管理会计-lecture 12quality costs-2

1、BU5004 Managerial Accounting,Session 12 Quality Costs,Quality costs,Cost of quality is the difference between the actual cost of producing, selling and supporting products and services and the equivalent costs if there were no failures during production or usage (CIMA, 2000),BU5004 Managerial Accoun

2、ting,2,Quality costs,Quality costs are costs incurred to prevent, detect or rectify the production of poor quality products For most businesses, quality costs are 10 to 20% of sales revenue Reducing quality costs is an important way to improve a firms profitability Also, improved product quality lea

3、ds to increased sales demand and profitability,BU5004 Managerial Accounting,3,Problems with traditional approach,Most firms have no way of measuring or reporting quality costs Many quality costs are hidden in traditional accounting reports: they are subsumed within production costs and the emphasis

4、is on output and decreasing unit costs,BU5004 Managerial Accounting,4,What is quality?,The quality of a product is the degree to which it satisfies customer expectations Customer expectations can be described by quality attributes performance, features reliability A quality product is one that meets

5、 or exceeds customer expectations,BU5004 Managerial Accounting,5,Aspects of quality,BU5004 Managerial Accounting,6,Customer expectations,Design specifications,Actual results,Design quality,Quality of conformance,(Production quality),What are quality costs?,A product that meets or exceeds its design

6、specifications and is free from defects is said to have high quality of conformance Quality related activities are carried out by a firm to prevent, detect and deal with poor quality products Preventing, detecting, and dealing with defects cause costs that are called quality costs or the cost of qua

7、lity,BU5004 Managerial Accounting,7,Quality cost categories,Quality costs can be broken down into 4 broad groups: Prevention costs are costs incurred to prevent faulty products being produced Appraisal costs are costs incurred to detect faulty products ones not conforming to design specifications In

8、ternal failure costs are costs incurred to correct faulty products before they are delivered to customers External failure costs are costs incurred to correct faulty products after they are delivered to customers,BU5004 Managerial Accounting,8,Examples of quality costs,BU5004 Managerial Accounting,9

9、,Prevention costs Appraisal costs,Design reviews Inspection of raw materials Quality engineeringProcess acceptance Supplier reviews Product testing Quality training programs Package inspection Preventative maintenance Quality audits Quality circles Test equipment,Examples of quality costs,BU5004 Man

10、agerial Accounting,10,Internal failure costs External failure costs,Scrap Product recalls Rework Complaint investigation Downtime (defect related) Returns Re-inspection Warranties Re-testing Repairs Design changes Lost sales,Hidden quality costs,Hidden quality costs are opportunity costs resulting f

11、rom selling faulty products These costs are classified as external failure costs and have to be estimated the multiplier method is a popular way of assessing hidden quality costs,BU5004 Managerial Accounting,11,Quality cost report,A quality cost reporting system is essential for an firm that is seri

12、ous about managing quality costs and improving product quality Senior managers need to know what quality costs are and how they are changing over time A quality cost report provides managers with a detailed listing of quality costs by category, for a specific period,BU5004 Managerial Accounting,12,Q

13、uality cost report - illustration,20072006 QC % of sales QC % of sales Prevention costs: Design review 40,000 nil Quality training 80,00060,000 120,000 6.060,000 3.0 Appraisal costs: Product inspection 20,00015,000 Process acceptance 30,00025,000 50,000 2.540,000 2.0 Internal failure costs: Scrap 30

14、,000 40,000 Rework 40,000 80,000 70,000 3.5 120,000 6.0 External failure costs: Customer returns 60,000 3.0 180,000 9.0 Total quality costs 300,000 15.0 400,000 20.0,BU5004 Managerial Accounting,13,Uses of quality cost information,A quality cost report has several uses: it makes senior managers awar

15、e of the magnitude of quality costs and its financial impact it helps managers identify the relative importance of quality problems faced by the firm it helps managers to see whether the quality costs are poorly distributed it helps managers assess the effectiveness of quality improvement programmes

16、,BU5004 Managerial Accounting,14,Distribution of quality costs,BU5004 Managerial Accounting,15,Prevention costs 40%,Internal failure costs 23.3%,External failure costs 20%,Appraisal costs 16.7%,For 2007,Trend analysis - total quality cost,BU5004 Managerial Accounting,16,5,10,15,20,0 1 2 3 4 5,% of s

17、ales,Year,Total quality cost,Managing quality costs,There are two views of how quality costs ought to be managed: Acceptable quality level view calls for a trade-off between preventative and appraisal costs, and failure costs permits a given number of faulty products to be produced Zero-defects view

18、 calls for the elimination of all failure costs claims it is cost-beneficial to reduce faulty products to zero,BU5004 Managerial Accounting,17,Acceptable quality level view,BU5004 Managerial Accounting,18,Costs,Failure costs,Total quality cost,Prevention and appraisal costs,0,100%,Percentage of outp

19、ut without defects,Acceptable quality level view,The diagram highlights three things: 1. Insufficient investment in preventative and appraisal activities results in excessively high costs related to product defects 2.There is a point above which additional investment in preventative/ appraisal activ

20、ities proves uneconomical 3.There is a level of quality at which the total quality cost is minimised finding it should be a firms goal,BU5004 Managerial Accounting,19,Zero defects view,Crosby* argues that: we are conditioned to believe that it is all right to make defective products it is cheaper to

21、 make it right the first time and avoid the costs of scrap and rework though it is difficult to achieve zero defects in practice, everyone should strive to reach this goal *Philip B Crosby-”Quality is free” (1979),BU5004 Managerial Accounting,20,Quality initiatives,Total quality management advocates

22、: design in quality zero defects continuous improvement cost of quality reporting ISO 9000 - is a set of standards that provides a framework around which a quality management system can be implemented Six Sigma (developed originally by Motorola)- is a set of practices developed to systematically improve processes by eliminating defects,BU5004 Managerial Accounting,21,Performance measures,The four quality costs may be used as financial performance measures Non financial measures of customer s