chapter 8 implementing quality concepts cost accounting traditions and innovations barfield,...
TRANSCRIPT
Chapter 8
Implementing Quality Concepts
Cost AccountingTraditions and Innovations
Barfield, Raiborn, Kinney
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
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
Learning Objectives (3 of 3)
• Demonstrate how cost management systems provide support for quality initiatives
• Explain how quality can become a part of an organization’s culture
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 user’s perspective– Relates to both performance and value Quality
Productivity
The quantity of output generated from the amount of input
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)
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
Consumer View of Quality
Product or service meets and satisfies all specified needs
Quality
Characteristics of Product Quality• Objective
– Performance– Features– Reliability– Conformance– Durability– Serviceability
• Subjective– Aesthetics– Perceived quality
Quality
Characteristics of Service Quality
Reliability
Assurance
Tangibles
Empathy
Responsiveness
FirstClass
FirstClass
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
FirstClass
It’s tooexpensive
Benchmarking
Investigate, compare, evaluate
own products, processes, services
against
competitors or “best of breed”
BenchmarkingResults 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
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
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
Product/Service Improvement
• Identify value-adding customers
• Identify customer wants– quality– value– “good” service
interaction between customer and organizational employees
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
Quality Costs
• Reduce appraisal and prevention costs by increased spending on prevention
• Improvements in quality often result in– lower total cost– improved productivity
Quality
The Quality Goal
• Meet the purchaser’s stated or implied quality needs
• Provide confidence that quality level is achieved and sustained– to provider’s management– to customer Quality
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
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
Calculating Lost Profits
Profit Lost by Selling Units as Defects
TotalDefective
Units
Numberof Units
Reworked
Profitfor Good
Unit
Profit forDefective
Unit
=
Z = (D - Y) (P1 - P2 )
X
Calculating Internal Costs of Failure
ReworkCost
Number of Units
Reworked
Cost toRework Defective
Unit
= X
R = (Y)(r)
Calculating External Costs of Failure
Cost ofProcessing CustomerReturns
Number ofDefective Units
Returned
Costof a
Return= X
W = (Dr )(w)
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
Calculating the Total Quality Cost
T = K + A + F
Total QualityCost
PreventionCost
AppraisalCost
FailureCost= + +
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
Strategic Cost Management
• Provides a link from failure cost to prevention cost
• Continuous monitoring allows changes to reduce/prevent failures
Production
FailureFeedback
Not just doingit well but
learning to do it better
Exceedingcustomer
expectations
EmployeeEmpowerment
CreatingCustomer
Value
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?