Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney

1. Chapter 8
Implementing Quality Concepts
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

2. 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

3. 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

4. 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

5. 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

6. Productivity
The quantity of output generated from the
amount of input

7. 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)

8. 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

9. Consumer View of Quality
Product or service meets and satisfies all
specified needs

10. Characteristics of Product Quality
• Objective
– Performance
– Features
– Reliability
– Conformance
– Durability
– Serviceability
• Subjective
– Aesthetics
– Perceived quality

11. Characteristics of Service Quality
Reliability
Assurance
Tangibles
Empathy
Responsiveness
First
Class
First
Class

12. 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
First
Class
It’s too
expensive

13. Benchmarking
Investigate, compare, evaluate
own products, processes, services
against
competitors or “best of breed”

14. Benchmarking
Results 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

15. 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

16. 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

17. Product/Service Improvement
• Identify value-adding customers
• Identify customer wants
– quality
– value
– “good” service
interaction between customer and
organizational employees

18. 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

19. Quality Costs
• Reduce appraisal and prevention costs by
increased spending on prevention
• Improvements in quality often result in
– lower total cost
– improved productivity

20. 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

21. 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

22. 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

23. Calculating Lost Profits
Profit Lost
by Selling
Units as
Defects
Total
Defective
Units
Number
of Units
Reworked
Profit
for Good
Unit
Profit for
Defective
Unit
=
Z = (D - Y) (P1 - P2 )
X

24. Calculating Internal Costs of Failure
Rework
Cost
Number of
Units
Reworked
Cost to
Rework
Defective
Unit
= X
R = (Y)(r)

25. Calculating External Costs of Failure
Cost of
Processing
Customer
Returns
Number of
Defective Units
Returned
Cost
of a
Return
= X
W = (Dr )(w)

26. 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

27. Calculating the Total Quality Cost
T = K + A + F
Total
Quality
Cost
Prevention
Cost
Appraisal
Cost
Failure
Cost
= + +

28. 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

29. Strategic Cost Management
• Provides a link from failure cost to
prevention cost
• Continuous monitoring allows changes to
reduce/prevent failures
Production
Failure
Feedback

30. Not just doing
it well but
learning to do
it better
Exceeding
customer
expectations
Employee
Empowerment
Creating
Customer
Value

31. 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?