© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Accounting Principles, 8e Raiborn and Kinney Chapter 17: Implementing Quality Concepts © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives What is quality, and from whose viewpoint should it be evaluated? What is benchmarking, and why do companies engage in it? What constitutes the total quality management philosophy? How is the Baldrige Award related to quality? What are the types of quality costs, and how are those types related? How is cost of quality measured? How are the balanced scorecard and a cost management system used to provide information on quality in an organization? How is quality instilled as part of an organization’s culture? (Appendix) What international quality standards exist?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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  Totality of internal processes that generate a product or service  Customer satisfaction with that product or service

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Quality Control Quality control — all attempts to reduce variability and product defects  Six Sigma  Statistical Process Control

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Characteristics of Product Quality Objective  Performance  Features  Reliability  Conformance  Durability  Serviceability and responsiveness Subjective  Aesthetics  Perceived value Sloan Management Review

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Characteristics of Service Quality  All the characteristics of product quality plus:  Assurance  Tangibles  Empathy

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Evaluating Quality Grade  One of the many quality levels that a product or service has relative to the inclusion or exclusion of characteristics to satisfy customer needs, especially price Value  Meet the highest number of needs at the lowest possible cost (purchase price plus operating, maintenance, and disposal costs) It’s too expensive

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reasons to Benchmark (slide 1 of 2) Increase awareness of the competition Understand competitors’ production and performance methods Identify areas of competitors’ internal strengths and weaknesses Identify external and internal threats and opportunities Justify and accelerate a plan for continuous process improvement and change

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reasons to Benchmark (slide 2 of 2) Create a framework for program and process assessment and evaluation Establish a focus for mission, goals, and objectives Establish performance improvement targets Understand customers’ needs and expectations Encourage creative thinking Identify state-of-the-art business practices and new technologies

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total Quality Management (TQM) Management approach of an organization, centered on quality, based on the participation of all its members and aiming at long-term success through customer satisfaction, and benefits to all members of the organization and to society

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. TQM Tenets Dictate continuous improvement to the internal managerial system (plan, control, make decisions) Require participation by everyone in the organization Focus on improving goods and services from the customer’s point of view Value long-term partnerships with suppliers

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Quality System Moves from after-the-fact inspection to proactive quality assurance Emphasizes  planning for quality in every process and product  prevention  building quality into the process or product Results  ability to set goals and methods for improvements  system for measuring quality  encouragement of teamwork  change from product inspection and defect correction to proactive quality assurance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Malcolm Baldrige National Quality Award Focuses on  Management systems  Processes  Consumer satisfaction  Business results Types of entrants  Business and not- for-profit  Education  Health care Represents Excellence

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Calculating the Total Quality Cost T = K + A + F Total Quality Cost Prevention Cost Appraisal Cost Failure Cost = ++

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Organizational Culture of Quality Committed and consistent top leadership Employees who are eager to meet and exceed customer expectations Work environment that cares about employees and rewards efforts to achieve high quality Empowered employees Job and quality training Pursuit of quality awards

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Questions What is quality? How is benchmarking used to improve quality? What are the different measures of the cost of quality?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Potential Ethical Issues Ignoring acceptable variation limits and therefore accepting defect levels that are excessive Using lower grade raw material and components than specified Using benchmarking to illegally gain information from competitors Discriminating against minority supplies Choosing to ignore internal information about defects and failures Minimizing estimates of internal and external failure costs Not supporting total quality management initiatives in company practices Selling products at low prices and attempting to recover revenue with exorbitant repair charges after warranty time period