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Chapter Seventeen: Mcgraw-Hill/Irwin
Chapter Seventeen: Mcgraw-Hill/Irwin
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
Discuss the strategic importance of quality
17-2
Learning Objectives
(continued)
Discuss the use of nonfinancial performance data to
support quality-related initiatives
17-3
Strategic Importance of Quality
Baldrige Quality Award
17-4
Exhibit 17.1
17-5
Accounting’s Role in the
Management & Control of Quality
Accountants can add value to the organization by
providing decision-makers with relevant financial and
nonfinancial information related to quality
17-6
Basic Terminology
“Quality”— customer satisfaction with the total
experience of a product or service, consisting of two
components:
Design quality (focuses on the features that customers want)
17-7
Creating a Comprehensive Framework for
Managing/Controlling Quality: Exhibit 17.2
17-8
Characteristics of the Comprehensive
Framework for Managing/Controlling Quality
Broad business perspective—knowledge of business
processes
Paramount role of the consumer
Relevant financial data
Nonfinancial performance indicators
Feedback loops
Linkage to operations management
Breadth of the system—value-chain approach
17-9
Setting Quality-Related Expectations
Six-Sigma approach:
Define
Measure
Analyze
Improve
Control
Goalpost vs. Absolute Conformance:
Goalpost conformance
Absolute quality conformance (robust quality approach)
17-10
Goalpost Conformance (Exhibit 17.3)
Goalpost conformance assumes that the firm
incurs no quality or failure cost or loss if
quality measures fall with the specified limits
17-11
Absolute Conformance (Exhibit 17.4)
Absolute quality conformance requires that all
products or services meet exactly the target
value with no variation allowed
17-12
Financial Measures & Cost of
Quality (COQ)
Relevant cost information for decision-making (refer
to concepts in Chapter 11):
Future costs and revenues that differ between decision
alternatives
“Avoidable costs” vs. Sunk costs
Out-of-Pocket costs + Opportunity costs
Cost of Quality (COQ) Reporting
17-13
COQ Reports
• Prevention—expenditures incurred to keep quality
defects from occurring
• Appraisal—costs incurred in the measurement and
analysis of data to find out if products and services
conform to specification/customer expectations
• Internal failure—costs incurred as a result of poor
quality found through appraisal prior to delivery to
customers
• External failure—costs incurred to rectify quality
defects after unacceptable products or services reach
the customer
17-14
Sample Costs of Quality
Prevention:
– Quality training costs
– Equipment maintenance costs
Appraisal:
– Testing & inspection costs
– Quality audits
– Vendor certification
– Test equipment and instruments
17-15
Sample Costs of Quality (continued)
Internal failure:
– Rework costs
– Scrap (net of disposal value)
– Lost contribution margin because of schedule disruptions
External failure:
– Costs to handle customer complaints & returns
– Lost sales/market share (customer ill-will)
– Field service/repair costs
– Product liability lawsuits
17-16
Example:
COQ Report
(Exhibit
17.8)
17-17
Conformance and
Nonconformance Quality Costs
Cost of Conformity:
– Prevention Costs
– Appraisal Costs
Cost of Nonconformity:
– Internal Failure Costs
– External Failure Costs
17-18
Nonfinancial Quality Indicators
Internal Nonfinancial Quality Metrics:
– Process yield
– Productivity
– Machine up-time
– Safety record
– Throughput
– Cycle time efficiency
17-19
Nonfinancial Quality Indicators
(continued)
External Nonfinancial Quality Metrics:
– Customer response time (CRT)
– No. of defective units shipped
– No. of customer complaints
– Delivery delays
– On-time delivery rate
– Percentage of products that experience
early or excessive failure 17-20
Detecting & Correcting Poor Quality
Detecting Poor Quality:
– Control Charts
– Statistical Control Charts
– Run Charts
17-22
Control Chart (continued)
70
60
50
40
30
20
10
0
1 2 3 4 5 6
1 Quality of chocolate 2 Liqueur
3 Egg size 4 Blending speed
5 Blending duration 6 Improper refrigeration
17-24
Pareto Diagram (Exhibit 17.11)
17-25
Cause-and-Effect (‘fish-bone”)
Diagram (Exhibit 17.12)
17-26
Chocolate Mousse
Cause-and Effect Diagram (Exhibit 17.13)
17-27
Lean Manufacturing and Accounting for Lean
Lean Manufacturing (“lean” for short)—
reconfiguring the manufacturing process to increase
product flow and product quality, reduce
inventories, improve decision-making, and enhance
profitability
Five Principles of Lean Manufacturing:
• Value
• Value Stream
• Pull and Flow
• Empowerment
• Perfection
17-28
Lean Manufacturing and Accounting for Lean
(continued)
Accounting for Lean:
• Dysfunctional (or limiting or inhibiting) nature of
traditional control mechanisms?
Value-Stream Income Statements:
• Definition of “value stream”?
• Intended to support/encourage/recognize the
value of “lean”
• Generate a more refined measure of “operating
income”
17-29
Sample Value-Stream Income Statement
(Exhibit 17.15)
17-30
Appendix: Taguchi Loss Functions
General expression of the loss function, L(x),
for an observed quality characteristic, x, is:
L(x) = k(x -T) 2
$5,000
k= 2 = $2,000,000
0.05
17-32
Taguchi Quality Loss Function
(continued)
L(x) = k(x -T)
L(0.47) = $2,000,000(0.47 -
0.50)2
L(0.47) = $1,800
Thus, if the actual thickness of a unit is 0.47, then
the estimated total loss for the unit is $1,800.
17-33
Chapter Summary
We defined an appropriate role for accounting in terms
of the management & control of quality
We defined “quality” and its two major components,
conformance quality and design quality
We developed and discussed a comprehensive
framework for the management & control of quality,
and the role of accounting within this framework
We discussed two different approaches for setting
quality-related goals (Six Sigma and Goalpost versus
Absolute Conformance)
17-34
Chapter Summary (continued)
• We discussed two areas where financial
information can be supplied by the accountant to
support TQM initiatives:
– Relevant cost information for decision-making purposes
– Cost of Quality (COQ) Reporting
17-35
Chapter Summary (continued)
• We described techniques, borrowed from
operations management, that can be used for
detecting & then correcting quality problems
(including control charts, statistical control charts,
histograms, Pareto charts, and cause-and-effect
diagrams)
• We described the term “lean manufacturing” and
offered some insights as to changes to management
accounting systems needed to support “lean”
initiatives of management (e.g., the switch to “value-
stream” income statements)
17-36
Chapter Summary (continued)
17-37