NATIONAL COLLEGE OF BUSINESS AND ARTS

Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

Session 8:

Managing Accounting in a
Changing Environment

8.1 Objectives and Significance of TQM

8.2 Elements of TQM

8.3 TQM Implementation Guidelines

8.3.1 Types of Conformance

8.3.2 Cost of Quality

8.3.3 Uses of Quality Cost Information

8.4 Just-in-Time System

8.5 Typical Benefits of TQM

REPORTERS:

Ms. Lanny R. Dela Vega

Ms. Joanne Alexis V. Biscocho

Ms. Michelle G. Encontro

 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

By: Lanny R Dela Vega

INTRODUCTION

– The most important requirement for TQM to function in any

organization is 100 per cent commitment by the top management.
– There is no way to push TQM if the top management is not
convinced, committed or determined to implement it.

The Quality Gurus

– Individuals who have been identified as making a significant

contribution to improving the quality of goods and services.

 Walter A. Shewhart
 W. Edwards Deming
 Joseph M. Juran
 Armand Feigenbaum
 Philip Crosby
 Genichi Taguchi
 Kaoru Ishikawa

What is Total Quality Management

1. A systematic management approach and organization wide

philosophy to long-term success
2. Planning and implementing a constant organizational improvement
process
3. All members, from top management to employees of an
organization participating in improving products, services, and the
culture
4. Focused on exceeding customers' expectations, identifying
problems, building commitment, and promoting open decision-
making among workers

Advantages of TQM

 Cost Reduction
 Customer Satisfaction
 Defect Reduction
 Improved Morale
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

Objectives of TQM

 Meeting the customer's requirements is the primary objective and

the key to organizational survival and growth.
 The second objective of TQM is continuous improvement of
quality. The management should stimulate the employees in
becoming increasingly competent and creative.
 Third, TQM aims at developing the relationship of openness and
trust among the employees at all levels in the organization.
 TO DELIVER HIGHEST VALUE AT LOWEST COST” is the main
objective of TQM

Elements of TQM

– Be customer focused
– Do it right the first time
– Constantly improve
– Quality is an attitude
– Telling staff what is going on
– Educate and train people
– Measure the work.
– Top management must be involved
– Make it a good place to work
– Introduce team work
– Organize by process, not by function

Implementation of TQM

Successful Implementation of TQM

– Requires total integration of TQM into day-to-day operations.
Causes of TQM Implementation Failures
– Lack of focus on strategic planning and core competencies.
– Obsolete, outdated organizational cultures.

The key elements of TQM can be divided into four groups

according to their function:

• Foundation: Integrity, Ethics, Trust

• Building Bricks: Leadership, Teamwork, Training
• Roof: Recognition (Motivation)
• Binding Mortar: Communication
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

TYPES OF CONFORMANCE
By: Joanne Alexis V Biscocho

 CONFORMANCE COSTS

A. PREVENTION COSTS - Costs associated with all activities

designed to prevent defects in product or service. These include:

• The direct and indirect costs related to quality training and

education, pilot studies, quality circles, quality engineering, etc.
• These costs are used to build awareness of the quality program
and to keep the costs of appraisal and failure to a minimum.
• Prevention costs are all costs incurred in an effort to “make it right
the first time”

1. Quality planning and engineering: creation of the overall quality

plan, the inspection plan, the reliability plan, the data system, all
activities of the quality assurance function, the preparation of
manuals and procedures used to communicate the quality plan,
costs auditing the system.

2. New products review: evaluation of new designs, preparation of

tests & experimental programs to evaluate the performance of new
products.

3. Product & process design: costs incurred during the design of the
product or the selection of the production processes that are
intended to improve the overall quality of the product.
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Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

4. Process control: the cost of process control techniques, such as

control charts, that monitor the manufacturing process in an effort
to reduce variation and build quality into the product.

5. Burn-in: the cost of pre-shipment operation of the product to

prevent early failures in the field.

6. Training: the cost of developing, preparing, implementing,

operating, and maintaining formal training programs for quality.

7. Quality data acquisition and analysis: the cost of running the

quality data system to acquire data on product and process
performance. Includes cost of analyzing these data to identify
quality problems.

B. APPRAISAL COSTS - Costs associated with measuring and

evaluating the product or service quality to ensure conformance.

• These include the cost of inspection, test or audit of purchases,

manufacturing or process operations and finished goods or services.
• The direct and indirect costs of the various tests & inspections to
determine the degree of conformity are included in this category.

