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Romeo Engine Plant Study

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picotek smartshopper

on 26 March 2013

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Transcript of Romeo Engine Plant Study

Romeo currently adopts the Labour and Overhead reporting system
Variance can only be reduced by decreasing actual costs or increasing their budget
Types of reporting systems:
Labour and Overhead
Standard cost per unit Executive Summary Conclusion Total Quality Management Example 1: Cost Assigning Their innovative cultural strategy, focus on quality and cost reducing methods have placed them at the top of their field
The introduction of the new engine will serve as a challenge for Romeo to keep leading the engine production industry
Our recommendations serve as a way for Romeo to remain successful in the face of this challenge Romeo Engine Plant, the company
Cost and quality management
Team-based environment
Control and feedback systems
Total Quality Management (TQM) Romeo Engine Plant Study By: Nicholle Csongradi, Caroline Fu, Monique Lim, Vivian Liu, Sabaa Notta, Durray Masood, Ilona Streletska, Valerie Wai ACTG2020-T Professor Sandy Qu Main concern: Introduction of the 4 valve aluminum block
Causes underlying issues to be a threat
Tighter controls required Outline of the Analysis 1. The strengths and weaknesses of the Romeo Engine Plant’s Total Quality Management (TQM).
2. Analysis of Romeo Engine Plant’s work team organizations.
3. The management control and feedback systems in place at Romeo Engine Plant and how these systems assist with the implementation of the overall manufacturing strategy.
4. The Labour and Overhead reporting system used in Romeo and how this system assists with the implementation of Romeo’s overall manufacturing strategy.
5. Further strategic improvements to increase chances of success regarding the new 4-valve aluminum block engine. Background: Total Quality Management Example 2: Quality Control Benchmarking Work Team Organizations Background
zero defects philosophy removed
defects are not detected until production at Romeo
Supplier is to pay Romeo $6600 for engine repair when a valve costs $0.05
Defective parts are removed from production and scrap costs are assigned to work teams at Romeo Analysis/Issues
Overcosting work teams
Creating inaccurate appraisals and performance evaluations
Time and effort in production lost (opportunity cost) if defect is discovered late in the production process Alternative 1 Alternative 2 Alternative 3 (Recommendation) undergo inspection before production begin
hiring a group of inspectors - a quality control group

less time and resources would be wasted
higher costs assigned to work teams are avoided
costly and possibly ineffective charge supplier the original item price ($0.05) while charging repair and scrap costs to work teams

Romeo's suppliers are more enticed to make deals with the compay without much financial risk
work teams still over assigned with costs
inaccurate reporting and demotivating teams Assign the scrap costs to the supplier in addition to the repair cost because it is the supplier's responsibility for the defective inputs

Accountability - encourages suppliers to improve and manage own quality control process
Romeo less likely to receive defective supplies
Work teams not overassigned with costs - no distortion in performance reviews
High quality demand and financial penalty proposed may discourage suppliers to work with Romeo Background
Engine Exchange Program
Allows return of engines from assembly plants and dealers
Out of one million produced since 1990, 1500 were returned, but only 10% is actually defective

Providing too much leniancy with which products can be returned
Return process is costly and time consuming
External failure costs Alternative 1 Alternative 2 Dealers should return any defects to assembly plants
If the engine really defective due to Romeo's operations, then it would be returned to Romeo

less time and resources would be wasted
Assembly plants may not check thoroughly Reverse the Engine Exchange Program
Do not allow any returns

Eliminates any potential external failure costs
Trust issues and conflicts with assembly plants, dealers and other external stakeholders may arise Impose standards/requirements for returns
Charge a penalty fee for engines not actually defective
To minimize the number of engines actually defective - set standards similar to ISO9000

Romeo's company standards are effectively communicated
standards sheet/checklist saves Romeo time when identifying problems with engines
Time and resources used will be minimized
Assembly plants and dealers may find the process tedious Promotes positive work environment, uniform policy
Decentralized, flat
work teams with own support staff (engineering, maintenance, administration)
However, decentralization can lead to duplication of activities and inconsistencies with decision making

Implement minor centralizing initiatives
centralized purchasing department
removes duplicate orders
economies of scale Management Control & Feedback Systems Machine Monitoring System (MMS)
Paging system
Maintenance coordinators

For Long term, overall strategy, but 60%-70% deal with machinery problems - employees only solve problems as they come - not proactive
Waste of time and money

Skilled trades people should be trained to find sources of problems to prevent the frequent machinery problems Common vs. Traceable Fixed Costs Example 1: Allocation of Utilities as Traceable Fixed Cost The checkbook system
assigned expenses to teams that are considered fixed costs in other plants (water, power, phone bill etc.)
some costs are plant-wide rather than department-wide

Contribution margin increases when accounting for these costs as fixed instead of variable
Operating income will also increase
Should the fixed costs be traceable or common fixed costs? Alternative 1 Alternative 2 (Recommendation) current method used: traceable costs
should also account for them as common costs
supports operations of more than one segment
eliminate arbitrary allocation of fixed costs - appearing unprofitable
May not help with controlling growth of certain costs allocating these expenses as traceable fixed costs
eliminating a certain segment of a plant limits usage of certain resources - lowering monthly charge
but expenses such as telephone will be running regardless - not treaceable fixed costs
most accurate allocation, better control measures Alternative 3 (Recommendation) Labour and Overhead
Reporting System Labour and Overhead
Reporting System Labour and Overhead
advantages: better understanding of budget, allocate resources, sereves as a benchmark, uncovers potential bottle necks
disadvantages: time consuming and counterproductive
Standard cost per unit
advantages: promotes efficiency, allows managers to focus on other issues, encourages reponsibility accounting
disadvantages: lead morale to suffer, focused on a short term basis, focuses on meeting standards Static budgets
designed for only the planned level of activity
Flexible budgets
provides estimates of what revenues and costs should be for any level of activity within a specific range
As Romeo is undergoing a number of improvements and changes, the flexible buget provides Romeo with more flexibility Budgets Thank you !
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