Cost management accounting and control 6e by hansen mowen guan chapter 14

COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

Quality and
Environmental Cost
Management
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.

1


Study Objectives
1. Define quality, describe the four types of quality
costs, discuss the approaches used for quality
cost measurement, and prepare a quality cost
report.
2. Explain why quality cost information is needed
and how it is used.
3. Describe and prepare three different types of
quality performance reports.
4. Explain how environmental costs can be
measured and reduced.
2


Costs of Quality
• Quality-linked activities

– Activities performed because poor quality may

or does exist
– Control activities
• performed by an organization
• to prevent or detect poor quality

– Failure activities
• Performed by an organization or its customers
• In response to poor quality
3


Costs of Quality
• Categories of quality costs
– Prevention costs: incurred to prevent poor quality in
product or services from being produced
– Appraisal costs: Incurred to determine whether
products and services are conforming
•
•

Product acceptance: sample finished goods
Process acceptance: sample goods while in process

– Internal failure costs: incurred because products or
services do not conform; discovered prior to delivery
– External failure costs: incurred because products or
services do not conform; discovered after delivery
4

Costs of Quality

5


Costs of Quality

6


Costs of Quality
• Quality cost

– Observable
• Available from the accounting records

– Hidden
• Opportunity costs resulting from poor quality
• Estimating hidden quality costs

– The multiplier method
– The market research method
7


Costs of Quality
Multiplier Method
Assumes that the total failure cost is simply some multiple of
measured failure costs:

(

Total external = k Measured external
failure cost
failure cost

)

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.
8


Costs of Quality
Market Research Method
Uses formal market research methods to assess the effect of
poor quality on sales and market share.
Market research results can be used to project
future profit losses attributable to poor quality.
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.

9


Costs of Quality

a

b

Actual sales of
$5,000,000.

$1,000,000 ÷ $5,000,000
= 20%.

10


Costs of Quality

11


Quality Cost Information and
Decision Making
Strategic Pricing

12


Quality Cost Information and
Decision Making
Cost-Volume-Profit Analysis and Strategic Decisions
New Product Analysis, Project #675

Projected sales potential:44,000 units
Production capacity: 45,000 units
Unit selling price:
$60
Unit variable costs:
Fixed costs:
Product development
Manufacturing
Selling
Total

$40
$ 500,000
200,000
300,000
$1,000,000

Break-even: 50,000 units
Decision:
Reject (breakeven
exceeds capacity and potential)

Includes $5 quality
costs
Includes $100,000
quality costs

13

Quality Cost Information and
Decision Making
Cost-Volume-Profit Analysis and Strategic Decisions
New Product Analysis, Project #675, Revised
Projected sales potential:44,000 units
Production capacity: 45,000 units
Unit selling price:
$60
Unit variable costs:
Fixed costs:
Product development
Manufacturing
Selling
Total

$40

$35

$ 500,000
200,000
300,000
$1,000,000

$500,000
100,000
300,000
$900,000

Break-even: 50,000 units

Decision:
Reject (breakeven
exceeds capacity and potential)

Break-even: 36,000 units
Decision:
Accept
14


Quality Cost Information and
Decision Making

15


Controlling Quality Costs
Traditional Approach
• Acceptable quality level (AQL) is the standard
– Includes a certain number of defective products
– Ship products if defective units do not exceed AQL

• Creates a “commitment to deliver” defective
products

16


Controlling Quality Costs
Total Quality Approach

Zero-defect standards
• Reflects a philosophy of total quality control
• Calls for products and services to be produced
and delivered that meet the targeted value
• Implies the elimination of failure costs

17


Controlling Quality Costs
Total Quality Approach
• Quantify the standard

– As the costs of quality decrease, higher
quality results
– 2.5% standard is accepted by many QC
experts
• Interim standards

– Mid-range goals while pursuing the zerodefects level
18


Controlling Quality Costs
Quality Performance Reports
1. Interim Standard Report: Progress with
respect to a current-period standard or goal
2. Multiple-Period Trend Report: The progress
trend since the inception of the qualityimprovement program
3. Long-Range Report: Progress with respect to

the long-range standard or goal

19


Controlling Quality Costs

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Controlling Quality Costs

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Controlling Quality Costs

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Controlling Quality Costs

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Controlling Quality Costs

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Controlling Quality Costs

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