Chapter Sixteen
The Management &
Control of Quality
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Learning Objectives
• Define accounting’s role in the management & control
of quality
• Define “quality” and the characteristics of total quality
management (TQM)
• Develop a comprehensive framework for the
management & control of quality
• Understand two different approaches for setting
quality-related goals
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Learning Objectives
(continued)
• Prepare and interpret relevant financial information
to support TQM initiatives
• Discuss the use of nonfinancial information to
support TQM initiatives
• Describe & understand techniques for detecting
& correcting quality problems
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Strategic Importance of Quality
• Baldridge Quality Award
• ISO 9000 and ISO 14000
• Conceptual linkage between Quality and Financial
Performance (Exhibit 16.1—see next slide)
• Empirical evidence regarding the relationship
between quality and financial performance—what
do the data suggest?
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Exhibit 16.1
Improved Quality
Lower
Return
Sales
Lower
Warranty
and Service
Costs
Lower
Manufacturing
Cost
Higher
Perceived
Value
Higher
Prices
Higher
Market
Share
Increased
Revenue
Financial Performance
Lower
Throughput
Time
Faster
Delivery
6
Accounting’s Role in the
Management & Control of Quality
• Accountants can add value to the organization by
providing decision-makers with relevant financial
and nonfinancial information related to quality
• Such information actively supports the quality
initiatives embraced by management
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Basic Terminology
• “Quality”— customer satisfaction with the total
experience of a product or service:
– Design quality (focuses on the features that customers
want)
– Performance quality (focuses on product/service
performance)
• Total quality management (TQM)
– Importance of having a good measurement system to
support TQM
– Limitations of conventional accounting systems?
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Comprehensive Framework for
Managing/Controlling Quality: Exhibit 16.3
• Broad business perspective—knowledge of business
processes
• Paramount role of the consumer
• Relevant financial data
• Nonfinancial performance indicators
• Feedback loops
• Linkage to operations management
• Breadth of the system—value-chain approach
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Setting Quality-Related Expectations
• Six-Sigma approach:
–
–
–
–
Define
Measure
Analyze
Improve
– Control
• Goalpost vs. Absolute Conformance:
– Goalpost conformance
– Absolute quality conformance (robust quality
approach)
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Goalpost Conformance
Goalpost or absolute conformance assumes
that the firm incurs no quality or failure cost
or loss if quality measures fall with the
specified limits
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Absolute Conformance
Absolute quality conformance requires that all
products or services meet exactly the target
value with no variation allowed
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Financial Measures & COQ
Financial information to support TQM initiatives:
– Relevant cost information for decision-making
(refer to concepts in Chapter 9):
• Future costs and revenues that differ between
decision alternatives
• “Avoidable costs” vs. Sunk costs
• Out-of-Pocket costs + Opportunity costs
– Cost of Quality (COQ) Reporting
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COQ Reports
• Prevention—expenditures incurred to keep quality
defects from occurring
• Appraisal—costs incurred in the measurement and
analysis of data to find out if products and services
conform to specification/customer expectations
• Internal failure—costs incurred as a result of poor
quality found through appraisal prior to delivery to
customers
• External failure—costs incurred to rectify quality
defects after unacceptable products or services reach
the customer
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Sample Costs of Quality
Prevention:
– Quality training costs
– Equipment maintenance costs
Appraisal:
– Testing & inspection costs
– Quality audits
– Vendor certification
– Test equipment and instruments
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Sample Costs of Quality (continued)
Internal failure:
– Rework costs
– Scrap (net of disposal value)
– Lost contribution margin because of schedule disruptions
External failure:
– Costs to handle customer complaints & returns
– Lost sales/market share (customer ill-will)
– Field service/repair costs
– Product liability lawsuits
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Example:
COQ
Report
Prevention costs
Training
$
Quality planning
Other quality improvements
Supplier evaluation
Total
Appraisal costs
Testing
Quality performance
Supplier monitoring
Customer surveys
Total
Internal failure costs
Rework and reject
Reinspection and testing
Equipment failure
Downtime
Total
External failure costs
Product liability insurance
Warranty repairs
Customer losses
Total
Total quality costs
$
Blocher,Stout,Cokins,Chen, Cost Management 4e
2,008
15,000 $
8,000
6,500
3,000
32,500
2,007
14,000
8,100
6,000
2,500
30,600
% Change
7%
-1%
8%
20%
6%
45,000
17,000
28,000
15,000
105,000
47,000
15,000
34,000
21,500
117,500
-4%
13%
-18%
-30%
-11%
7,500
2,500
1,800
2,000
13,800
8,200
3,500
2,000
2,400
16,100
-9%
-29%
-10%
-17%
-14%
65,000
106,000
11,000
182,000
346,200
0%
18%
9%
11%
2%
65,000
125,000
12,000
202,000
353,300 $
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Conformance and
Nonconformance Costs
Cost of Conformity:
– Prevention Costs
– Appraisal Costs
Cost of Nonconformity:
– Internal Failure Costs
– External Failure Costs
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Detecting & Correcting Poor Quality
Detecting Poor Quality
– Control Charts
– Statistical Control Charts
– Run Charts
Correcting Quality Problems
– Histograms
– Pareto Diagrams (Charts)
– “Cause-and-Effect” (“fishbone”) Diagrams
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Control Charts
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Control Charts (continued)
The circled observations are unacceptable, that is, they
suggest an out-of-control process. Management may want
to investigate the underlying causes of these observations
and take appropriate corrective action.
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Histograms
70
60
50
40
30
20
10
0
1
1
3
5
2
3
Quality of chocolate
Egg size
Blending duration
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4
2
4
6
5
6
Liqueur
Blending speed
Improper refrigeration
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Pareto Diagram
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Cause-and-Effect Diagram
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Chocolate Mousse
Cause-and Effect Diagram
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Appendix: Taguchi Loss Functions
General expression of the loss function, L(x),
for an observed quality characteristic, x, is:
L(x) = k(x -T)2
where: x = an observed value of the quality
characteristic
T = the target value of the quality characteristic
k = the cost coefficient, determined by the firm’s
failure costs
Total Quality Cost
k = --------------------------------------------(Tolerance Allowed)2
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Taguchi Loss Functions
(continued)
Your firm has determined that no customer will
accept sheet-metal deviating more than 0.05”
from the target thickness (0.50”). The cost to the
firm is $5,000 for each rejection by a customer.
Total Quality Cost
k=
(Tolerance Allowed)2
$5,000
k=
0.05
2
= $2,000,000
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Taguchi Loss Functions
(continued)
L(x) = k(x -T)
L(0.47) = $2,000,000(0.47 - 0.50)2
L(0.47) = $1,800
 If the actual thickness of a unit is 0.47, then
the estimated total loss for the unit is $1,800.
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Chapter Summary
• We specified accounting’s role in the management &
control of quality
• We defined “quality” and the characteristics of total
quality management (TQM)
• We developed and discussed comprehensive
framework for the management & control of quality,
and the role of accounting within this framework
• We discussed two different approaches for setting
quality-related goals (Six Sigma and Goalpost versus
Absolute Conformance)
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008
29
Chapter Summary (continued)
• We discussed two areas where financial
information can be supplied by the accountant
to support TQM initiatives:
– Relevant cost information for decision-making purposes
– Cost of Quality (COQ) Reporting
• We discussed the use of nonfinancial information
to support TQM initiatives
• We described techniques, borrowed from
operations management, that can be used for
detecting & correcting quality problems
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008