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Chapter 8 Implementing Quality Concepts Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney.

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Presentation on theme: "Chapter 8 Implementing Quality Concepts Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney."— Presentation transcript:

1 Chapter 8 Implementing Quality Concepts Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney

2 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

3 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

4 Learning Objectives (3 of 3) Demonstrate how cost management systems provide support for quality initiatives Explain how quality can become a part of an organizations culture

5 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 users perspective –Relates to both performance and value Quality

6 Productivity The quantity of output generated from the amount of input

7 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)

8 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

9 Consumer View of Quality Product or service meets and satisfies all specified needs Quality

10 Characteristics of Product Quality Objective –Performance –Features –Reliability –Conformance –Durability –Serviceability Subjective –Aesthetics –Perceived quality Quality

11 Characteristics of Service Quality Reliability Assurance Tangibles Empathy Responsiveness First Class First Class

12 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 First Class Its too expensive

13 Benchmarking Investigate, compare, evaluate own products, processes, services against competitors or best of breed

14 Benchmarking Results 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

15 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

16 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

17 Product/Service Improvement Identify value-adding customers Identify customer wants –quality –value –good service interaction between customer and organizational employees

18 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

19 Quality Costs Reduce appraisal and prevention costs by increased spending on prevention Improvements in quality often result in –lower total cost –improved productivity Quality

20 The Quality Goal Meet the purchasers stated or implied quality needs Provide confidence that quality level is achieved and sustained –to providers management –to customer Quality

21 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

22 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

23 Calculating Lost Profits Profit Lost by Selling Units as Defects Total Defective Units Number of Units Reworked Profit for Good Unit Profit for Defective Unit = Z = (D - Y) (P 1 - P 2 ) X

24 Calculating Internal Costs of Failure Rework Cost Number of Units Reworked Cost to Rework Defective Unit = X R = (Y)(r)

25 Calculating External Costs of Failure Cost of Processing Customer Returns Number of Defective Units Returned Cost of a Return = X W = (D r )(w)

26 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

27 Calculating the Total Quality Cost T = K + A + F Total Quality Cost Prevention Cost Appraisal Cost Failure Cost = ++

28 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

29 Strategic Cost Management Provides a link from failure cost to prevention cost Continuous monitoring allows changes to reduce/prevent failures Production Failure Feedback

30 Not just doing it well but learning to do it better Exceeding customer expectations Employee Empowerment Creating Customer Value

31 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?

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