Cost management accounting and control 6e by hansen mowen guan chapter 14

Define quality, describe the four types of quality costs, discuss the approaches used for quality cost measurement, and prepare a quality cost report.. Explain why quality cost informati

Management

Study Objectives

1 Define quality, describe the four types of quality

costs, discuss the approaches used for quality cost measurement, and prepare a quality cost report

2 Explain why quality cost information is needed

and how it is used

3 Describe and prepare three different types of

quality performance reports

4 Explain how environmental costs can be

measured and reduced

• Performed by an organization or its customers

• In response to poor quality

• Categories of quality costs

– Prevention costs: incurred to prevent poor quality in product or services from being produced

– Appraisal costs: Incurred to determine whether

products and services are conforming

• Product acceptance: sample finished goods

• Process acceptance: sample goods while in process

– Internal failure costs: incurred because products or services do not conform; discovered prior to delivery – External failure costs: incurred because products or services do not conform; discovered after delivery

Costs of Quality

Costs of Quality

Costs of Quality

• Opportunity costs resulting from poor quality

• Estimating hidden quality costs

– The multiplier method

– The market research method

Assumes that the total failure cost is simply some multiple of

measured failure costs:

Costs of Quality

Multiplier Method

If k = 4, and the measured external failure costs are $3

million, then the actual external failure costs are

estimated to be $12 million.

Total external = Measured external

failure cost k failure cost

where k is the multiplier effect

Costs of Quality

Uses formal market research methods to assess the effect of poor quality on sales and market share.

Market research results can be used to project

future profit losses attributable to poor quality.

Market Research Method

Customer surveys and interviews with members of a

company’s sales force can provide significant insights into the

magnitude of a company’s hidden costs.

Costs of Quality

Quality Cost Information and

Decision Making

Strategic Pricing

New Product Analysis, Project #675

Projected sales potential:44,000 units

Production capacity: 45,000 units

Unit selling price: $60

Quality Cost Information and

Decision Making

Cost-Volume-Profit Analysis and Strategic Decisions

Break-even: 50,000 units

Decision: Reject (breakeven

exceeds capacity and potential)

Unit variable costs: $40

Includes $100,000 quality costs

Projected sales potential:44,000 units

Production capacity: 45,000 units

Unit selling price: $60

Quality Cost Information and

Decision Making

Cost-Volume-Profit Analysis and Strategic Decisions

Break-even: 50,000 units

exceeds capacity and potential)

Unit variable costs: $40 $35

Quality Cost Information and

Decision Making

Controlling Quality Costs

• Acceptable quality level (AQL) is the standard

– Includes a certain number of defective products

– Ship products if defective units do not exceed AQL

• Creates a “commitment to deliver” defective

products

Traditional Approach

Controlling Quality Costs

Zero-defect standards

• Reflects a philosophy of total quality control

• Calls for products and services to be produced and delivered that meet the targeted value

• Implies the elimination of failure costs

Total Quality Approach

Controlling Quality Costs

• Quantify the standard

– As the costs of quality decrease, higher

Controlling Quality Costs

1 Interim Standard Report: Progress with

respect to a current-period standard or goal

2 Multiple-Period Trend Report: The progress

trend since the inception of the

quality-improvement program

3 Long-Range Report: Progress with respect to

the long-range standard or goal

Quality Performance Reports

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

Controlling Quality Costs

– Direct degradation of the environment

– Indirect degradation (unnecessary usage)

• Categories

– prevention costs

– detection costs

– internal failure costs

– external failure costs

Defining, Measuring, and

Controlling Environmental Costs

Defining, Measuring, and

Controlling Environmental Costs

Defining, Measuring, and

Controlling Environmental Costs

Defining, Measuring, and

Controlling Environmental Costs

continued

Defining, Measuring, and

Controlling Environmental Costs

Note: “S” = societal costs

Defining, Measuring, and

Controlling Environmental Costs

Defining, Measuring, and

Controlling Environmental Costs

Defining, Measuring, and

Controlling Environmental Costs