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14-1 HANSEN & MOWEN HANSEN & MOWEN Cost Management Cost Management ACCOUNTING AND CONTROL ACCOUNTING AND CONTROL
14-1
HANSEN & MOWENHANSEN & MOWEN
Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL
14-2
Quality Cost ManagementQuality Cost Management
14
14-3
A quality product or service is one that meets
or exceeds customer expectations.
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.
Quality of conformance is a measure of how a
product meets its specifications.
Costs of QualityCosts of Quality 1
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Distribution of Color Density of Sony Television Distribution of Color Density of Sony Television SetsSets
Distribution of Color Density of Sony Television Distribution of Color Density of Sony Television SetsSets
Costs of QualityCosts of Quality 1
14-5
Defining Quality CostsDefining Quality Costs
1) Prevention costs
2) Appraisal costs
3) Internal failure costs
4) External failure costs
Costs of QualityCosts of Quality 1
14-6
Examples of Quality Costs by CategoryExamples of Quality Costs by CategoryExamples of Quality Costs by CategoryExamples of Quality Costs by Category
Costs of QualityCosts of Quality 1
14-7
Examples of Quality Costs by Category (cont’d)Examples of Quality Costs by Category (cont’d)Examples of Quality Costs by Category (cont’d)Examples of Quality Costs by Category (cont’d)
Costs of QualityCosts of Quality 1
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 QualityCosts of Quality 1
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 QualityCosts of Quality 1
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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 QualityCosts of Quality 1
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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 QualityCosts of Quality 1
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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 QualityCosts of Quality 1
14-13
Costs of QualityCosts of Quality 1
The Taguchi Quality Loss FunctionThe Taguchi Quality Loss FunctionThe Taguchi Quality Loss FunctionThe Taguchi Quality Loss Function
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Costs of QualityCosts of Quality 1
Quality Loss Computation IllustratedQuality Loss Computation IllustratedQuality Loss Computation IllustratedQuality Loss Computation Illustrated
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Quality Cost ReportQuality Cost ReportQuality Cost ReportQuality Cost Report
Basic Concepts of the Balanced Basic Concepts of the Balanced ScorecardScorecard 2
aActual sales of $5,000,000.
b$1,000,000/$5,000,000 = 20 percent.
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Quality Cost Categories: Relative Contribution GraphsQuality Cost Categories: Relative Contribution GraphsQuality Cost Categories: Relative Contribution GraphsQuality Cost Categories: Relative Contribution Graphs
Basic Concepts of the Balanced Basic Concepts of the Balanced ScorecardScorecard 2
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AQL Quality Cost GraphAQL Quality Cost GraphAQL Quality Cost GraphAQL Quality Cost Graph
Basic Concepts of the Balanced Basic Concepts of the Balanced ScorecardScorecard 2
14-18
Zero-Defects Quality Cost GraphZero-Defects Quality Cost GraphZero-Defects Quality Cost GraphZero-Defects Quality Cost Graph
Basic Concepts of the Balanced Basic Concepts of the Balanced ScorecardScorecard 2
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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
3Quality Cost Information Quality Cost Information and Decision Makingand Decision Making
14-20
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
Strategic Pricing
3Quality Cost Information Quality Cost Information and Decision Makingand Decision Making
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Reports: New Product Analysis, Project #675
Projected sales potential: 44,000 unitsProduction capacity: 45,000 unitsUnit selling price: $60Unit variable costs: $40Fixed costs:
Product development$ 500,000Manufacturing200,000Selling 300,000 Total$1,000,000
Projected break-even: 50,000 unitsDecision: RejectReason(s): The break-even point is greater than the production
capacity as well as the projected sales volume.
3Quality Cost Information Quality Cost Information and Decision Makingand Decision Making
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3Quality Cost Information Quality Cost Information and Decision Makingand Decision Making
ISO 9000 StandardsISO 9000 StandardsISO 9000 StandardsISO 9000 Standards
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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.
4Controlling Quality CostsControlling Quality Costs
The Total Quality Approach
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)
4Controlling Quality CostsControlling Quality Costs
The Total Quality Approach
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4Controlling Quality CostsControlling Quality Costs
Interim Quality Performance ReportInterim Quality Performance ReportInterim Quality Performance ReportInterim Quality Performance Report
14-26
4Controlling Quality CostsControlling Quality Costs
Interim Quality Performance ReportInterim Quality Performance ReportInterim Quality Performance ReportInterim Quality Performance Report
14-27
4Controlling Quality CostsControlling Quality Costs
Interim Quality Performance ReportInterim Quality Performance ReportInterim Quality Performance ReportInterim Quality Performance Report
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4Controlling Quality CostsControlling Quality Costs
Interim Quality Performance ReportInterim Quality Performance ReportInterim Quality Performance ReportInterim Quality Performance Report
14-29
4Controlling Quality CostsControlling Quality Costs
Multiple-Period Trend Graph: Total Quality Multiple-Period Trend Graph: Total Quality CostsCosts
Multiple-Period Trend Graph: Total Quality Multiple-Period Trend Graph: Total Quality CostsCosts
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4Controlling Quality CostsControlling Quality Costs
Multiple-Period Trend Graph: Individual Quality Costs Multiple-Period Trend Graph: Individual Quality Costs CategoriesCategories
Multiple-Period Trend Graph: Individual Quality Costs Multiple-Period Trend Graph: Individual Quality Costs CategoriesCategories
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4Controlling Quality CostsControlling Quality Costs
Multiple-Period Trend Graph: Relative Quality CostsMultiple-Period Trend Graph: Relative Quality CostsMultiple-Period Trend Graph: Relative Quality CostsMultiple-Period Trend Graph: Relative Quality Costs
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4Controlling Quality CostsControlling Quality Costs
Long-Range Quality Performance ReportLong-Range Quality Performance ReportLong-Range Quality Performance ReportLong-Range Quality Performance Report
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4Controlling Quality CostsControlling Quality Costs
Long-Range Quality Performance ReportLong-Range Quality Performance ReportLong-Range Quality Performance ReportLong-Range Quality Performance Report
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4Controlling Quality CostsControlling Quality Costs
Long-Range Quality Performance ReportLong-Range Quality Performance ReportLong-Range Quality Performance ReportLong-Range Quality Performance Report
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4Controlling Quality CostsControlling Quality Costs
Long-Range Quality Performance ReportLong-Range Quality Performance ReportLong-Range Quality Performance ReportLong-Range Quality Performance Report
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End of End of Chapter 14Chapter 14
