What is the optimal level of product quality?

•Observable Cost Perspective: finding the optimal level product quality is a

balancing at between incurring costs of prevention and appraisal on one
hand and costs of failure on the other (observable costs). As the percentage
of defective products decreases, the costs of prevention and appraisal
increase. However, the costs of internal and external failure decrease.
Adding the costs of prevention, appraisal, and internal and external failure
yields total quality costs. The optimal product quality level is the point that
minimizes total quality costs

-Zero-Defect Perspective: contemporary view is that is both observable and

hidden costs of quality are considered, any deviation from a product's target
specifications results in increased quality costs. Under this zero-defect
viewpoint, the optimal level of product quality occurs at the zero defect
level. total costs are quality are minimized at the zero defect level
 Total Quality Management
• Monitoring product quality coupled with
measuring and reporting quality costs helps
companies maintain programs of TQM
-Refers to the broad set of management and
control processes designed to focus the entire
organization and all of its employees on providing
products or services that do the best possible job
of satisfying the customer
-Among the tools used in TQM is the Six Sigma
program, an analytical method that aims at
achieving near-perfect results in a production
process
 Identifying Quality Control Programs
• -An effective TQM program includes methods for
identifying quality control programs
-One method of identifying quality control
programs is the cause-and-effect diagram. Helps
identify causes of errors so they can be
eliminated
-Pareto diagram: shows graphically the frequency
with which various quality control problems are
observed. Helps the TQM team visualize and
communicate to others what the most serious
types of defects are
 ISO 9000 Standards
• ISO 9000 Standards
• -International Organization for Standardization
-ISO 9000 standards focus on the processes a company uses to match the
quality of design and quality of conformance that its products offer with
the expectations of its customers
-Basically require that a company have a well-defined quality control
system in place, and that the target level of product quality be maintained
consistently
-Require a company to prepare extensive documentation of all aspects of
the quality control system
-Three major parts:
1. ISO 9000: states the scope of the standard, defines and describes a
quality management system, and establishes a quality-related vocabulary
2. ISO 9001: provides a model for quality assurance in design,
development, production, installation, and servicing
3. ISO 9004: provides guidelines for the design of a quality assurance
system
 Implications for Managerial
Accounting
• 1. Standards require extensive documentation
of the quality control system. Often falls to
controller's office
2. Require that the costs and benefits of the
quality control system be measured and
documented. Must measure and report
product life-cycle costs, quality costs, and the
effectiveness of efforts at continuous
improvement
 Implications for Managerial
Accounting
1. Standards require extensive documentation
of the quality control system. Often falls to
controller's office
2. Require that the costs and benefits of the
quality control system be measured and
documented. Must measure and report
product life-cycle costs, quality costs, and the
effectiveness of efforts at continuous
improvement