1. The Management & Control of Quality
Chapter Sixteen
The Management & Control of Quality

2. Learning Objectives
Define accounting’s role in the management & control of quality
Define “quality” and the characteristics of total quality management (TQM)
Develop a comprehensive framework for the management & control of quality
Understand two different approaches for setting quality-related goals

3. Learning Objectives (continued)
Prepare and interpret relevant financial information to support TQM initiatives
Discuss the use of nonfinancial information to support TQM initiatives
Describe & understand techniques for detecting
& correcting quality problems

4. Strategic Importance of Quality
Baldridge Quality Award
ISO 9000 and ISO 14000
Conceptual linkage between Quality and Financial Performance (Exhibit 16.1—see next slide)
Empirical evidence regarding the relationship between quality and financial performance—what do the data suggest?

5. Exhibit 16.1 Improved Quality Lower Return Sales
Lower Manufacturing Cost
Higher Perceived Value
Lower Throughput Time
Lower Warranty and Service Costs
Higher Prices
Higher Market Share
Faster Delivery
Increased Revenue
Financial Performance

6. Accounting’s Role in the Management & Control of Quality
Accountants can add value to the organization by providing decision-makers with relevant financial and nonfinancial information related to quality
Such information actively supports the quality initiatives embraced by management

7. Basic Terminology
“Quality”— customer satisfaction with the total experience of a product or service:
Design quality (focuses on the features that customers want)
Performance quality (focuses on product/service performance)
Total quality management (TQM)
Importance of having a good measurement system to support TQM
Limitations of conventional accounting systems?

8. Comprehensive Framework for Managing/Controlling Quality: Exhibit 16.3
Broad business perspective—knowledge of business processes
Paramount role of the consumer
Relevant financial data
Nonfinancial performance indicators
Feedback loops
Linkage to operations management
Breadth of the system—value-chain approach

9. Setting Quality-Related Expectations
Six-Sigma approach:
Define
Measure
Analyze
Improve
Control
Goalpost vs. Absolute Conformance:
Goalpost conformance
Absolute quality conformance (robust quality approach)

10. Goalpost Conformance
Goalpost or absolute conformance assumes that the firm incurs no quality or failure cost or loss if quality measures fall with the specified limits

11. Absolute Conformance
Absolute quality conformance requires that all products or services meet exactly the target value with no variation allowed

12. Financial Measures & COQ
Financial information to support TQM initiatives:
Relevant cost information for decision- making (refer to concepts in Chapter 9):
Future costs and revenues that differ between decision alternatives
“Avoidable costs” vs. Sunk costs
Out-of-Pocket costs + Opportunity costs
Cost of Quality (COQ) Reporting

13. COQ Reports
Prevention—expenditures incurred to keep quality defects from occurring
Appraisal—costs incurred in the measurement and analysis of data to find out if products and services conform to specification/customer expectations
Internal failure—costs incurred as a result of poor quality found through appraisal prior to delivery to customers
External failure—costs incurred to rectify quality defects after unacceptable products or services reach the customer

14. Sample Costs of Quality
Prevention:
Quality training costs
Equipment maintenance costs
Appraisal:
Testing & inspection costs
Quality audits
Vendor certification
Test equipment and instruments

15. Sample Costs of Quality (continued)
Internal failure:
Rework costs
Scrap (net of disposal value)
Lost contribution margin because of schedule disruptions
External failure:
Costs to handle customer complaints & returns
Lost sales/market share (customer ill-will)
Field service/repair costs
Product liability lawsuits

16. Example: COQ Report

17. Conformance and Nonconformance Costs
Cost of Conformity:
Prevention Costs
Appraisal Costs
Cost of Nonconformity:
Internal Failure Costs
External Failure Costs

18. Detecting & Correcting Poor Quality
Detecting Poor Quality
Control Charts
Statistical Control Charts
Run Charts
Correcting Quality Problems
Histograms
Pareto Diagrams (Charts)
“Cause-and-Effect” (“fishbone”) Diagrams

19. Control Charts

20. Control Charts (continued)
The circled observations are unacceptable, that is, they suggest an out-of-control process. Management may want to investigate the underlying causes of these observations and take appropriate corrective action.

21. Histograms 1 Quality of chocolate 2 Liqueur
3 Egg size Blending speed
5 Blending duration Improper refrigeration

22. Pareto Diagram

23. Cause-and-Effect Diagram

24. Chocolate Mousse Cause-and Effect Diagram

25. Appendix: Taguchi Loss Functions
General expression of the loss function, L(x), for an observed quality characteristic, x, is:
L(x) = k(x -T)2
where: x = an observed value of the quality characteristic
T = the target value of the quality characteristic
k = the cost coefficient, determined by the firm’s failure costs
Total Quality Cost
k =
(Tolerance Allowed)2

26. Taguchi Loss Functions (continued)
Your firm has determined that no customer will accept sheet-metal deviating more than 0.05” from the target thickness (0.50”). The cost to the firm is $5,000 for each rejection by a customer.
Total Quality Cost
(Tolerance Allowed)2
k =
k = = $2,000,000
$5,000
0.05 2

27. Taguchi Loss Functions (continued)
L(x) = k(x -T)
L(0.47) = $2,000,000( )2
L(0.47) = $1,800
 If the actual thickness of a unit is 0.47, then the estimated total loss for the unit is $1,800.

28. Chapter Summary
We specified accounting’s role in the management & control of quality
We defined “quality” and the characteristics of total quality management (TQM)
We developed and discussed comprehensive framework for the management & control of quality, and the role of accounting within this framework
We discussed two different approaches for setting quality-related goals (Six Sigma and Goalpost versus Absolute Conformance)

29. Chapter Summary (continued)
We discussed two areas where financial information can be supplied by the accountant to support TQM initiatives:
Relevant cost information for decision-making purposes
Cost of Quality (COQ) Reporting
We discussed the use of nonfinancial information to support TQM initiatives
We described techniques, borrowed from operations management, that can be used for detecting & correcting quality problems