Cost Management: Issues of Quality ACCT7320, C. Bailey

Quality as a Competitive Weapon TQM a key issue of the 1990’s-Present high costs associated with quality % in many organizations. Baldrige Quality Award ISO 9000 and ISO Conceptual linkage between Quality and Profitability (Exhibit 17.1—see next slide)

17-3 Exhibit 17.1

What is quality? Quality Definitions fitness for use degree to which a product satisfies customer wants conformance to design specifications Conformance Quality; Design Quality Next slide…

Meeting the customer’s needs

Two Aspects of Quality Actual Performance Design Specifications Customer Requirements Quality of Design Failure Conformance Quality Failure

Costs of Quality The cost incurred to prevent, or the costs arising as a result of, a low-quality product. Traditional Categories Prevention Appraisal Internal failure External failure

Prevention Cost …incurred to preclude the production of products/ services that do not conform to specifications. Areas for consideration: Design Engineering Process Engineering Supplier evaluations Preventive equipment maintenance Quality training New materials used to manufacture products

Appraisal Cost …..incurred to detect which of the individual units of products do not conform to specs. Areas for consideration: Inspection Online product manufacturing & process inspection Product testing

Internal failure costs …..incurred on a defective products before it is shipped to customers. Areas for consideration: Spoilage Rework Scrap Breakdown maintenance Manufacturing/process engineering on internal failure Opportunity costs

External failure costs …..incurred on a defective products after it is shipped to customers. Areas for consideration: Customer support Manufacturing/process engineering for external failures Warranty repair costs Liability claims Opportunity costs

Cost of Quality Report

Evaluating Quality Performance Advantages of Costs of Quality Measures Focus attention on how costly poor quality is. Estimate benefits of different quality- improvement programs; setting priorities for cost reduction. Help evaluate trade-offs among prevention and failure costs.

Evaluating Quality Performance, Cont’d. Advantages of Nonfinancial Measures Often easy to quantify and to understand. Direct attention to physical processes Provide immediate feedback on whether efforts have succeeded in improving quality. A balanced scorecard combines financial and nonfinancial measures so management can evaluate trade-offs between areas of improvement.

Cost Of Quality: Traditional View Lowest Quality Point of “enough quality” Total Costs Prevention & Appraisal) Internal & External Failure) Costs Highest Quality

Problems with the Traditional View Accountants do not traditionally measure some important costs Opportunity costs Cost to reduce failure may be lower than thought Deming’s principles

Cost Of Quality: Revised Failure more expensive, P & A Less Costly than believed New point of “enough quality” Total Costs Prevention & Appraisal) Internal & External Failure) Costs Highest Quality Lowest Quality

End of Presentation