PowerPoint Presentation by Gail B. Wright
Professor Emeritus of Accounting Bryant University


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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.

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 3 .

communication materials Serviceability: ease of maintaining.LO 1 DIMENSIONS OF QUALITY: 1 Performance: how consistently a product functions Aesthetics : appearance of tangible products. Aesthetics facilities. repairing product Features of quality design: characteristics that differentiate between similar products Continued 4 .

service will perform intended function for specified length of time Durability: length of time a product functions of conformance conformance : measure of how a Quality Quality of product meets its specifications Fitness for use: suitability of product for advertised functions 5 .LO 1 DIMENSIONS OF QUALITY: 2 Reliability: probability that product.

Zero defects is the goal.LO 1 DEFECTIVE PRODUCT: Definition Is one that does not conform to specifications. 6 .

• Failure activities are responses to poor quality.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. 7 .

LO 1 CATEGORIES OF QUALITY COSTS 1. External failure costs: incurred when products fail to conform after delivery and recalled 8 . scrapped. etc. Appraisal Appraisal costs : incurred to determine whether products. Prevention costs: incurred to prevent poor quality 2. customer needs 3. 4. service reworked. services conform to requirements. Internal failure costs: incurred when nonconformance is discovered & product.

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 9 .

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) 10 .

11 .LO 1 How does market research estimate hidden quality costs? Market research uses customer surveys & interviews of sales staff to project future profit losses.

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. 12 .

[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 13 .LO 1 FORMULA: Taguchi Function Taguchi quality loss function estimates hidden costs of poor quality.

14 .LO 2 ACCEPTABLE QUALITY LEVEL (AQL): Definition Is the optimal balance between control costs & failure costs.

15 .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.

16 .LO 2 ZERO DEFECTS MODEL: Definition Claims that it is cost beneficial to reduce nonconforming units to zero.

17 .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.

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 18 .

b) causes are preventable. 19 .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. and c) prevention is always cheaper.

LO 2 ABM & OPTIMAL QUALITY COSTS ABM classifies costs as value-added & non-value-added and recommends non-value-added costs be eliminated. when performed efficiently  Non-value-added quality costs  Appraisal costs  Failure costs (both internal & external) 20 .  Value-added quality costs  Prevention activities.

quality costs shift from nonvalue-added to valueadded (prevention) costs.LO 2 TQC COMPONENT GRAPH Over time. EXHIBIT 15-8 21 .

LO 3 What are principal objectives of reporting quality costs? Principal objectives are to improve & facilitate a) managerial planning. and c) decision making. 22 . b) control.

23 . 2 conditions must be satisfied:  Technical efficiency: For any mix of inputs that will produce a given output. the least costly mix is chosen.LO 4 TOTAL PRODUCTIVE EFFICIENCY When concerned with productive efficiency. 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.

financial productivity must be measured 24 .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.

LO 4 TOTAL PRODUCTIVITY MEASUREMENT: Definition Is measuring productivity for all inputs simultaneously. 25 .

LO 4 PROFIT-LINKED PRODUCTIVITY MEASUREMENT: Definition Is measuring the amount of profit change attributable to productivity change. 26 .

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]. 27 .

060.LO 4 FORMULA: Profit Recovery Profit recovery is the change in revenue minus a change in the cost of inputs .510. Profit recovery = Profit change – Profit linked productivity change = ($1.000 – $450.000 28 .000) = $1.


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