Chapter 17:

Implementing Quality
Concepts
Cost Accounting:
Foundations and Evolutions, 9e
Kinney Raiborn

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Learning Objectives
What is quality, and from whose viewpoint should it be
evaluated?
What is benchmarking, and why do companies engage in it?
What constitutes the total quality management philosophy?
How is the Baldrige Award related to quality?
What are the types of quality costs, and how are those types
related?
How is cost of quality measured?
How are a cost management system and the balanced scorecard
used to provide information on quality in an organization?
How is quality instilled as part of an organizations culture?
(Appendix) What international quality standards exist?

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Quality

Qualitythe 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
Totality of internal processes that
generate a product or service
Customer satisfaction with that product or
service
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Production View of Quality
ProductivityThe quantity of good output generated
from a specific amount of input during a time period
Increase productivity by reducing non-value-added
activities
Reduce the need to reprocess, rework, replace, repair
Fit machinery for mistake-proof operations
Have employees monitor and be responsible for their own
output
Do not store slow-moving inventory
Reduce unnecessary material moves
Reduce unscheduled production interruptions
Increase supplier quality/reduce inspections
Have suppliers inspect before shipping

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Quality Control and Statistical
Process Control
Quality controlall attempts to reduce
variability and product defects
Six Sigma
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
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Consumer View of Quality

Product or service meets and satisfies

all specified needs at a reasonable cost
Relates to both performance and value

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Characteristics of Product Quality

Objective Subjective
Performance Aesthetics
Features Perceived value
Reliability
Conformance
Durability
Serviceability and
responsiveness

*Sloan Management Review

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Characteristics of Service Quality

All the characteristics of product quality

plus:
Assurance
Tangibles
Empathy

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Evaluating Quality

GradeThe quality ValueMeets the

level that a product or highest number of
service has relative to needs at the lowest
the inclusion or possible cost (purchase
exclusion of price plus operating,
characteristics to satisfy maintenance, and
customers needs, disposal costs)
especially price
Its too
expensive

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Reasons to Benchmark
BenchmarkingInvestigate, Justify and accelerate a plan
compare, evaluate own for continuous process
products, processes, services improvement and change
against competitors or best in Create a framework for
class program and process
Reasons to benchmark: assessment and evaluation
Establish a focus for mission,
Increase awareness of the goals, and objectives
competition
Establish performance
Understand competitors improvement targets
production and performance
methods as well as cost Understand customers
structures needs and expectations
Identify areas of competitors Encourage creative thinking
internal strengths and Identify state-of-the-art
weaknesses business practices and new
Identify external and internal technologies
threats and opportunities

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Types of Benchmarking
Results benchmarking Strategic benchmarking
Focus on competitors Noncompetitor,
Reverse engineering nonindustry-specific
Focus on product/service benchmarking
specifications and performance Understand how successful
results companies compete
Determine best in class
Process Benchmarking
Often noncompetitor
benchmarking
Best in (specific
characteristic)
Flexible manufacturing
Equipment maintenance
Worker training
Distribution and logistics

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Total Quality Management
Total Quality Management (TQM)Management
approach of an organization, centered on quality,
based on the participation of all its members and
aiming at long-term success through customer
satisfaction, and benefits to all members of the
organization and to society
Tenets
Dictate continuous improvement to the internal managerial
system (plan, control, make decisions)
Require participation by everyone in the organization
Focus on improving goods and services from the
customers point of view
Value long-term partnerships with suppliers

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The Quality System
Moves from after-the-fact inspection to proactive quality assurance
Emphasizes
Planning for quality in every process and product

Prevention

Zero defects and continuous improvement

Results
Ability to set goals and methods for improvements

System for measuring quality and providing feedback on quality

enhancements
Encouragement of teamwork

Change from product inspection and defect correction to

proactive quality assurance

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Upper-Level Management
Involvement
Personally involved in quality process
Develop an atmosphere that produces
quality improvements
Set an example of commitment to TQM
Provide constructive feedback for
opportunities for improvements
Provide positive feedback for achieved
improvements
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Product/Service Improvement

Identify value-adding customers

Identify customer wants
Quality
Value
Good serviceinteraction between
customer and organizational employees

