Ch15 Quakity Cost

7/28/2019 Ch15 Quakity Cost

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PowerPoint Presentation by

Gail B. WrightProfessor Emeritus of Accounting

Bryant University

Copyright 2007 Thomson South-Western, a part of The

Thomson Corporation. Thomson, the Star Logo, and

South-Western are trademarks used herein under license.

MANAGEMENT

ACCOUNTING

8th EDITION

BY

HANSEN & MOWEN

15 QUALITY COSTS AND PRODUCTIVITY

STUDENT EDITION


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1. Identify & describe the 4 types of qualitycosts.

2. Prepare a quality cost report; differentiatebetween acceptable quality level & totalquality 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.

LEARNING OBJ ECTIVES


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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

LO 1


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DIMENSIONS OF QUALITY: 1

Performance: how consistently a product

functions

Aesthetics : appearance of tangible products,

facilities, communication materials

Serviceability: ease of maintaining, repairing

product

Features of quality design: characteristics that

differentiate between similar products

LO 1

Continued

Aesthetics


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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 conformance : measure of how a

product meets its specifications

Fitness for use: suitability of product for

advertised functions

LO 1

Quality of conformance


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DEFECTIVE PRODUCT:

Definition

Is one that does not conform tospecifications. Zero defects is

the goal.

LO 1


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CATEGORIES OF QUALITY

COSTS

1. Prevention costs: incurred to prevent poor quality

2. Appraisal costs : incurred to determine whether

products, services conform to requirements,

customer needs

3. Internal failure costs: incurred when non-

conformance is discovered & product, service re-

worked, scrapped, etc.4. External failure costs: incurred when products fail

to conform after delivery and recalled

LO 1

Appraisal costs


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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

LO 1


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FORMULA: Multiplier Method

Multiplier method estimates quality costs as

some multiple of measured failure costs.

LO 1

Total external failure cost:

= k (Measured external failure costs)


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How does market research

estimate hidden qualitycosts?

Market researchuses customer

surveys & interviews of sales

staff to project future profit

losses.

LO 1


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What assumption does the

Taguchi quality lossfunction make?

Taguchi quality loss function

assumes that variations from

target value of quality

characteristic causes hiddenquality costs regardless of

specification limits.

LO 1


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FORMULA: Taguchi Function

Taguchi quality loss function estimates hidden

costs of poor quality.

LO 1

[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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ACCEPTABLE QUALITY

LEVEL (AQL): Definition

Is the optimal balancebetween control costs &

failure costs.

LO 2


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Is there a problem with the

ACL (traditional) view ofquality?

AQL encouraged lower quality

levels by accepting production

of a given number of defectiveunits.

LO 2

O 2


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ZERO DEFECTS MODEL:

Definition

Claims that it is costbeneficial to reduce non-

conforming units to zero.

LO 2

LO 2


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Is there a problem with the

zero defects model?

Zero defects model understates

quality costs & the potential for

savings from efforts to improvequality.

LO 2

understates

LO 2


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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

LO 2

LO 2


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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.

LO 2

LO 2


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ABM & OPTIMAL QUALITY

COSTSABM 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)

LO 2

LO 2


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TQC COMPONENT GRAPH

LO 2

EXHIBIT15-8

Over time, quality

costs shift from non-

value-added to value-

added (prevention)

costs.

LO 3


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What are principal

objectives of reportingquality costs?

Principal objectives are to

improve & facilitate a)

managerial planning, b) control,

and c) decision making.

LO 3

LO 4


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TOTAL PRODUCTIVE

EFFICIENCY

When concerned with productive efficiency,

2 conditions must be satisfied:

Technical efficiency: For any mix of inputsthat 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.

LO 4

LO 4


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PARTIAL MEASURES: Analysis

LO 4

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

LO 4


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TOTAL PRODUCTIVITY

MEASUREMENT: Definition

Is measuring productivity forall inputs simultaneously.

LO 4

LO 4


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PROFIT-LINKED PRODUCTIVITY

MEASUREMENT:Definition

Is measuring the amount ofprofit change attributable to

productivity change.

LO 4

LO 4


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PROFIT-LINKAGE RULE:Definition

States that productivity change isthe difference between

[Cost of inputs without

productivity change

cost ofinputs actually used].

LO 4

LO 4


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FORMULA: Profit Recovery

Profit recovery is the change in revenue minus a

change in the cost of inputs .

LO 4

Profit recovery

= Profit changeProfit linked productivity change

= ($1,510,000$450,000)

= $1,060,000


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THE END

CHAPTER 15

Ch15 Quakity Cost

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