1. Inspection & test of incoming material: Costs associated with the

inspection and testing of all vendor-supplied material.
• Receiving inspection & test
• The same at the vendor’s facility
• Periodic audit of the vendor’s quality assurance system.

2. Product inspection & test: the cost of checking the conformance

of the product throughout its various stages of manufacturing.
• Final acceptance testing
• Packing and shipping checks
• Salaries of inspectors and supervisors.

3. Materials & Services consumed: The cost of operating a system

that keeps the measuring instruments and equipment in calibration.

4. Maintaining accuracy of test equipment: the cost of operating a

system that keeps the measuring instruments and equipment in
calibration.
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Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

 NON-CONFORMANCE COSTS

These are associated with products or services that do not conform

the customer's requirement. They are often referred to as “failure”
costs and consist of two types.

A. INTERNAL FAILURE COSTS:

•Costs incurred prior to the shipment of the product or the delivery
of the service.
• These costs are associated with defects that are found prior to
customer delivery.
• These include the net cost of scrap, re-inspection and retest,
downtime due to quality problems, opportunity cost of product
classified as seconds, or other product downgrades.
• These costs would disappear if there were no defects in the
product.

1. Scrap costs: the net loss of labor, material and overhead (fixed
costs) resulting from defective product that cannot economically be
repaired or used.

2. Rework: the cost of correcting nonconforming units so that they

meet specifications. Rework costs usually include additional
operations or steps in the manufacturing process, thus includes
extra direct labor, machine time and supplies costs.

3. Retest cost: the cost of reinspection and retesting of products

that have undergone rework or other modification.

4. Downtime costs: the cost of idle production facilities that result

from nonconformance to requirements.

5. Downgrading cost: the price differential between the normal

selling price and any selling price that might be obtained for a
product that does not meet the customer’s requirements.
Downgrading is common in the textile, apparel goods, electronics,
and carpet industries.

B. EXTERNAL FAILURE COSTS

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 The costs of discovered defects occurring after product shipment

or service delivery.
 These costs include warranty charges, customer complaint
adjustments, returned merchandise, product recalls, allowances,
and product liability.
 They also include the direct and indirect costs such as labor and
travel associated with the investigation of customer complaints,
warranty field inspection, tests and repairs.
 These costs would disappear if every unit of product conformed
to requirements and specifications.

1. Complaint adjustment: all cost of investigation and adjustment of

justified complaints attribute to the nonconforming product.

2. Returned product & material: all costs associated with receipt,

handling, and replacement of the nonconforming product or material
returned from the field. Also recalls of defective product.

3. Warranty charges: all costs involved in service to customers

under warranty contracts. Includes repair and replacement of
product or parts.

4. Liability costs: costs or awards incurred as a result of product

liability litigation.

5. Indirect costs: in addition to direct operating costs of external

failures, there are some indirect costs.

• Customer dissatisfaction with the level of quality

• Loss of good-will; loss of business reputation; loss of future
business; loss of market share.

COST OF QUALITY

TQM was evolved to satisfy customers in the most economical way.

Quality means cost of effectiveness. It means reducing expenditure by
eliminating wastes through systematic quality management approach.
Therefore, it is important to compute expenditure incurred an account of
poor quality, and prevent it. TQM aims at gradual reduction of wasteful
expenditure and eventually their total elimination. Quality cost should be
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

accounted separately so as to know how much the organization is losing

on account of poor quality. Decreasing cost of production should indicate
quality improvement. Accounting and analyzing quality cost have given
innumerable benefits to the organizations. Thus, the quality cost is an
important tool for TQM.

Cost of quality (COQ) - is the sum of cost incurred by an organization in

preventing poor quality.

3 Types of Quality Costs:

1. Prevention Costs
 Are the planned costs incurred by an organization to ensure
that no effects defects occur in any of the stages such as
design, development, production and delivery of a product or
service.
 Include education and training of employees, process of
improvements efforts, process control, market research,
product qualification, field testing, preventive maintenance,
calibration of instruments, audits, quality assurance staff, etc.
2. Appraisal Costs
 Are incurred in verifying, checking or evaluating a product or
service at various stages during manufacturing or delivering.
 They are incurred due to lack of confidence in the quality of
the product or service either due to the incoming material or
due to the process. For instance, the incoming materials are
inspected, because, the receiver is not sure about the quality
of the incoming goods
 Include incoming inspection, internal product audit, supplier
evaluation and audit inspection during the process and final
inspection, etc.
3. Failure Costs
 Incurred by an organization because the product or service did
not meet the expected requirements and the product had to
be fixed or replaced or the service had to be repeated. The
failure costs are due to the incurred failure of the organization
to control defects in the product.
 Defective products in the market can lead to the loss of
reputation and customer loyalty. One dissatisfied customer will
tell 100 others, which means the loss of both present and
future customers.
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

Cost of Quality = Cost of Prevention + Cost of Appraisal +Cost of

Failure

Reducing the Cost of Quality

• The aim of management is to minimize the cost of quality.

