1. COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 1 Quality and Environmental Cost Management

2. 2 Study Objectives 1.Define quality, describe the four types of quality costs, discuss the approaches used for quality cost measurement, and prepare a quality cost report. 2.Explain why quality cost information is needed and how it is used. 3.Describe and prepare three different types of quality performance reports. 4.Explain how environmental costs can be measured and reduced.

3. 3 Costs of Quality Quality-linked activities –Activities performed because poor quality may or does exist –Control activities performed by an organization to prevent or detect poor quality –Failure activities Performed by an organization or its customers In response to poor quality

4. 4 Categories of quality costs –Prevention costs: incurred to prevent poor quality in product or services from being produced –Appraisal costs: Incurred to determine whether products and services are conforming Product acceptance: sample finished goods Process acceptance: sample goods while in process –Internal failure costs: incurred because products or services do not conform; discovered prior to delivery –External failure costs: incurred because products or services do not conform; discovered after delivery Costs of Quality

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7. 7 Quality cost –Observable Available from the accounting records –Hidden Opportunity costs resulting from poor quality Estimating hidden quality costs –The multiplier method –The market research method

8. 8 Assumes that the total failure cost is simply some multiple of measured failure costs: Costs of Quality Multiplier Method If k = 4, and the measured external failure costs are $3 million, then the actual external failure costs are estimated to be $12 million. where k is the multiplier effect

9. 9 Costs of Quality Uses formal market research methods to assess the effect of poor quality on sales and market share. Market research results can be used to project future profit losses attributable to poor quality. Market Research Method Customer surveys and interviews with members of a company’s sales force can provide significant insights into the magnitude of a company’s hidden costs.

10. 10 a Actual sales of $5,000,000. Costs of Quality b $1,000,000 ÷ $5,000,000 = 20%.

11. 11 Costs of Quality

12. 12 Quality Cost Information and Decision Making Strategic Pricing

13. 13 New Product Analysis, Project #675 Projected sales potential:44,000 units Production capacity:45,000 units Unit selling price: $60 Quality Cost Information and Decision Making Cost-Volume-Profit Analysis and Strategic Decisions Break-even:50,000 units Decision:Reject (breakeven exceeds capacity and potential) Unit variable costs: $40 Fixed costs: Product development$ 500,000 Manufacturing200,000 Selling 300,000 Total$1,000,000 Includes $5 quality costs Includes $100,000 quality costs

14. 14 New Product Analysis, Project #675, Revised Projected sales potential:44,000 units Production capacity:45,000 units Unit selling price: $60 Quality Cost Information and Decision Making Cost-Volume-Profit Analysis and Strategic Decisions Break-even:50,000 units Decision:Reject (breakeven exceeds capacity and potential) Unit variable costs: $40$35 Fixed costs: Product development$ 500,000$500,000 Manufacturing200,000100,000 Selling 300,000300,000 Total$1,000,000$900,000 Break-even:36,000 units Decision:Accept

15. 15 Quality Cost Information and Decision Making

16. 16 Controlling Quality Costs Acceptable quality level (AQL) is the standard –Includes a certain number of defective products –Ship products if defective units do not exceed AQL Creates a “commitment to deliver” defective products Traditional Approach

17. 17 Controlling Quality Costs Zero-defect standards Reflects a philosophy of total quality control Calls for products and services to be produced and delivered that meet the targeted value Implies the elimination of failure costs Total Quality Approach

18. 18 Controlling Quality Costs Quantify the standard –As the costs of quality decrease, higher quality results –2.5% standard is accepted by many QC experts Interim standards –Mid-range goals while pursuing the zero- defects level Total Quality Approach

19. 19 Controlling Quality Costs 1.Interim Standard Report: Progress with respect to a current-period standard or goal 2.Multiple-Period Trend Report: The progress trend since the inception of the quality- improvement program 3.Long-Range Report: Progress with respect to the long-range standard or goal Quality Performance Reports

20. 20 Controlling Quality Costs

21. 21 Controlling Quality Costs

22. 22 Controlling Quality Costs

23. 23 Controlling Quality Costs

24. 24 Controlling Quality Costs

25. 25 Controlling Quality Costs

26. 26 Controlling Quality Costs

27. 27 Controlling Quality Costs

28. 28 Controlling Quality Costs

29. 29 Controlling Quality Costs

30. 30 Controlling Quality Costs

31. 31 Defining, Measuring, and Controlling Environmental Costs Environmental costs: costs that are incurred because poor environmental quality exists or may exist Damage –Direct degradation of the environment –Indirect degradation (unnecessary usage) Categories –prevention costs –detection costs –internal failure costs –external failure costs

32. 32 Defining, Measuring, and Controlling Environmental Costs

33. 33 Defining, Measuring, and Controlling Environmental Costs

34. 34 Defining, Measuring, and Controlling Environmental Costs

35. 35 Defining, Measuring, and Controlling Environmental Costs continued

36. 36 Defining, Measuring, and Controlling Environmental Costs Note: “S” = societal costs

37. 37 Defining, Measuring, and Controlling Environmental Costs

38. 38 Defining, Measuring, and Controlling Environmental Costs

39. 39 Defining, Measuring, and Controlling Environmental Costs

40. COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 40 End Chapter 14