ma lecture week 21 - quality
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www.bradford.ac.uk/management
Accounting for Quality
Lecture 21
Learning outcomes
At the end of the session, you should be able:
To define qualityTo distinguish between the two types of quality
conformanceTo identify the four categories of quality costs and
understand their relationship To outline the implications of quality management to
management accounting
Accounting for Quality: Overview
Recall that to survive and be successful in today’s global competitive environment, companies need to provide quality products or services. to satisfy customer needs and to meet or exceed customer expectations
Whether a company competes through a strategy of cost leadership or product differentiation, quality issues permeate every aspect of its operations A firm choosing to complete on a cost leadership strategy, is not choosing low-
quality products Similarly a differentiation strategy will fail if the firm fails to build quality into its
products
Focusing on quality of a product can be beneficial Creates customer satisfaction Reduces the cost of quality, which can be substantial Generating higher sales, leading to increased shareholder value
Therefore accounting for quality is an important role of the management accountant Makes management aware of the magnitude of quality costs Provides a benchmark against which the impact of quality improvement activities
could be measured.
Quality as a Competitive Tool
Quality is defined as:
The total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use.
Ensuring that the technical aspects of the product’s design and performance conform to the manufacturer’s standards.
Basic Aspects of Quality
Quality may be viewed as hinging on two major factors: Design Quality- refers to how closely the characteristics of a product
or service meet the needs and wants of customers. Conformance Quality- refers to the performance of a product or
service relative to its design and product specifications.
Quality of design failureQuality of design failureConformance quality failureConformance quality failure
Design SpecificationsDesign SpecificationsActual PerformanceActual Performance Customer SatisfactionCustomer Satisfaction
Types of conformance
Quality involves conformance with specifications for products or services that meet or exceed customer requirements and expectations
Two types of conformance Goalpost conformance - Conformance to a quality
specification expressed as a specified range around the target- the target is the ideal or desirable outcome of the operation
Absolute conformance - Requires all products or services to meet the target value exactly with no variations
Managing quality to create value
• Two major perspectives:– Financial perspective: costs of quality
– Non-financial perspective• Customers• Internal processes• Learning and growth
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Financial Perspective: Costs of Quality
The costs of quality (COQ)- refers to costs of activities associated with prevention, identification, repair, and rectification of poor quality and opportunity costs from lost of production time and sales as a result of poor quality.
These costs focus on conformance quality and are incurred in all business functions of the value chain.
Companies have discovered that they can spend as much as 20% to 30% of total manufacturing costs on quality-related processes
Yet, traditionally, quality costs only included costs of inspection and costs of testing the finished products
Cost of Quality Framework
Divides costs into two components:Conformance costs- prevention and appraisal
costsNon-conformance costs- internal and external
failure costs.
Assumes a relation between conformance costs and non-conformance costsAs companies invest more into prevention and
appraisal costs, they will be able to reduce their failure costs
Prevention is better than cure
Cost of Quality Framework
Conformance costs – costs to achieve high qualityPrevention costs
Costs incurred to ensure that the products conform to quality standards.
E.g., product design and product reviews, employee training, training and certifying suppliers, quality engineering, equipment maintenance.
Appraisal costsCosts incurred in individual product inspection to
make sure they meet both internal and external customer requirements,
E.g., cost of inspecting incoming materials and parts, process control monitoring, maintenance of test equipment.
Cost of Quality Framework
Non-conformance costs: consequences of poor quality Internal failure costs
Costs incurred when the manufacturing process detects a defective component or product before it is shipped to external customers,
E.g., scrap cost, rework cost, re-inspection costs, cost of downtime due to defective parts
External failure costsCosts incurred by a non-conforming product detected after
it is shipped to customers, E.g., cost of repairs, warranty costs, service calls, customer
complaints
Famous external failures• Toyota well known for quality however;
– In 2009 in the US– Family died when accelerator pedal got stuck– Enormous media coverage – US government got
involved– 6 million cars recalled– Production and sales of model suspended– £2billion loss in North America alone– Worldwide reputation losses beyond calculation
Non-financial quality indicators
• A “balanced” approach to quality should include (cf. BSC framework): – Financial indicators (Costs of Quality, above)– Non-financial indicators (see next):
• External, customer focused quality indicators• Internal business processes quality indicators• Learning and growth quality indicators
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Non-financial quality indicators• External, customer focused quality indicators
– Focused on the two dimensions of quality: design quality and conformance quality
– Indicators include:• Market share; repeat business• Customer complaints• Products with early or repeated failures• Percentage of defective units shipped• Delivery performance
– Both lead and lag indicators14
Non-financial quality indicators• Internal business processes quality indicators
– Internal dimensions of quality to achieve customer-relevant quality and avoid failures
– Indicators include:• Defective units produced or reworked• Number of quality-driven changes to products and
processes• Development time of new products or services• Order-to-delivery time• On-time performance• Productivity and efficiency measures
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Non-financial quality indicators
• Learning and growth quality indicators– Focus on intangible aspects related to
organizational learning and growth– Indicators include:
• Training on quality, of company employees and from external parties
• Employee satisfaction and turnover• Employee empowerment
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Setting quality targets
• External quality targets– Based on other companies in the same industry or
on the industry average– Benchmarks by consultancy firms / associations– The case of ISO benchmarks:
• the ISO 900 family of standards• benefits of ISO certification: controversial
insights
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Setting quality targets
• Internal quality targets– Based on past performance or internal
benchmarking– The six sigma approach:
• improve processes to achieve an extraordinarily high-conformance quality level, near perfection
• aim to reduce process variability that causes defects and undermines customer satisfaction
• five ‘DMAIC’ steps18
The five ‘DMAIC’ steps
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Define project with strong business case – problem and
objectives
Measure current performance using reliable
data
Analyse root problem – and any cause and effect
relationships
Improve the process through generating and implementing
solutions targeted at critical process
Control the process to ensure
sustainable performance
TQM• TQM: permanent and integrated effort across the
entire organization to excel in all customer-relevant quality dimensions of products and services
• Customer satisfaction: TQM’s focus and ‘obsession’• Design quality:
– Meeting customers’ expectations + designing quality into the product and processes to prevent waste; prevent, rather than detect, defects
• Conformance quality
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TQM• Important tool: plan-do-check-act (PDCA) cycle, a systematic,
interactive approach to continuous improvement and problem solving
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Examine what is causing
problem and suggest solution
Experiment with a solution
Examine results of different solutions
Implement solution if it works – or
return to plan stage
TQM• Belief: costs of improving quality are more than
compensated by cost reductions from efficiency improvements and by revenue increases– But still needs to be confirmed!
• “Return on Quality” (ROQ) approach:– Concern that costs of some quality improvement
initiatives, or improving quality beyond a certain level, may exceed expected benefits
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Quality and management accounting
Potential for significant involvement by management accounting
Helping to establish the present position of the organisation in relation to each area of quality chosen
Costing the present performance in order to reveal the potential for improvementThrough cost reductionProfit improvement
Carrying out a post audit to demonstrate that savings are achieved
Regular reporting for management control
Quality and management accounting
Monitoring measures selected in order to check that improvement is taking place.
Financial measuresFocus managers’ attention on the costs of poor qualityAssist in problem solving by comparing costs and
benefits of different quality improvement programs and setting priorities for cost reduction
Non-Financial measuresDirect attention to physical processes and to areas that
need improvementProvide immediate short-term feedback on whether
quality improvement efforts are succeedingProvide useful indicators of future long-term
performance