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PowerPoint Presentation by
Gail B. WrightProfessor Emeritus of Accounting
Bryant University
Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
15 QUALITY COSTS AND PRODUCTIVITY
STUDENT EDITION
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1. Identify & describe the 4 types of qualitycosts.
2. Prepare a quality cost report; differentiatebetween acceptable quality level & totalquality 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.
LEARNING OBJ ECTIVES
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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
LO 1
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DIMENSIONS OF QUALITY: 1
Performance: how consistently a product
functions
Aesthetics : appearance of tangible products,
facilities, communication materials
Serviceability: ease of maintaining, repairing
product
Features of quality design: characteristics that
differentiate between similar products
LO 1
Continued
Aesthetics
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DIMENSIONS OF QUALITY: 2
Reliability: probability that product, service
will perform intended function for specified
length of time
Durability: length of time a product functions
Quality of conformance : measure of how a
product meets its specifications
Fitness for use: suitability of product for
advertised functions
LO 1
Quality of conformance
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DEFECTIVE PRODUCT:
Definition
Is one that does not conform tospecifications. Zero defects is
the goal.
LO 1
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CATEGORIES OF QUALITY
COSTS
1. Prevention costs: incurred to prevent poor quality
2. Appraisal costs : incurred to determine whether
products, services conform to requirements,
customer needs
3. Internal failure costs: incurred when non-
conformance is discovered & product, service re-
worked, scrapped, etc.4. External failure costs: incurred when products fail
to conform after delivery and recalled
LO 1
Appraisal costs
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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
LO 1
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FORMULA: Multiplier Method
Multiplier method estimates quality costs as
some multiple of measured failure costs.
LO 1
Total external failure cost:
= k (Measured external failure costs)
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How does market research
estimate hidden qualitycosts?
Market researchuses customer
surveys & interviews of sales
staff to project future profit
losses.
LO 1
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What assumption does the
Taguchi quality lossfunction make?
Taguchi quality loss function
assumes that variations from
target value of quality
characteristic causes hiddenquality costs regardless of
specification limits.
LO 1
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FORMULA: Taguchi Function
Taguchi quality loss function estimates hidden
costs of poor quality.
LO 1
[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
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ACCEPTABLE QUALITY
LEVEL (AQL): Definition
Is the optimal balancebetween control costs &
failure costs.
LO 2
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Is there a problem with the
ACL (traditional) view ofquality?
AQL encouraged lower quality
levels by accepting production
of a given number of defectiveunits.
LO 2
O 2
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ZERO DEFECTS MODEL:
Definition
Claims that it is costbeneficial to reduce non-
conforming units to zero.
LO 2
LO 2
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Is there a problem with the
zero defects model?
Zero defects model understates
quality costs & the potential for
savings from efforts to improvequality.
LO 2
understates
LO 2
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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
LO 2
LO 2
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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, b) causes are preventable,and c) prevention is always cheaper.
LO 2
LO 2
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ABM & OPTIMAL QUALITY
COSTSABM classifies costs as value-added &
non-value-added and recommends
non-value-added costs be eliminated.
Value-added quality costs
Prevention activities, when performed
efficiently
Non-value-added quality costs Appraisal costs
Failure costs (both internal & external)
LO 2
LO 2
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TQC COMPONENT GRAPH
LO 2
EXHIBIT15-8
Over time, quality
costs shift from non-
value-added to value-
added (prevention)
costs.
LO 3
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What are principal
objectives of reportingquality costs?
Principal objectives are to
improve & facilitate a)
managerial planning, b) control,
and c) decision making.
LO 3
LO 4
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TOTAL PRODUCTIVE
EFFICIENCY
When concerned with productive efficiency,
2 conditions must be satisfied:
Technical efficiency: For any mix of inputsthat will produce a given output, 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, the
least costly mix is chosen.
LO 4
LO 4
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PARTIAL MEASURES: Analysis
LO 4
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,financial productivity must be measured
LO 4
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TOTAL PRODUCTIVITY
MEASUREMENT: Definition
Is measuring productivity forall inputs simultaneously.
LO 4
LO 4
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PROFIT-LINKED PRODUCTIVITY
MEASUREMENT:Definition
Is measuring the amount ofprofit change attributable to
productivity change.
LO 4
LO 4
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PROFIT-LINKAGE RULE:Definition
States that productivity change isthe difference between
[Cost of inputs without
productivity change
cost ofinputs actually used].
LO 4
LO 4
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FORMULA: Profit Recovery
Profit recovery is the change in revenue minus a
change in the cost of inputs .
LO 4
Profit recovery
= Profit changeProfit linked productivity change
= ($1,510,000$450,000)
= $1,060,000
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THE END
CHAPTER 15