1. 14-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL

2. 14-2 Quality Cost Management 14

3. 14-3 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. Costs of Quality 1

4. 14-4 Distribution of Color Density of Sony Television Sets Costs of Quality 1

5. 14-5 Defining Quality Costs 1) 1) Prevention costs 2) 2) Appraisal costs 3) 3) Internal failure costs 4) 4) External failure costs Costs of Quality 1

6. 14-6 Examples of Quality Costs by Category Costs of Quality 1

7. 14-7 Examples of Quality Costs by Category (cont’d) Costs of Quality 1

8. 14-8  The Multiplier Method  The Market Research Method  The Taguchi Quality Loss Function Hidden Quality Costs are opportunity costs resulting from poor quality. Costs of Quality 1

9. 14-9 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. Costs of Quality 1

10. 14-10 The market research method uses 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. Costs of Quality 1

11. 14-11 The Taguchi loss function assumes 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. Costs of Quality 1

12. 14-12 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 The Taguchi Quality Loss Function Costs of Quality 1

13. 14-13 Costs of Quality 1 The Taguchi Quality Loss Function

14. 14-14 Costs of Quality 1 Quality Loss Computation Illustrated

15. 14-15 Quality Cost Report Basic Concepts of the Balanced Scorecard 2 a Actual sales of $5,000,000. b $1,000,000/$5,000,000 = 20 percent.

16. 14-16 Quality Cost Categories: Relative Contribution Graphs Basic Concepts of the Balanced Scorecard 2

17. 14-17 AQL Quality Cost Graph Basic Concepts of the Balanced Scorecard 2

18. 14-18 Zero-Defects Quality Cost Graph Basic Concepts of the Balanced Scorecard 2

19. 14-19 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 3 Quality Cost Information and Decision Making

20. 14-20 Data from the low-level instruments are: Quality costs (estimated): Inspection of materials$ 200,000 Scrap800,000 Rejects500,000 Rework400,000 Product inspection300,000 Warranty work 1,000,000 Total estimate$3,200,000 Strategic Pricing 3 Quality Cost Information and Decision Making

21. 14-21 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 Manufacturing200,000 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. 3 Quality Cost Information and Decision Making

22. 14-22 3 Quality Cost Information and Decision Making ISO 9000 Standards

23. 14-23 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. 4 Controlling Quality Costs The Total Quality Approach

24. 14-24 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) 4 Controlling Quality Costs The Total Quality Approach

25. 14-25 4 Controlling Quality Costs Interim Quality Performance Report

26. 14-26 4 Controlling Quality Costs Interim Quality Performance Report

27. 14-27 4 Controlling Quality Costs Interim Quality Performance Report

28. 14-28 4 Controlling Quality Costs Interim Quality Performance Report

29. 14-29 4 Controlling Quality Costs Multiple-Period Trend Graph: Total Quality Costs

30. 14-30 4 Controlling Quality Costs Multiple-Period Trend Graph: Individual Quality Costs Categories

31. 14-31 4 Controlling Quality Costs Multiple-Period Trend Graph: Relative Quality Costs

32. 14-32 4 Controlling Quality Costs Long-Range Quality Performance Report

33. 14-33 4 Controlling Quality Costs Long-Range Quality Performance Report

34. 14-34 4 Controlling Quality Costs Long-Range Quality Performance Report

35. 14-35 4 Controlling Quality Costs Long-Range Quality Performance Report

36. 14-36 End of Chapter 14