STUDENT EDITION
PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
© Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
HANSEN & MOWEN
15 QUALITY COSTS AND PRODUCTIVITY
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LEARNING OBJECTIVES
1. Identify & describe the 4 types of quality
costs.
2. Prepare a quality cost report; differentiate
between acceptable quality level & total
quality control.
3. Tell why quality cost information is needed
& show how it is used.
4. Explain what productivity is; calculate the
impact of productivity changes on profits.
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LO 1
WEIGHING COSTS & BENEFITS
Managers need to know what quality costs
are & how they change over time
Costs of quality
Studies suggest that cost of quality production
might be as much as 20% – 30% of sales
Benefits of quality
Competitive dimension
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LO 1
DIMENSIONS OF QUALITY: 1
Performance: how consistently a product
functions
Aesthetics : appearance of tangible products,
Aesthetics
facilities, communication materials
Serviceability: ease of maintaining, repairing
product
Features of quality design: characteristics that
differentiate between similar products
Continued
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LO 1
DIMENSIONS OF QUALITY: 2
Reliability: probability that product, service
will perform intended function for specified
length of time
Durability: length of time a product functions
Quality of
of conformance
conformance : measure of how a
Quality
product meets its specifications
Fitness for use: suitability of product for
advertised functions
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LO 1
DEFECTIVE PRODUCT:
Definition
Is one that does not conform to
specifications. Zero defects is
the goal.
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LO 1
What are costs of quality?
Costs of quality exist because poor
quality does or may exist:
• Control activities to prevent,
detect poor quality.
• Failure activities are responses to
poor quality.
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LO 1
CATEGORIES OF QUALITY
COSTS
1. Prevention costs: incurred to prevent poor quality
2. Appraisal
Appraisal costs : incurred to determine whether
products, services conform to requirements,
customer needs
3. Internal failure costs: incurred when nonconformance is discovered & product, service reworked, scrapped, etc.
4. External failure costs: incurred when products fail
to conform after delivery and recalled
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LO 1
CLASSIFYING QUALITY COSTS
Observable
Costs available in accounting records
Hidden
Significant
Not directly available in accounting records
Estimated
Multiplier method
Market research
Taguchi quality loss function
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LO 1
FORMULA: Multiplier Method
Multiplier method estimates quality costs as
some multiple of measured failure costs.
Total external failure cost:
= k (Measured external failure costs)
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LO 1
How does market research
estimate hidden quality
costs?
Market research uses customer
surveys & interviews of sales
staff to project future profit
losses.
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LO 1
What assumption does the
Taguchi quality loss
function make?
Taguchi quality loss function
assumes that variations from
target value of quality
characteristic causes hidden
quality costs regardless of
specification limits.
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LO 1
FORMULA: Taguchi Function
Taguchi quality loss function estimates hidden
costs of poor quality.
[Quality loss * Actual value of quality
characteristic] L(y)
= a proportional constant multiplier of
external cost failure structure * (difference
between actual and target value squared)
L(y) = k(y-T)2
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LO 2
ACCEPTABLE QUALITY
LEVEL (AQL): Definition
Is the optimal balance
between control costs &
failure costs.
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LO 2
Is there a problem with the
ACL (traditional) view of
quality?
AQL encouraged lower quality
levels by accepting production
of a given number of defective
units.
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LO 2
ZERO DEFECTS MODEL:
Definition
Claims that it is cost
beneficial to reduce nonconforming units to zero.
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LO 2
Is there a problem with the
zero defects model?
Zero defects model understates
quality costs & the potential for
savings from efforts to improve
quality.
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LO 2
REDUCING QUALITY COSTS
Take direct attack on failure costs to drive
them to zero
Invest in “right” prevention activities to bring
about improvement
Reduce appraisal costs according to results
achieved
Continuously evaluate, redirect prevention
efforts to gain further improvement
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LO 2
What is the strategy for
reducing costs based on?
The strategy is based on the premise
that a) there is a root cause for each
failure, b) causes are preventable,
and c) prevention is always cheaper.
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LO 2
ABM & OPTIMAL QUALITY
COSTS
ABM classifies costs as value-added &
non-value-added and recommends
non-value-added costs be eliminated.
 Value-added quality costs
 Prevention activities, when performed
efficiently
 Non-value-added quality costs
 Appraisal costs
 Failure costs (both internal & external)
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LO 2
TQC COMPONENT GRAPH
Over time, quality
costs shift from nonvalue-added to valueadded (prevention)
costs.
EXHIBIT 15-8
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LO 3
What are principal
objectives of reporting
quality costs?
Principal objectives are to
improve & facilitate a)
managerial planning, b) control,
and c) decision making.
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LO 4
TOTAL PRODUCTIVE
EFFICIENCY
When concerned with productive efficiency,
2 conditions must be satisfied:
 Technical efficiency: For any mix of inputs
that will produce a given output, no more of
any 1 input is used than necessary to
produce the output
 Input trade-off efficiency: Given the
mixes that satisfy the first condition, the
least costly mix is chosen.
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LO 4
PARTIAL MEASURES: Analysis
Conclusions that can be drawn about partial
measures:
 Existence of trade-offs mandates total
measure of productivity for assessing merits
of productivity decisions
 Because of possibility of trade-offs,
financial productivity must be measured
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LO 4
TOTAL PRODUCTIVITY
MEASUREMENT: Definition
Is measuring productivity for
all inputs simultaneously.
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LO 4
PROFIT-LINKED PRODUCTIVITY
MEASUREMENT: Definition
Is measuring the amount of
profit change attributable to
productivity change.
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LO 4
PROFIT-LINKAGE RULE:
Definition
States that productivity change is
the difference between
[Cost of inputs without
productivity change – cost of
inputs actually used].
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LO 4
FORMULA: Profit Recovery
Profit recovery is the change in revenue minus a
change in the cost of inputs .
Profit recovery
= Profit change – Profit linked productivity change
= ($1,510,000 – $450,000)
= $1,060,000
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CHAPTER 15
THE END
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