• It makes no difference if this is done by reducing all three
components or by increasing some and decreasing others enough to
lower the total cost.
• To have a significant impact on the total cost; the cost of failure
must be reduced, and the usual strategy for achieving this objective
is to spend more on prevention.
• “It is always cheaper to do a job right the first time than to do it
over”.

The Traditional Cost of Quality Model

The study of the relationship of the COQ categories led to the

development of a significant body of economic literature offering
various models to explain the interrelationship of the COQ.

Definition of COQ model figure:

• In this case, the costs of prevention and appraisal are zero with a
100% failure rate.
• The costs of prevention & appraisal rise to infinity as perfection
(no failures) is reached.
• This hypothetical model shows that total quality cost is higher
when quality is low and falls as quality improves.
• According to the model, a company greatly reduce failure costs by
adding relatively low-cost prevention and appraisal measures.
• As prevention and appraisal expenditures continue to rise, the rate
of improvement begins to diminish until additional expenditures
produce little decrease in failure.
• The model suggests that a relationship exists between
conformance and nonconformance quality costs, with a minimal
total quality cost at the optimal balance.
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

• Implicit in this model is the trade-off of conformance costs for

nonconformance costs to achieve the lowest total quality cost.

Behavior of Cost Components During TQM Implementation

The general behavior of the four quality cost components for a

company starting TQM is as follows:

• Prevention costs remain relatively consistent as the awareness of

TQM is built and maintained.
• Appraisal costs will initially increase as inspection programs are
initiated but should eventually level off.
• Internal failure costs will initially increase as the inspection
programs are implemented, but should the gradually decrease with
learning.
• External failure costs should continue to fall as various TQM
programs are brought on line.

USES OF QUALITY COST INFORMATION

The quality level increases, when the number of defects in the product or
service reduces. The cost of non-conformance (failure cost) decreases as
quality level improves. The quality level increases when the cost of
conformance (sum of prevention and appraisal cost) increases. The total
quality cost is the sum of both. A quality cost report has several uses.

 First quality cost information helps managers see the financial

significance of defects. Managers usually are not aware of the
magnitude of their quality costs because these costs cut
across departmental lines and are not normally tracked and
accumulated by the cost system. Thus, when first presented
with a quality cost report, managers often are surprised by the
amount of cost attributable to poor quality.
 Second quality cost information helps managers identify the
relative importance of the quality problems faced by the firm.
For example, the quality cost report may show that scrap is a
major quality problem or that the company is incurring huge
warranty costs. With this information, managers have a better
idea of where to focus efforts.
 Third, quality cost information helps managers see whether
their quality costs are poorly distributed. In general, quality
costs should be distributed more toward prevention and
appraisal activities and less toward failures.
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

LIMITATIONS OF QUALITY COST INFORMATION:

Three limitations of quality cost information should be recognized.

Typically, during the initial years of a quality improvement program, the
benefits of compiling a quality cost report outweigh the costs and
limitations of the reports. As managers gain experience in balancing
prevention and appraisal activities, the need for quality cost report often
diminishes.

 Simply measuring and reporting quality costs does not solve

quality problems. Problems can be solved by taking actions.
 Results usually lag behind quality improvement programs.
Initially quality cost may even increase as quality control
systems are designed and installed. Decrease in these costs
may not begin to occur until the quality program has been in
effect for a year or more.
 The most important quality costs lost sales arising from
customers ill will, is usually omitted from the quality cost
report because it is difficult to estimate.

REFERENCE:

https://www.accountingdetails.com/uses_of_quality_cost_information
.html

https://www.slideshare.net/

Just-in-time Inventory and its Advantages

By: Michelle G Encontro
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

Just-in-time (JIT) inventory

Just in time inventory, also known as JIT inventory, is the reduced
amount of inventory owned by a business after it installs a just-in-time
manufacturing system . This type of system is called a "pull" system.
The intent of a JIT system is to ensure that the components and sub-
assemblies used to create finished goods are delivered to the
production area exactly on time. Doing so eliminates a considerable
amount of investment in inventory, thereby reducing the working
capital needs of a business.

