Cost Management ACCOUNTING AND CONTROL

1. Cost ManagementACCOUNTING AND CONTROL HANSEN & MOWEN

2. 14 CHAPTER Quality Cost Management

3. 1 Costs of Quality OBJECTIVE A quality product or service is one that meets or exceeds customer expectations. Quality of conformance is a measure of how a product meets its specifications.

4. 1 Costs of Quality OBJECTIVE • Distribution of Color Density of Sony Television Sets

5. 1 Costs of Quality OBJECTIVE Defining Quality Costs Prevention costs Appraisal costs Internal failure costs External failure costs

6. 1 Costs of Quality OBJECTIVE • Examples of Quality Costs by Category

7. 1 Costs of Quality OBJECTIVE • Examples of Quality Costs by Category (cont’d)

8. 1 Costs of Quality OBJECTIVE Hidden Quality Costs are opportunity costs resulting from poor quality. The Multiplier Method The Market Research Method The Taguchi Quality Loss Function

9. 1 Costs of Quality OBJECTIVE The multiplier method assumes that the total failure cost is simply some multiple of measured failure costs: Total external failure cost = k(Measured external failure costs) where k is the multiplier effect If k = 4, and the measured external failure costs are $3 million, then the actual external failure costs are estimated to be $12 million.

10. 1 Costs of Quality OBJECTIVE The market research methoduses formal market research methods to assess the effect of poor quality on sales and market share. 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. • Market research results can be used to project future profit losses attributable to poor quality.

11. 1 Costs of Quality OBJECTIVE The Taguchi loss functionassumes any variation from the target value of a quality characteristic causes hidden quality costs. Furthermore, the hidden quality costs increase quadratically as the actual value deviates from the target value.

12. 1 Costs of Quality OBJECTIVE The Taguchi Quality Loss Function L(y) = k(y – T)² k = A proportionately constant dependent upon the organization’s external failure cost structure y = Actual value of quality characteristic T = Target value of quality characteristic L = Quality loss

13. 1 Costs of Quality OBJECTIVE • The Taguchi Quality Loss Function

14. 1 Costs of Quality OBJECTIVE • Quality Loss Computation Illustrated

15. 2 Basic Concepts of the Balanced Scorecard OBJECTIVE • Quality Cost Report aActual sales of $5,000,000. b$1,000,000/$5,000,000 = 20 percent.

16. 2 Basic Concepts of the Balanced Scorecard OBJECTIVE • Quality Cost Categories: Relative Contribution Graphs

17. 2 Basic Concepts of the Balanced Scorecard OBJECTIVE • AQL Quality Cost Graph

18. 2 Basic Concepts of the Balanced Scorecard OBJECTIVE • Zero-Defects Quality Cost Graph

19. Quality Cost Information and Decision Making 3 OBJECTIVE Strategic Pricing Revenues (1,000,000 @ $20) $20,000,000 Cost of goods sold -15,000,000 Operating expenses - 3,000,000 Product-line income $ 2,000,000

20. Quality Cost Information and Decision Making 3 OBJECTIVE Strategic Pricing Data from the low-level instruments are: Quality costs (estimated): Inspection of materials $ 200,000 Scrap 800,000 Rejects 500,000 Rework 400,000 Product inspection 300,000 Warranty work 1,000,000 Total estimate $3,200,000

21. Quality Cost Information and Decision Making 3 OBJECTIVE Reports: New Product Analysis, Project #675 Projected sales potential: 44,000 units Production capacity: 45,000 units Unit selling price: $60 Unit variable costs: $40 Fixed costs: Product development $ 500,000 Manufacturing 200,000 Selling 300,000 Total $1,000,000 Projected break-even: 50,000 units Decision: Reject Reason(s): The break-even point is greater than the production capacity as well as the projected sales volume.

22. Quality Cost Information and Decision Making 3 OBJECTIVE • ISO 9000 Standards

23. Controlling Quality Costs 4 OBJECTIVE The Total Quality Approach Zero-defect standards reflects a philosophy of total quality control and calls for products and services to be produced and delivered that meet the targeted value.

24. Controlling Quality Costs 4 OBJECTIVE The Total Quality Approach 1.Progress with respect to a current-period standard or goal (an interim standard report) 2.The progress trend since the inception of the quality-improvement program (a multiple-period trend report) 3. Progress with respect to the long-range standard or goal (a long-range report)

25. Controlling Quality Costs 4 OBJECTIVE • Interim Quality Performance Report

26. Controlling Quality Costs 4 OBJECTIVE • Interim Quality Performance Report

27. Controlling Quality Costs 4 OBJECTIVE • Interim Quality Performance Report

28. Controlling Quality Costs 4 OBJECTIVE • Interim Quality Performance Report

29. Controlling Quality Costs 4 OBJECTIVE • Multiple-Period Trend Graph: Total Quality Costs

30. Controlling Quality Costs 4 OBJECTIVE • Multiple-Period Trend Graph: Individual Quality Costs Categories

31. Controlling Quality Costs 4 OBJECTIVE • Multiple-Period Trend Graph: Relative Quality Costs

32. Controlling Quality Costs 4 OBJECTIVE • Long-Range Quality Performance Report

33. Controlling Quality Costs 4 OBJECTIVE • Long-Range Quality Performance Report

34. Controlling Quality Costs 4 OBJECTIVE • Long-Range Quality Performance Report

35. Controlling Quality Costs 4 OBJECTIVE • Long-Range Quality Performance Report

36. End of Chapter 14