TOTAL QUALITY

MANAGEMENT

By: -Hakeem–Ur–Rehman

IBIT–PU

T MQQUALITY COSTING MEASUREMENT

& PRODUCTIVITY

QUALITY COST Feigenbaum defined quality costs as:

“Those costs associated with the definition,creation, and control of quality as well as theevaluation and feedback of conformance withquality, reliability, and safety requirements, andthose costs associated with the consequences offailure to meet the requirements both within thefactory and in the hands of customers.”

“QUALITY IS FREE” (Crosby)

COST OF QUALITY

CATEGORIES OF QUALITY COST:– COST OF ACHIEVING GOOD QUALITY– COST OF POOR QUALITY

COST OF ACHIEVING GOOD QUALITY– PREVENTION COSTS

The cost of any action taken to investigate, prevent or reduce therisk of a non-conformity

Include quality planning costs, designing products with qualitycharacteristics, Training Costs, etc.

– APPRAISAL COSTS The costs associated with measuring, checking, or evaluating

products or services to assure conformance to qualityrequirements

Include inspection & Testing Costs, Test Equipment Costs,Operator Costs, etc.

COST OF QUALITY CATEGORIES OF QUALITY COST:

– COST OF ACHIEVING GOOD QUALITY– COST OF POOR QUALITY

COST OF POOR QUALITY– INTERNAL FAILURE COSTS The costs arising within the organization due to non-

conformities or defects include scrap, rework, process failure, downtime, and

price reductions– EXTERNAL FAILURE COSTS The costs arising after delivery of product or service to

the customer due to non-conformities or defects include complaints, returns, warranty claims, liability,

and lost sales

THE 1-10-100 RULE

GOAL OF COST OF QUALITY SYSTEM

TO FACILITATE QUALITY EFFORTS

THAT WILL LEAD TO OPERATING COST

REDUCTION OPPORTUNITIES

STRATEGYDirect attack on Failure Costs to minimize them

Investment in Prevention activities Reduction in Appraisal Costs

MODEL OF OPTIMUM COST OF QUALITY

MEASURING AND REPORTING QUALITY COSTS INDEX NUMBERS

– ratios that measure quality costs against a basevalue

– LABOR INDEX ratio of quality cost to labor hours

– COST INDEX ratio of quality cost to manufacturing cost

– SALES INDEX ratio of quality cost to sales

– PRODUCTION INDEX ratio of quality cost to units of final product

AN EVALUATION OF QUALITY COSTS & QUALITY INDEX NUMBERS

EXAMPLE: The H&S Motor Company small motors (e.g., 3 hp) for usein lawnmowers and garden equipment. The company instituted a qualitymanagement program in 2004 and has recorded the following quality costdata and accounting measures for four years.

YEAR

2004 2005 2006 2007

QUALITY COSTS

Prevention $27,000 41,500 74,600 112,300

Appraisal 155,000 122,500 113,400 107,000

Internal Failure 386,400 469,200 347,800 544,400

External Failure 242,000 196,000 103,500 106,000

TOTAL $810,400 829,200 639,300 869,700

ACCOUNTING MEASURES

Sales $4,360,000 4,450,000 5,050,000 5,190,000

Manufacturing Costs 1,760,000 1,810,000 1,880,000 1,890,000

The company wants to assess its quality–assurance program and developquality index numbers using sales and manufacturing cost bases for thefour–year period.

AN EVALUATION OF QUALITY COSTS & QUALITY INDEX NUMBERS: “EXAMPLE (Cont…)”

Quality Index = [(Total Quality Costs) / Base] X 100

The Index Number for 2004 sales is:– Quality Cost per sale = [(810,400/4,360,000)] X 100 = 18.58%

Year Quality Sales Index

Quality ManufacturingIndex

2004 18.58 46.04

2005 18.63 45.18

2006 12.66 34.00

2007 10.49 28.80

“The H&S Company quality index numbers reflect dramatically improved qualityduring he four – year period”

Quality Costs as a Proportion of both sales & manufacturing costs improvedsignificantly

Quality Index Numbers are useful in showing trends in product quality over timeand reflecting the impact of product quality relative to accounting measures withwhich managers are usually familiar

QUALITY INDEX NUMBERS: “QUESTION”Backwoods American, Inc., produces expensive water-repellent, down-linedparkas. The company implemented a total quality management program in2002. Following are quality related accounting data that have beenaccumulated for the five year period after the program’s start.

YEARS2003 2004 2005 2006 2007

QUALITY COSTS (000s)Prevention $3.2 10.7 28.3 42.6 50.0Appraisal 26.3 29.2 30.6 24.1 19.6Internal Failure 39.1 51.3 48.4 35.9 32.1External Failure 118.6 110.5 105.2 91.3 65.2ACCOUNTING MEASURES (000s)Sales $2,700.6 2,690.1 2,705.3 2,810.2 2,880.7Manufacturing Cost 420.9 423.4 424.7 436.1 435.5

Compute quality–sales indices and quality–cost indices for each of the fiveyears. Is it possible to assess the effectiveness of the company’s qualitymanagement program from these index values?