Under the JIT concept, inventory may be reduced by the following

means:

 Reduced production runs. Fast equipment setup times make it

economical to create very short production runs, which reduces
the investment in finished goods inventory.
 Production cells. Employees walk individual parts through the
processing steps in a work cell, thereby reducing scrap levels.
Doing so also eliminates the work-in-process queues that typically
build up in front of a more specialized work station.
 Compressed operations. Production cells are arranged close
together, so there is less work-in-process inventory being moved
between cells.

 Delivery quantities. Deliveries are made with the smallest

possible quantities, possibly more than once a day, which nearly
eliminates raw material inventories .

 Certification. Supplier quality is certified in advance, so their

deliveries can be sent straight to the production area, rather than
piling up in the receiving area to await inspection.

 Local sourcing. When suppliers are located quite close to a

company's production facility, the shortened distances make it
 NATIONAL COLLEGE OF BUSINESS AND ARTS
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much more likely that deliveries will be made on time, which

reduces the need for safety stock .

Advantages of JIT Inventory

There are a multitude of improvements related to JIT inventory,

particularly in relation to reduced cash requirements and the ease with
which manufacturing problems can be uncovered. Advantages of JIT
inventory include:

 Working capital. JIT inventory is designed to be exceedingly low, so

the investment in working capital is minimized.
 Obsolete inventory. Since inventory levels are so low, there is little
risk of having much obsolete inventory.

 Defects. With so little inventory on hand, defective inventory items

are more easy to identify and correct, resulting in lower scrap costs.

 Process time. A thoroughly implemented JIT system should shorten

the amount of time required to manufacture products, which may
decrease the quoted lead times given to customers placing orders.

 Engineering change orders. It is much easier to

implement engineering change orders to existing products, because
there are few existing stocks of raw materials to draw down before
you can implement changes to a product.

Disadvantages of JIT Inventory

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There is one key problem with JIT inventory, but it is a large one:

 Shortages. Low JIT inventory levels make it more likely that any
problem in the supplier pipeline will lead to a shortage that will
stop production. This risk can be mitigated through the use of
expensive overnight delivery services when shortages occur.

Evaluation of JIT Inventory

The benefits of reducing the investment in inventory are substantial,

which can lead a company to pare away too much inventory. When this
happens, any unanticipated disruption to the flow of materials can
bring operations to a halt almost immediately. Consequently, JIT
concepts should certainly be followed, but be aware that there is a
lower limit on how far you can reduce inventory levels.

Definition of terms:

Inventory is an asset that is intended to be sold in the ordinary course

of business. Inventory may not be immediately ready for sale.

In accounting, inventory is typically broken down into three categories,

which are:

 Raw materials . Includes materials intended to be consumed in the

production of finished goods.
 Work-in-process . Includes items that are in the midst of the
production process, and which are not yet in a state ready for
sale to customers.

 Finished goods . Includes goods ready for sale to customers. May

be termed merchandise in a retail environment where items are
bought from suppliers in a state ready for sale. Inventory is
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

typically classified as a short-term asset , since it is

usually liquidated within one year.

Finished goods are products that have completed all aspects of the
production process, and which are being held for sale. Products still in
the production process are classified as work-in-process inventory .
Several characteristics of finished goods are as follows:

 A company with a fast delivery strategy may need to keep a large

amount of finished goods inventory in stock.

 A company may want to minimize its finished goods inventory if

the inventory has a short shelf life , and so is at risk of spoilage or
obsolescence.

 Finished goods are considered to have significant value as

collateral for a lender, since they can be sold off with no delay for
finishing work.

Goods that have been acquired for immediate resale without any value-
added activities are considered to be merchandise, rather than finished
goods. Thus, retailers have merchandise in stock, rather than finished
goods.

Scrap is the excess unusable material that is left over after a product
has been manufactured. This residual amount has minimal value, and is
usually sold off for its material content. A business can reduce the
amount of scrap that it generates by exercising great care in setting up
production equipment, buying raw materials of adequate quality, and
training employees in the proper use of production equipment.

An engineering change order authorizes design changes that affect

the structure of a production design after it has been wholly or partially
completed. An engineering change order is used to correct design
errors, substitute less-expensive components, improve quality, and so
 NATIONAL COLLEGE OF BUSINESS AND ARTS
Aurora Boulevard, Cubao, Quezon City  Telephone Nos. 913-87-85 to 87

forth. A number of change orders may be implemented over the life of

a product. Someone managing inventory will want to time the release
of engineering change orders so that existing raw materials that will be
eliminated by the change will be used up before the change order takes
effect.

Reference: https://www.accountingtools.com/articles/what-is-just-in-time-
jit-inventory.html - March 2018