F)
  materials quantity variance a good thing?
• a. Yes
• b. No

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Standard Costs
Lets use the general model to calculate all
standard cost variances, starting withdirect
material.
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Material VariancesExample

• Hanson Inc. has the following direct material
  standard to manufacture one Zippy
• 1.5 pounds per Zippy at 4.00 per pound
• Last week 1,700 pounds of material were
  purchased and used to make 1,000 Zippies. The
  material cost a total of 6,630.

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Quick Check ?

• What is the actual price per poundpaid for
  the material?
• a. 4.00 per pound.
• b. 4.10 per pound.
• c. 3.90 per pound.
• d. 6.63 per pound.

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Quick Check ?

• What is the actual price per poundpaid for
  the material?
• a. 4.00 per pound.
• b. 4.10 per pound.
• c. 3.90 per pound.
• d. 6.63 per pound.

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Quick Check ?

• Hansons material price variance (MPV)for the
  week was
• a. 170 unfavorable.
• b. 170 favorable.
• c. 800 unfavorable.
• d. 800 favorable.

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Quick Check ?

• Hansons material price variance (MPV)for the
  week was
• a. 170 unfavorable.
• b. 170 favorable.
• c. 800 unfavorable.
• d. 800 favorable.

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Quick Check ?

• The standard quantity of material thatshould
  have been used to produce1,000 Zippies is
• a. 1,700 pounds.
• b. 1,500 pounds.
• c. 2,550 pounds.
• d. 2,000 pounds.

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Quick Check ?

• The standard quantity of material thatshould
  have been used to produce1,000 Zippies is
• a. 1,700 pounds.
• b. 1,500 pounds.
• c. 2,550 pounds.
• d. 2,000 pounds.

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Quick Check ?

• Hansons material quantity variance (MQV)for
  the week was
• a. 170 unfavorable.
• b. 170 favorable.
• c. 800 unfavorable.
• d. 800 favorable.

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Quick Check ?

• Hansons material quantity variance (MQV)for
  the week was
• a. 170 unfavorable.
• b. 170 favorable.
• c. 800 unfavorable.
• d. 800 favorable.

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Material VariancesSummary
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
1,700 lbs. 1,700 lbs.
1,500 lbs.

3.90 per lb. 4.00
per lb. 4.00 per lb.
6,630 6,800
6,000
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Material Variances
Hanson purchased and used 1,700 pounds. How are
the variances computed if the amount purchased
differs from the amount used?
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Material VariancesContinued

• Hanson Inc. has the following material standard
  to manufacture one Zippy
• 1.5 pounds per Zippy at 4.00 per pound
• Last week 2,800 pounds of material were
  purchased at a total cost of 10,920, and 1,700
  pounds were used to make 1,000 Zippies.

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Material VariancesContinued
Actual Quantity Actual Quantity
Purchased Purchased

Actual Price Standard Price

2,800 lbs. 2,800 lbs.

3.90 per lb.
4.00 per lb. 10,920
11,200
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Material VariancesContinued
Actual
Quantity
Used Standard Quantity


Standard Price
Standard Price
1,700
lbs. 1,500 lbs.


4.00 per lb. 4.00
per lb.
6,800 6,000
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Isolation of Material Variances
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Responsibility for Material Variances
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Standard Costs
Now lets calculate standard cost variances for
direct labor.
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Note

• Materials variances
• Material price variance
• MPV AQ (AP - SP)
• Material quantity variance
• MQV SP (AQ - SQ)
• Labor variances
• Labor rate variance
• LRV AH (AR - SR)
• Labor efficiency variance
• LEV SR (AH - SH)

