Chapter 8

Implementing Quality Concepts

Cost AccountingTraditions and Innovations

Barfield, Raiborn, Kinney

Learning Objectives (1 of 3)

• Explain why the emphasis on quality in business is unlikely to decline

• List ways to define and evaluate quality

• Define the characteristics of product quality and service quality

• Explain how benchmarking is used to improve quality

Learning Objectives (2 of 3)

• Describe the role of Total Quality Management

• List the types of quality costs and how these costs are related

• Explain how to measure the costs of quality

• Clarify the need for both a management accounting system and a financial accounting system

Learning Objectives (3 of 3)

• Demonstrate how cost management systems provide support for quality initiatives

• Explain how quality can become a part of an organization’s culture

Quality

• The sum of all of the characteristics of a product or service that influence its ability to meet the stated or implied needs of the person acquiring it – Must be viewed from the user’s perspective– Relates to both performance and value Quality

Productivity

The quantity of output generated from the amount of input

Production View of Quality

• Increase productivity by reducing non-value-added activities– do not store slow-moving inventory

– reduce unnecessary material moves

– reduce unscheduled production interruptions

– increase supplier quality/reduce inspections

• have suppliers inspect before shipping

– reduce the need to reprocess, rework, replace, repair

• fit machinery for mistake-proof operations

– have employees monitor and be responsible for own output (Statistical Process Control)

Statistical Process Control • Analyze where fluctuations occur in

processes

• Use control charts

• SPC charts require workers to respond when there are – occurrences outside the control limits– nonrandom patterns

• Workers can prevent product defects and process malfunctions

Consumer View of Quality

Product or service meets and satisfies all specified needs

Quality

Characteristics of Product Quality• Objective

– Performance– Features– Reliability– Conformance– Durability– Serviceability

• Subjective– Aesthetics– Perceived quality

Quality

Characteristics of Service Quality

Reliability

Assurance

Tangibles

Empathy

Responsiveness

FirstClass

FirstClass

Evaluating Quality

Grade

Ability of product or service to satisfy needs, including price

Value

Meet the highest number of needs at the lowest possible cost

FirstClass

It’s tooexpensive

Benchmarking

Investigate, compare, evaluate

own products, processes, services

against

competitors or “best of breed”

BenchmarkingResults benchmarking• Focus on competitors• Reverse engineering

– Focus on product/service specifications and performance results

• Determines “best in class”

Process benchmarking• Noncompetitor

benchmarking extremely valuable

• “Best- in- (specific characteristic)”– flexible manufacturing– equipment maintenance– worker training– distributions and logistics

Steps in Benchmarking

• Determine area for improvement

• Select characteristic to measure quality

• Identify “best-in-class” companies

• Ask for cooperation from “best-in-class” company

• Collect information• Analyze the “negative

gap”• Make improvements• Strive for continuous

improvement

The Quality System• Moves from after-the-fact inspection to proactive

quality assurance

• Emphasizes – prevention– continuous improvement– building quality into process or product

• Measures quality

• Encourages teamwork and employee involvement

Product/Service Improvement

• Identify value-adding customers

• Identify customer wants– quality– value– “good” service

interaction between customer and organizational employees

Types of Quality Costs

• Cost of Compliance– Preventive costs - prevent product defects– Appraisal costs - monitor and compensate when

prevention fails

• Cost of Noncompliance– Failure costs

• Internal losses - scrap, rework• External losses - warranty work, customer

complaint departments, litigation, product recalls

Quality Costs

• Reduce appraisal and prevention costs by increased spending on prevention

• Improvements in quality often result in– lower total cost– improved productivity

Quality

The Quality Goal

• Meet the purchaser’s stated or implied quality needs

• Provide confidence that quality level is achieved and sustained– to provider’s management– to customer Quality

Malcolm Baldrige National Quality Award

• Focuses on– Management systems– Processes– Consumer satisfaction– Business results

• Types of entrants– Manufacturing– Service– Small business– Education– Health care

Represents Excellence

Measuring the Cost of Quality

• Determine where to spend dollars on quality prevention– Pareto Analysis

• Track the costs of quality– change chart of accounts or coding system

• Develop a quality reporting system

Calculating Lost Profits

Profit Lost by Selling Units as Defects

TotalDefective

Units

Numberof Units

Reworked

Profitfor Good

Unit

Profit forDefective

Unit

=

Z = (D - Y) (P1 - P2 )

X

Calculating Internal Costs of Failure

ReworkCost

Number of Units

Reworked

Cost toRework Defective

Unit

= X

R = (Y)(r)

Calculating External Costs of Failure

Cost ofProcessing CustomerReturns

Number ofDefective Units

Returned

Costof a

Return= X

W = (Dr )(w)

Total Failure Cost

• Profit lost by selling units as defects

• Rework cost

• Cost of processing customer returns

• Cost of warranty work

• Cost of product recalls

• Cost of litigation related to products

• Opportunity cost of lost customers

Calculating the Total Quality Cost

T = K + A + F

Total QualityCost

PreventionCost

AppraisalCost

FailureCost= + +

Strategic Cost Management

• Use of management accounting information to– set and communicate organizational strategies– establish, implement, assess the methods to

accomplish the strategies– assess the achievement of strategies

Includes reporting information on quality goals and objectives

Strategic Cost Management

• Provides a link from failure cost to prevention cost

• Continuous monitoring allows changes to reduce/prevent failures

Production

FailureFeedback

Not just doingit well but

learning to do it better

Exceedingcustomer

expectations

EmployeeEmpowerment

CreatingCustomer

Value

Questions

• What is quality?

• What is benchmarking? How can benchmarking be used to improve quality?

• What are the different ways to measure the costs of quality?