Cost Accounting: Foundations & Evolutions, 9e Kinney and Raiborn

1. Chapter 17:Implementing Quality Concepts Cost Accounting: Foundations & Evolutions, 9e Kinney and Raiborn

2. 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 organization’s culture? • (Appendix) What international quality standards exist?

3. 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 • Totality of internal processes that generate a product or service • Customer satisfaction with that product or service

4. Quality Control • Qualitycontrol—all attempts to reduce variability and product defects • Six Sigma • Statistical Process Control

5. 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

6. Objective Performance Features Reliability Conformance Durability Serviceability and responsiveness Subjective Aesthetics Perceived value Characteristics of Product Quality Sloan Management Review

7. Characteristics of Service Quality • All the characteristics of product quality plus: • Assurance • Tangibles • Empathy

8. Grade The quality level that a product or service has relative to the inclusion or exclusion of characteristics to satisfy customer needs, especially price Value Meets the highest number of needs at the lowest possible cost (purchase price plus operating, maintenance, and disposal costs) Evaluating Quality It’s too expensive

9. Reasons to Benchmark (slide 1 of 2) • Increase awareness of the competition • Understand competitors’ production and performance methods as well as cost structures • Identify areas of competitors’ internal strengths and weaknesses • Identify external and internal threats and opportunities • Justify and accelerate a plan for continuous process improvement and change

10. Reasons to Benchmark (slide 2 of 2) • Create a framework for program and process assessment and evaluation • Establish a focus for mission, goals, and objectives • Establish performance improvement targets • Understand customers’ needs and expectations • Encourage creative thinking • Identify state-of-the-art business practices and new technologies

11. 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

12. TQM Tenets • Dictate continuous improvement for an internal managerial system (plan, control, make decisions) • Require participation by everyone in the organization • Focus on improving goods and services from the customer’s point of view • Value long-term partnerships with suppliers

13. 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 quality 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

14. Focuses on Management systems Processes Consumer satisfaction Business results Malcolm Baldrige National Quality Award • Types of entrants • Business and not-for-profit • Education • Health care Represents Excellence

15. Types of Quality Costs • Cost of Compliance • Preventivecosts—prevent product defects • Appraisalcosts—monitor and compensate when prevention fails • Cost of Noncompliance • Failure costs • Internallosses—scrap, rework • Externallosses—warranty work, customer complaint departments, litigation, product recalls

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

17. 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

18. Questions • What is quality? • How is benchmarking used to improve quality? • What are the different measures of the cost of quality?

19. 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 total quality management initiatives in company practices • Selling products at low prices and attempting to recover revenue with exorbitant repair charges after warranty time period