PART Vb bQUALITY, TIME AND THE STRATEGIC

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C HAP TE R 2 0
Quality and throughput concerns in managing
costs
Teaching tips and points to stress
Quality as a competitive weapon
This discussion of the quality movement links to the customer satisfaction, quality and cost management themes introduced in Chapter 1. The discussion also helps motivate students interest in the management accountant’s role in enhancing quality.
Correcting students misconceptions
Students often mistakenly believe that in considering quality (or other) initiatives, the relevant do nothing alternative will maintain the status quo. Such an assumption is unlikely to be accurate because the competitors are unlikely to remain at a standstill.
Points to stress
Chapter 20 points out that quality encompasses quality of design, as well as conformance quality. Even if a product meets the manufacturing specifications (i.e. possesses conformance quality, it can still be of poor overall quality if it fails to satisfy customer needs and wants (i.e. has poor design quality. Historically, many Western managers paid relatively little attention to improving quality. Traditional cost accounting systems did not isolate/aggregate costs of poor-quality products. Since these costs were not visible, they were not included in the performance evaluation/reward system. An increasingly important role of management accounting is to compile and make these costs visible to top management. Today, most companies with a quality programme calculate the costs of quality. While quality costs occur in all value-chain functions, most prevention costs occur in
R&D/design, whereas most appraisal and internal failure costs occur in manufacturing. External failure costs occur primarily in downstream functions marketing, distribution and customer service. Prevention appraisal costs are most likely to be reported by accounting systems because they are accrual costs. Internal and external failure costs include many opportunity costs that are difficult to estimate and are typically not captured by accounting systems. If management fails to include all the opportunity costs in a cost of quality (COQ) analysis, they will underestimate failure costs and are likely to underinvest in prevention and appraisal. Accounting systems failure to report opportunity costs is likely to contribute to many managers underestimation of the costs of producing poor-quality products. Market research and focus groups can help estimate such opportunity costs.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 The acceptable proportion of defects depends on a cost–benefit analysis. High internal and external failure costs, relative to prevention and appraisal costs, shift the emphasis towards fewer defects. Historically, many companies have underestimated failure costs, partly because they have not considered lost contribution margin (CM) from lost sales due to customer bad will, or production capacity squandered on spoiled or reworked units. Poor quality can reduce CM in two ways (a) lost sales due to customer bad will and (b) lost sales from wasted production output when the company has a manufacturing constraint. Coverage of the theory of constraints (TOC) later in the chapter continues Chapters explanation that companies should maximise the CM/unit of the constraining (bottleneck) factor. One way to do this is to reduce the amount of the bottleneck resource consumed by spoiled and reworked units that reduce the time and resources otherwise available to produce good units. If managers performance is based on one or two criteria (e.g. quarterly profits, they will act to make their performance look better on these criteria, even though such actions may hurt the company’s long-run profitability (e.g. delaying maintenance. This is why many companies have revised their performance evaluation on several dimensions (e.g. a balanced scorecard approach.

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