Professional Documents
Culture Documents
Objectives
Objectives
1. Identify and describe the four types of quality costs.
After
2. Prepare a quality cost studying
After report this
and explain
studying this the difference
between the conventional
chapter, viewshould
of acceptable quality
chapter, you
you should
level and the view espoused by total quality control.
be
be able
able to:
to:
3. Tell why quality cost information is needed and how it
is used.
4. Explain what productivity is, and calculate the impact
of productive changes on profits.
11 -3
Quality Defined
A quality product
or service is one
that meets or
exceeds customer
expectations...
11 -4
Quality Defined
… on the following eight dimensions:
Performance Durability
Aesthetics Quality of
conformance
Serviceability
Fitness for use
Features
Reliability
11 -5
Quality Defined
… on the following eight dimensions:
How
How consistently
consistently
Performance Durability
and
and well
well aa product
product
The appearance
The functions
appearance of
functions of
Aesthetics Quality
tangible of
tangible products
products
Measures
Measures
(style,
conformance
(style, the
the
beauty)
beauty)ease
ease of
of
Serviceability maintaining
maintaining and/or
Characteristics
Characteristics and/or
of
of aa
repairing
Fitness
repairing
product
product
The that
that the
for
the product
use
product
differentiate
differentiate
Features The probability that
probability that the
the
functionally
functionally
product
product or similar
similar
or service
service will
will
Reliability perform
performproducts
products
its
its intended
intended
function
function for for aa specified
specified
length
length of of time
time
11 -6
Quality Defined
… on the following eight dimensions:
The length of time
Performance Durability
aAproduct
measurefunctions
of how
Aesthetics
a product meets its Quality of
specifications
The suitability of the conformance
Serviceability
product for carrying
out its advertised
Fitness for use
Features
functions
Reliability
11 -7
Quality Defined
A defective product
is one that does not
conform to
specifications.
11 -8
Quality Defined
Zero defects
means that all
products
conform to
specifications.
11 -9
Quality Defined
The definition of quality-related activities imply
four categories of quality costs: Incurred
Incurred to
to
prevent
Incurredpoor
Incurred
prevent to
poor
to
1) Preventive costs quality
quality or
determine
determine or
services
whether
services
whether being
Incurred
products
being
Incurred
productswhen
when
2) Appraisal costs
and
and Incurred
productswhen
produced
products
services
Incurred
produced
services and
when
and
3) Internal failure costs products
services
conform todo
to
products
services
conform doand
not
and
not
services
conform
requirements
services
conform
requirements fail
to
fail
toto
to
4) External failure costs
conform
conform to
specifications
specificationsto
requirements
requirements afterafter
being
being delivered
delivered
11 -10
Examples of Quality Costs
Prevention costs
Quality engineering
Quality training programs
Quality planning
Quality reporting
Supplier evaluation and selection
Quality audits
Quality circles
Field trials
Design reviews
11 -11
Examples of Quality Costs
Appraisal Costs
Inspection of raw materials
Testing of raw materials
Packaging inspection
Supervising appraisal
Product acceptance
Process acceptance
Inspection of equipment
Testing equipment
Outside endorsements
11 -12
Examples of Quality Costs
Rework
Downtime (defect related)
Reinspection
Retesting
Design changes
11 -13
Examples of Quality Costs
External failure costs
Cost of recalls
Lost sales
Returns/allowances
Warranties
Repairs
Product liability
Customer dissatisfaction
Lost market share
Complaint adjustment
11 -14
Internal Appraisal
Failure (20.4%)
(25.6%)
11 -23
Quality Cost Graph
Total
Cost Quality
Costs Failure Costs
Control Costs
0
AOL 100%
Percent Defects
11 -24
Cost Total
Quality
Costs Failure Costs
Control Costs
0 100%
Percent Defects
11 -25
Trend Analysis
Assume
Assume the
the following
following data:
data:
Quality Costs Actual Sales % of Sales
2000 $440,000 $2,200,000 20.0%
2001 423,000 2,350,000 18.0
2002 412,500 2,750,000 15.0
2003 392,000 2,800,000 14.0
2004 280,000 2,800,000 10.0
Multiple-Period Trend Graph: 11 -26
20
15
10
0 1 2 3 4
5
Year
Multiple-Trend Analysis for 11 -27
and Control
Productivity
Productivity isis concerned
concerned
with
with producing
producing output
output
efficiently,
efficiently, and
and isis itit
specifically
specifically addresses
addresses the the
relationship
relationship ofof output
output and and
the
the inputs
inputs used
used to
to produce
produce
the
the outputs.
outputs.
Productivity: Measurement 11 -30
and Control
Technical Efficiency
Technical Efficiency is the condition where no more of any
one input is used than necessary to produce a given output.
Technical Efficiency
Same Output, Fewer Inputs
Inputs: Outputs:
Labor
3 6
Capital
Technical Efficiency
More Output, Fewer Inputs
Inputs: Outputs:
Labor
3 8
Capital
Technically Efficient Combination I:
Inputs: Outputs:
Labor
3 8
Capital
$20,000,000
11 -34
Technical Efficiency
Of
Of the
the two
two combinations
combinations that
that produce
produce the
the same
same output,
output,
the
the least
least costly
costly combination
combination would
would be
be chosen.
chosen.
11 -35
Partial
Partial Productivity
Productivity Measurement
Measurement
Partial Productivity Measurement: Measuring
productivity for one input at a time.
Partial Measure = Output/Input
Operational Productivity Measure: Partial measure
where both input and output are expressed in
physical terms.
Financial Productivity Measure: Partial measure
where both input and output are expressed in
dollars.
11 -36
Profit-Linked
Profit-Linked Productivity
Productivity
Measurement
Measurement
Profit-Linkage Rule: For the current period, calculate
the cost of the inputs that would have been used in the
absence of any productivity change, and compare this
cost with the cost of the inputs actually used. The
difference in costs is the amount by which profits
changed because of productivity changes.
To compute the inputs that would have been used
(PQ), use the following formula:
PQ = Current Output/Base-Period Productivity Ratio
11 -40
Profit-Linked
Profit-Linked Productivity
Productivity
Measurement
Measurement
Example: Kunkul provided the following data:
2003 2004
Number of motors produced 120,000 150,000
Labor hours used 40,000 37,500
Materials used (lbs.) 1,200,000 1,700,000
Unit selling price (motors) $50 $48
Wages per labor hour $11 $12
Cost per pound of material $2 $3
11 -41
Profit-Linked
Profit-Linked Productivity
Productivity
Measurement
Measurement
PQ (labor) = 150,000/3 = 50,000 hrs.
PQ (materials) = 150,000/0.100 = 1,500,000 lbs.
Cost of labor: (50,000 x $12) $ 600,000
Cost of materials: (1,500,000 x $3) 4,500,000
Total PQ cost $5,100,000
The actual cost of inputs:
Profit-Linked
Profit-Linked Productivity
Productivity
Measurement
Measurement
Profit-linked effect = Total PQ cost - Total current cost
= $5,100,000 – $5,550,000
= $450,000 decrease in profits
Chapter Eleven
The
The End
End
11 -45