1. Quality and Environmental Cost Management
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license.

2. Study Objectives
Define quality, describe the four types of quality costs, discuss the approaches used for quality cost measurement, and prepare a quality cost report.
Explain why quality cost information is needed and how it is used.
Describe and prepare three different types of quality performance reports.
Explain how environmental costs can be measured and reduced.

3. Costs of Quality 1. Quality-linked activities
Activities performed because poor quality may or does exist
Control activities
performed by an organization
to prevent or detect poor quality
Failure activities
Performed by an organization or its customers
In response to poor quality

4. Costs of Quality 1. Categories of quality costs
Prevention costs: incurred to prevent poor quality in product or services from being produced
Appraisal costs: Incurred to determine whether products and services are conforming
Product acceptance: sample finished goods
Process acceptance: sample goods while in process
Internal failure costs: incurred because products or services do not conform; discovered prior to delivery
External failure costs: incurred because products or services do not conform; discovered after delivery

5. Costs of Quality 1.

6. Costs of Quality 1.

7. Costs of Quality 1. Quality cost Estimating hidden quality costs
Observable
Available from the accounting records
Hidden
Opportunity costs resulting from poor quality
Estimating hidden quality costs
The multiplier method
The market research method

8. Costs of Quality 1. Multiplier Method
Assumes that the total failure cost is simply some multiple of measured 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.

9. Costs of Quality 1. Market Research Method
Uses formal market research methods to assess the effect of poor quality on sales and market share.
Market research results can be used to project future profit losses attributable to poor quality.
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.

10. Costs of Quality 1. a Actual sales of $5,000,000.
b $1,000,000 ÷ $5,000,000 = 20%.

11. Costs of Quality 1.

12. Quality Cost Information and Decision Making2.
Strategic Pricing

13. Quality Cost Information and Decision Making2.
Cost-Volume-Profit Analysis and Strategic Decisions
New Product Analysis, Project #675
Projected sales potential: 44,000 units
Production capacity: 45,000 units
Unit selling price: $60
Break-even: 50,000 units
Decision: Reject (breakeven exceeds capacity and potential)
Unit variable costs: $40
Fixed costs:
Product development $ 500,000
Manufacturing 200,000
Selling ,000
Total $1,000,000
Includes $5 quality costs
Includes $100,000 quality costs

14. Quality Cost Information and Decision Making2.
Cost-Volume-Profit Analysis and Strategic Decisions
New Product Analysis, Project #675, Revised
Projected sales potential: 44,000 units
Production capacity: 45,000 units
Unit selling price: $60
Unit variable costs: $40 $35
Fixed costs:
Product development $ 500,000 $500,000
Manufacturing 200, ,000
Selling , ,000
Total $1,000,000 $900,000
Break-even: 50,000 units
Decision: Reject (breakeven exceeds capacity and potential)
Break-even: 36,000 units
Decision: Accept

15. Quality Cost Information and Decision Making2.

16. Controlling Quality Costs3.
Traditional Approach
Acceptable quality level (AQL) is the standard
Includes a certain number of defective products
Ship products if defective units do not exceed AQL
Creates a “commitment to deliver” defective products

17. Controlling Quality Costs3.
Total Quality Approach
Zero-defect standards
Reflects a philosophy of total quality control
Calls for products and services to be produced and delivered that meet the targeted value
Implies the elimination of failure costs

18. Controlling Quality Costs3.
Total Quality Approach
Quantify the standard
As the costs of quality decrease, higher quality results
2.5% standard is accepted by many QC experts
Interim standards
Mid-range goals while pursuing the zero-defects level

19. Controlling Quality Costs3.
Quality Performance Reports
Interim Standard Report: Progress with respect to a current-period standard or goal
Multiple-Period Trend Report: The progress trend since the inception of the quality-improvement program
Long-Range Report: Progress with respect to the long-range standard or goal

20. Controlling Quality Costs3.

21. Controlling Quality Costs3.

22. Controlling Quality Costs3.

23. Controlling Quality Costs3.

24. Controlling Quality Costs3.

25. Controlling Quality Costs3.

26. Controlling Quality Costs3.

27. Controlling Quality Costs3.

28. Controlling Quality Costs3.

29. Controlling Quality Costs3.

30. Controlling Quality Costs3.

31. Defining, Measuring, and Controlling Environmental Costs4.
Environmental costs: costs that are incurred because poor environmental quality exists or may exist
Damage
Direct degradation of the environment
Indirect degradation (unnecessary usage)
Categories
prevention costs
detection costs
internal failure costs
external failure costs

32. Defining, Measuring, and Controlling Environmental Costs4.

33. Defining, Measuring, and Controlling Environmental Costs4.

34. Defining, Measuring, and Controlling Environmental Costs4.

35. Defining, Measuring, and Controlling Environmental Costs4.
continued

36. Defining, Measuring, and Controlling Environmental Costs4.
Note: “S” = societal costs

37. Defining, Measuring, and Controlling Environmental Costs4.

38. Defining, Measuring, and Controlling Environmental Costs4.

39. Defining, Measuring, and Controlling Environmental Costs4.

40. End Chapter 14
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license.