Actual hours
Actual rate
Standard rate
Standard hours allowed for the actual good output
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Labor Variances Example
Hanson Inc. has the following direct labor
standard to manufacture one Zippy 1.5 standard
hours per Zippy at 12.00 perdirect labor hour
Last week 1,550 direct labor hours were worked
at a total labor cost of 18,910to make 1,000
Zippies.
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Quick Check ?
What was Hansons actual rate (AR)for labor
for the week? a. 12.20 per hour. b. 12.00 per
hour. c. 11.80 per hour. d. 11.60 per hour.
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Quick Check ?
What was Hansons actual rate (AR)for labor
for the week? a. 12.20 per hour. b. 12.00 per
hour. c. 11.80 per hour. d. 11.60 per hour.
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Quick Check ?
Hansons labor rate variance (LRV) for the
week was a. 310 unfavorable. b. 310
favorable. c. 300 unfavorable. d. 300
favorable.
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Quick Check ?
Hansons labor rate variance (LRV) for the
week was a. 310 unfavorable. b. 310
favorable. c. 300 unfavorable. d. 300
favorable.
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Quick Check ?
The standard hours (SH) of labor thatshould
have been worked to produce1,000 Zippies is a.
1,550 hours. b. 1,500 hours. c. 1,700
hours. d. 1,800 hours.
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Quick Check ?
The standard hours (SH) of labor thatshould
have been worked to produce1,000 Zippies is a.
1,550 hours. b. 1,500 hours. c. 1,700
hours. d. 1,800 hours.
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Quick Check ?
Hansons labor efficiency variance (LEV)for
the week was a. 590 unfavorable. b. 590
favorable. c. 600 unfavorable. d. 600
favorable.
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Quick Check ?
Hansons labor efficiency variance (LEV)for
the week was a. 590 unfavorable. b. 590
favorable. c. 600 unfavorable. d. 600
favorable.
LEV SR(AH - SH) LEV 12.00(1,550 hrs -
1,500 hrs) LEV 600 unfavorable
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Labor VariancesSummary
Actual Hours Actual Hours
Standard Hours

Actual Rate Standard Rate
Standard Rate
1,550 hours 1,550 hours
1,500 hours

12.20 per hour 12.00 per
hour 12.00 per hour 18,910
18,600
18,000
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Labor Rate Variance A Closer Look
Production managers who make work assignmentsare
generally responsible for rate variances.
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Labor Efficiency Variance A Closer Look
UnfavorableEfficiencyVariance
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Responsibility forLabor Variances
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Responsibility forLabor Variances
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Standard Costs
Now lets calculate standard cost variances for
the last of the variable production costs
variable manufacturing overhead.
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Note
Actual hours of the allocation base

• Labor variances
• Labor rate variance
• LRV AH (AR - SR)
• Labor efficiency variance
• LEV SR (AH - SH)
• Variable overhead variances
• Variable overhead spending variance
• VOSV AH (AR - SR)
• Variable overhead efficiency variance
• VOEV SR (AH - SH)

Actual variable overhead rate
Standard variable overhead rate
Standard hours allowed for the actual good output
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Variable ManufacturingOverhead Variances Example
Hanson Inc. has the following variable
manufacturing overhead standard tomanufacture
one Zippy 1.5 standard hours per Zippy at 3.00
perdirect labor hour Last week 1,550 hours
were worked to make 1,000 Zippies, and 5,115 was
spent forvariable manufacturing overhead.
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Quick Check ?
What was Hansons actual rate (AR) for
variable manufacturing overhead rate for the
week? a. 3.00 per hour. b. 3.19 per
hour. c. 3.30 per hour. d. 4.50 per hour.
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Quick Check ?
What was Hansons actual rate (AR) for
variable manufacturing overhead rate for the
week? a. 3.00 per hour. b. 3.19 per
hour. c. 3.30 per hour. d. 4.50 per hour.
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Quick Check ?
Hansons spending variance (VOSV) for variable
manufacturing overhead forthe week was a. 465
unfavorable. b. 400 favorable. c. 335
unfavorable. d. 300 favorable.
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Quick Check ?
Hansons spending variance (VOSV) for variable
manufacturing overhead forthe week was a. 465
unfavorable. b. 400 favorable. c. 335
unfavorable. d. 300 favorable.
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Quick Check ?
Hansons efficiency variance (VOEV) for
variable manufacturing overhead for the week
was a. 435 unfavorable. b. 435
favorable. c. 150 unfavorable. d. 150
favorable.
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Quick Check ?
Hansons efficiency variance (VOEV) for
variable manufacturing overhead for the week
was a. 435 unfavorable. b. 435
favorable. c. 150 unfavorable. d. 150
favorable.
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Variable ManufacturingOverhead Variances
Actual Hours Actual Hours
Standard Hours