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Quality Awards

USAMalcolm Baldridge Award

JapanDeming Prize

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Malcolm Baldridge National Quality
Award (slide 1 of 2)
Focuses on Types of entrants
Management systems Business and not-for
Processes profit
Consumer satisfaction Education
Business results Health care

Represents Excellence
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Malcolm Baldridge National Quality
Award (slide 2 of 2)
Must excel in:
Leadership
Strategic planning
Customer focus
Measurement, analysis, and knowledge management
Workforce focus
Operations focus
Results
Award winners are effective and systematic in
deploying and achieving the multiple requirements
within each category and are innovative in
continuously seeking improvement

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Types of Quality Costs
Cost of Compliance
Preventive costsprevent product defects

Appraisal costsmonitor and compensate

when prevention fails
Cost of Noncompliance
Failure costs

Internal lossesscrap, rework

External losseswarranty work, customer

complaint departments, litigation, product
recalls

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Quality Cost Principles

The cost of compliance and the cost of

noncompliance are inversely related
A decrease in preventive costs will probably
increase failure costs
A increase in preventive costs will probably
decrease failure costs
Improvements in quality often result in
Lower total cost
Improved productivity

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Total Failure Costs

Profit lost by selling defective units

Cost of rework
Cost of processing customer returns
Cost of warranty work
Cost of product recalls
Cost of litigation related to products
Opportunity cost of lost customers

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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
Traditional general ledger accounts bury quality
costs in
Work in process inventory
Finished goods inventory
Marketing and advertising
Personnel
Engineering
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Cost of Quality
Separate cost of quality accounts include:
Prevention costs Internal failure costs
Quality training Reworking products
Quality market research Scrap and waste
Quality technology Storing and disposing of waste
Quality product design Reprocessing
Preventive maintenance Rescheduling and setup

Appraisal costs External failure costs

Quality inspections Complaint handling
Procedure verifications Warranty handling
Measurement equipment Repairing or replacing returns
Customer reimbursements
Expediting replacements
Product recalls
Image improvement after
failure
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Computing Cost of Quality

Compute
Quality costs incurred for production/service
activities
Costs of non-value-added activities
Product/service life-cycle costs
Rework costs

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Calculating Lost Profits
Total Number
Defective of Units
Units Reworked
Profit Lost
by Selling X
=
Units as
Defects Profit Profit for
for Good Defective
Unit Unit

Z = (D Y) (P1 P2 )
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Calculating Internal Costs of Failure

Cost to
Number of
Rework Rework
Cost = Units X Defective
Reworked
Unit

R = (Y)(r)

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Calculating External Costs of Failure

Cost of
Number of Cost
Processing
Customer
= Defective Units X of a
Returned Return
Returns

W = (Dr)(w)

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Calculating Total Failure Cost
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

F = Z + R + W + PR + L + O
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Calculating the Total Quality Cost

Total
Prevention Appraisal Failure
Quality = Cost
+ Cost
+ Cost
Cost

T=K+A+F
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 Balanced Scorecard and Quality
Customer loyalty/ Employee empowerment/
percentage of revenue number of units reworked
from repeat customers

Financial Internal
Business

Customer Learning and

Value Growth

Technology leadership/
Satisfied customers/number percentage of production
of customer complaints automated

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Balanced Scorecard Additional
Measures
Additional measures
Manufacturing cycle efficiency
Time to market for new products
Customer satisfaction levels
On-time deliveries
Defect rates
Success rates of research and development
activities

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Organizational Culture of Quality

Committed and consistent top leadership

Employees who are eager to meet and
exceed customer expectations
Work environment that cares about
employees and rewards efforts to achieve
high quality
Empowered employees
Job and quality training
Pursuit of quality awards
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Questions

What is quality?
How is benchmarking used to improve
quality?
What are the different measures of the cost
of quality?

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Potential Ethical Issues
Ignoring acceptable variation limits and therefore accepting
defect levels that are excessive
Using lower grade raw material and components than
specified
Using benchmarking to illegally gain information from
competitors
Discriminating against minority supplies
Choosing to ignore internal information about defects and
failures
Minimizing estimates of internal and external failure costs
Not supporting TQM initiatives in company practices
Selling products at low prices and attempting to recover
revenue with exorbitant repair charges after warranty time
period

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