ACT 5733 Advanced

Managerial Accounting

Chapter 19 Assessing
Quality

ACT 5733 - Chapter 19 - Felo

Session Outline
Review HW 4
Assessing quality

ACT 5733 - Chapter 19 - Felo

Cost of Quality
Goal is to build in quality or identify poor
quality as soon as possible
Cost of conformance (better) versus cost of
non-conformance (worse)
Cheaper to prevent problems than to fix
them
Track cost of quality as % of sales or % of
total spending on quality

ACT 5733 - Chapter 19 - Felo

Cost of Quality Components
Prevention maintenance, training, &
supplier evaluation
Appraisal inspection, testing, & statistical
quality control programs
Internal failure scrap, rework, expedited
shipping, production rescheduling
External failure recalls, warranty,
lawsuits, bad publicity, refunds

ACT 5733 - Chapter 19 - Felo

Cost of Quality Example
Cost Items Amount
Rework $12,000
Product testing $7,000
Product repairs $20,000
Statistical quality control program $5,000
Training $4,000
Scrap material $8,000
Product liability claims $25,000
Maintenance $4,000
TOTAL COST $85,000
Sales $2,000,000

ACT 5733 - Chapter 19 - Felo

Cost of Quality Example - 1
Category Amount % of Sales % of Qual Spnd
Prevention
Training $4,000 0.20% 4.71%
Maintenance $4,000 0.20% 4.71%
$8,000 0.40% 9.41%
Appraisal
Product testing $7,000 0.35% 8.24%
Statistical QCP $5,000 0.25% 5.88%
$12,000 0.60% 14.12%

ACT 5733 - Chapter 19 - Felo

Cost of Quality Example - 2
Category Amount % of Sales % of Qual Spnd
Internal Failure
Rework $12,000 0.60% 14.12%
Scrap material $8,000 0.40% 9.41%
$20,000 1.00% 23.53%
External Failure
Product repairs $20,000 1.00% 23.53%
Product liability claims $25,000 1.25% 29.41%
$45,000 2.25% 52.94%
TOTAL COST $85,000 4.25% 100.00%

ACT 5733 - Chapter 19 - Felo

Nonfinancial Quality Measures
Can often be leading indicators of financial
performance
Less susceptible to bias
Customer perspective What do customers
expect?
Internal perspective Are we delivering
quality to customers?
Learning & Growth perspective What
drives process improvements?

ACT 5733 - Chapter 19 - Felo

Customer Perspective
What do customers expect?
Results (lagging) market share, wallet
share, customer satisfaction, & customer
retention
Drivers (leading) on-time delivery %,
defect-free order %, % returns, and
warranty claims

ACT 5733 - Chapter 19 - Felo

Internal Perspective
Are we delivering quality to customers?
% yield (good products / started products)
% reworked products
# of defects in processes
Scrap
Cycle efficiency (value-added time / total
time)
Unscheduled downtime

ACT 5733 - Chapter 19 - Felo

Learning & Growth Perspective
What drives process improvements?
Training dollars
% employees completing training
% employees with certification
Employee satisfaction
Employee retention / turnover
IT infrastructure measures

ACT 5733 - Chapter 19 - Felo