Actual Rate Standard Rate
Standard Rate
1,550 hours 1,550 hours
1,500 hours

3.30 per hour 3.00 per
hour 3.00 per hour 5,115
4,650
4,500
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Variable Manufacturing Overhead Variances A
Closer Look
If variable overhead is applied on the basisof
direct labor hours, the labor efficiencyand
variable overhead efficiency varianceswill move
in tandem.
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Variance Analysis and Management by Exception
How do I know which variances to investigate?
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Advantages of Standard Costs
Management byexception
Possible reductionsin production costs
Improved cost control and performanceevaluation
Better Informationfor planning anddecision
making
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Disadvantages ofStandard Costs
Emphasis onnegative mayimpact morale.
Favorable variancesmay bemisinterpreted.
Continuous improvementmay be moreimportant
thanmeeting standards.
Standard costreports maynot be timely.
Emphasizing standardsmay exclude otherimportant
objectives.
Incentives to build inventories.
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The Balanced Scorecard
Management translates its strategy into
performance measures that employees understand
and accept.
Performancemeasures
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The Balanced Scorecard
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The Balanced Scorecard
Learning improvesbusiness processes.
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Benefits of Balance Scorecard

• If implemented well
• Forces management to articulate a coherent
  strategy.
• Strategy is communicated throughout organization.
• Performance measures are more likely to be
  consistent with strategy and actionable.
• Portfolio of measures reduces gaming problems.
• Feedback loop makes strategy dynamic.

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Some Possible Problems

• Cultural/behavioral
• Program fatigue.
• Culture shock/resistance.
• Every existing performance measurehas a
  champion.
• Gaming still possible.

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Delivery Performance Measures
Process Time Inspection Time Move Time
Queue Time
Wait Time
Process time is the only value-added time.
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Delivery Performance Measures
Process Time Inspection Time Move Time
Queue Time
Wait Time
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Quick Check ?

• A TQM team at Narton Corp has recorded the
  following average times for production
• Wait 3.0 days Move 0.5 days
• Inspection 0.4 days Queue 9.3 days
• Process 0.2 days
• What is the throughput time?
• a. 10.4 days
• b. 0.2 days
• c. 4.1 days
• d. 13.4 days

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Quick Check ?

• A TQM team at Narton Corp has recorded the
  following average times for production
• Wait 3.0 days Move 0.5 days
• Inspection 0.4 days Queue 9.3 days
• Process 0.2 days
• What is the throughput time?
• a. 10.4 days
• b. 0.2 days
• c. 4.1 days
• d. 13.4 days

Throughput time Process Inspection Move
Queue 0.2 days 0.4 days 0.5
days 9.3 days 10.4
days
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Quick Check ?

• A TQM team at Narton Corp has recorded the
  following average times for production
• Wait 3.0 days Move 0.5 days
• Inspection 0.4 days Queue 9.3 days
• Process 0.2 days
• What is the MCE?
• a. 50.0
• b. 1.9
• c. 52.0
• d. 5.1

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Quick Check ?

• A TQM team at Narton Corp has recorded the
  following average times for production
• Wait 3.0 days Move 0.5 days
• Inspection 0.4 days Queue 9.3 days
• Process 0.2 days
• What is the MCE?
• a. 50.0
• b. 1.9
• c. 52.0
• d. 5.1

MCE Value-added time Throughput time
Process time Throughput time 0.2
days 10.4 days 1.9
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Quick Check ?

• A TQM team at Narton Corp has recorded the
  following average times for production
• Wait 3.0 days Move 0.5 days
• Inspection 0.4 days Queue 9.3 days
• Process 0.2 days
• What is the delivery cycle time?
• a. 0.5 days
• b. 0.7 days
• c. 13.4 days
• d. 10.4 days

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Quick Check ?
Delivery cycle time Wait time Throughput
time 3.0 days
10.4 days 13.4
days

• A TQM team at Narton Corp has recorded the
  following average times for production
• Wait 3.0 days Move 0.5 days
• Inspection 0.4 days Queue 9.3 days
• Process 0.2 days
• What is the delivery cycle time?
• a. 0.5 days
• b. 0.7 days
• c. 13.4 days
• d. 10.4 days

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End of Chapter 10