QUALITY INDEX NUMBERS: “QUESTION”ANSWER:

These index values do not provide much information regardingthe effectiveness of the quality assurance program. They are,however, useful in making comparisons from one period to thenext and in showing trends in product quality over time.

QUALITY MANAGEMENT AND PRODUCTIVITY

Productivity– ratio of output to input

Yield:– is a measure of output used as an indicator of

productivity– Improved quality increases product yieldYield=(total input)(% good units) + (total input)(1-%good

units)(% reworked)

or

Y=(I)(% G)+(I)(1-% G)(% R)

COMPUTING PRODUCT YIELD EXAMPLE:

– The H & S Motor company starts production for a particular type of motor with asteel motor housing. The production process begins with 100 motors each day.The percentage of good motors produced each day average 80% and thepercentage of poor–quality motors that can be reworked is 50%. The companywants to know the daily product yield and the effect on productivity if the dailypercentage of good–quality motors is increased to 90%.

Yield=(total input)(% good units) + (total input)(1-%good units)(% reworked)

Y=(I)(% G)+(I)(1-% G)(% R)

Y = (100)(0.80) + (100)(1 – 0.80)(0.50) = 90 Motors

I f product quality is increased to 90% good motors, the yield w ill be:

Y = (100)(0.90) + (100)(1 – 0.90)(0.50) = 95 Motors

A 10% point increase in quality products results in a 5.5% ((95/ 90 )*100)increase in productivity output.

COMPUTING PRODUCT YIELD “QUESTION”The Colonial House furniture company manufactures two-draw oak filecabinets that are sold unassembled through catalogues. The companyinitiates production of 180 cabinets’ packages each week. The percentage ofgood-quality cabinets averages 83% per week, and percentage of poor-quality cabinets that can be reworked is 60%.

a) Determine the weekly product yield of file cabinets.b) If the company desires a product yield of 174 units per week, what

increase in the percentage of good quality products must results?

PRODUCT COST PER UNIT

YRKIK rd ))(())(( +

=Product Cost

where:Kd = direct manufacturing cost per unitI = inputKr = rework cost per unitR = reworked unitsY = yield

COMPUTING PRODUCT COST PER UNIT EXAMPLE:

– The H & S Motor company has a direct manufacturing cost per unit of $30, andmotors that are of inferior quality can be reworked for $12 per unit. Fromprevious Example, 100 motors are produced daily, 80% (on average) are of goodquality and 20% are defective. Of the defective motors, half can reworked toyield good–quality products. Through its quality management program, thecompany has discovered a problem in its production process that, when corrected(at a minimum cost), will increase the good – quality products to 90%. Thecompany wants to assess the impact on the direct cost per unit of improvementin product quality.

The Original manufacturing cost per motor is:Product Cost

= [($30)(100) + ($12)(10)] / 90 motors = $34.67 per motor

The manufacturing cost per motor with the quality improvement is: Product Cost = [($30)(100) + ($12)(5)] / 95 motors = $32.21 per motor

“The improvement in the production process as a result of the quality management program willresult in a decrease of $2.46 per unit, or [(34.67–32.21)/34.67] X 100 = 7.1%, in directmanufacturing cost per unit as well as a 5.5% increase in product yield (computed in previousexample), with a minimal investment in Labor, plant, or equipment.

YRKIK rd ))(())(( +

=

COMPUTING PRODUCT COST PER UNIT: “QUESTION”

The Omega Shoe Company manufactures a number of different styles ofathletic shoes. Its biggest seller is the X–pacer running shoe. In 2005 Omegaimplemented a quality–management program. The company’s shoeproduction for the past three years and manufacturing costs are as fellows.

YEAR2005 2006 2007

Units Produced (Input) 32,000 34,600 35,500Manufacturing Cost $278,000 291,000 305,000Percent good quality 78% 83% 90%

Only one–quarter of the defective shoes can be reworked, at a cost of $2apiece.Compute the manufacturing cost per good product for each of the three yearsand indicate the annual percentage increase or decrease resulting from thequality management program.

COMPUTING PRODUCT COST PER UNIT: “QUESTION”

ANSWER

COMPUTING PRODUCTYIELD FOR MULTISTAGE

PROCESSES

Y = (I)(%g1)(%g2) … (%gn)

where:I = input of items to the production process that will result in finished productsgi = good-quality, work-in-process products at stage i

COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESS

EXAMPLE:– At the H&S motor company, motors are produced in a four–

stage process. Motors are inspected following each stage,with percentage yields (on average) of good–quality, work inprocess units as follows:

STAGE AVERAGE PERCENTAGE GOOD QUALITY1 0.932 0.953 0.974 0.92

1. The company wants to know the daily product yield for product input of100 units per day.

2. Furthermore, it would like to know how many input units it would have tostart with each day to result in a final daily yield of 100 good – qualityunits.

COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESS

SOLUTION:– Y = (I)(%g1)(%g2)(%g3)(%g4) = (100)(0.93)(0.95)(0.97)(0.92)– Y = 78.8 motors Thus, the production process has a daily good – quality product yield of

78.8 motors.

– To determine the product input that would be required toachieve a product yield of 100 motors, “I” is treated as adecision variable when Y equals 100:

– I = (Y) / (%g1)(%g2)(%g3)(%g4)– I = (100) / (0.93)(0.95)(0.97)(0.92)– I = 126.8 motors

To achieve output of 100 good – quality motors, the production processmust start with approximately 127 motors.

COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESS: “QUESTION”

The Colonial House Furniture Company manufactures four–drawer oak filing cabinets in sixstages. In the first stage, the boards forming the walls of the cabinet are cut; in the secondstage, the front drawer panels are wood-worked; in the third stage, the boards are sanded andfinished; in the fourth stage, the boards are cleaned, stained, and painted with a clear finish; inthe fifth stage, the hardware for pulls, runners, and fittings is installed; and in the final stage,the cabinets are assembled. Inspection occurs at each stage of the process, and the averagepercentage of good quality units are as fellows.

StageAverage

PercentageGood Quality

1 87%2 91%3 94%4 93%5 93%6 96%

The cabinets are produced in weekly production runs with aproduct input for 300 units.a. Determine the weekly product yield of good–quality

cabinets.b. What would weekly product input have to be in order to

achieve a final weekly product yield of 300 cabinets?

QUALITY–PRODUCTIVITY RATIOQPR:

– productivity index that includes productivity andquality costs

– It increases if either processing cost or reworkcosts or both decrease.

– It increases if more good-quality units areproduced relative to total product input(i.e.,number of units that begin the productionprocess)

QPR =(non-defective units)

(input) (processing cost) + (defective units) (reworked cost)

COMPUTING QUALITY & PRODUCTIVITY RATIO EXAMPLE:

– The H&S Motors Company produces small motors at a process cost of$30 per unit. Defective motors can be reworked at a cost of $12 each.The company produces 100 motors per day on average 80% good-quality motors., resulting in 20% defects, 50% of which can be reworkedprior to shipping to customers. The company wants to examine theeffects of:

1. Increase the production rate to 200 motors per day2. Reducing the processing cost to $26 and the rework cost to $103. Increasing, through quality improvement, the product yield of good

quality products to 95%4. The combination 2 & 3

SOLUTION:– QPR for the base case:

QPR = [(80 + 10) / {(100)($30) + (10)($12)}] X 100 QPR = 2.89

QPR =(non-defective units)

(input) (processing cost) + (defective units) (reworked cost)

COMPUTING QUALITY & PRODUCTIVITY RATIO SOLUTION:– Case#1: “Increase input to production capacity of 200 units”

QPR = [(160 + 20) / {(200)($30) + (20)($12)}] X 100 QPR = 2.89

“Increasing production capacity alone has no effect on the QPR”– Case#2: “Reduce processing cost to $26 and rework cost to $10”

QPR = [(80 + 10) / {(100)($26) + (10)($10)}] X 100 QPR = 3.33

“Processing & Rework cost decreases caused the QPR to increase”– Case#3: “Increasing, through quality improvement, the product yield of

good quality products to 95% ” QPR = [(95 + 2.5) / {(100)($30) + (2.5)($12)}] X 100 QPR = 3.22

“Again, QPR increases as product quality improves”– Case#4: “Decrease costs & increase initial good-quality units”

QPR = [(95 + 2.5) / {(100)($26) + (2.5)($10)}] X 100 QPR = 3.71

“The larger increase in the QPR results from decreasing costs &increasing initial good quality products through improved quality”

COMPUTING QUALITY & PRODUCTIVITY RATIO: “QUESTION”

Air–Phone, Inc., manufactures cellular telephones at a process cost of $47 perunit. The company produces an average of 250 phones per week and has ayield of 87% good-quality phones, resulting in 13% defective phones, all ofwhich can be reworked. The cost of reworking a defective telephone is $16.a. Compute the Quality–Productivity Ratio (QPR).b. Compute the QPR if the company increase the production rate to 320

phones per week while reducing the processing cost to $42, reducing therework cost to $12, and increasing the product yield of good–qualitytelephones to 94%.

Questions& Answers

Questions& Answers

QUESTIONS &

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