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CHAPTER
12
Quality Management
and Measurement
Managerial
Accounting
10e
Crosson
Needles
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Concepts Underlying Quality
(slide 1 of 4)
 In a business setting, quality is the result of an operating
environment in which a product or service meets or
conforms to a customer’s specifications the first time it is
produced or delivered.
 Total quality management (TQM) is an organizational
environment in which all business functions work together to
build quality into the firm’s products or services.
 A return on quality (ROQ) results when the marginal
revenues possible from a higher-quality good or service
exceed the marginal costs of providing that higher quality.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Concepts Underlying Quality
(slide 2 of 4)
 Before the advent of TQM over 20 years ago, managers
assumed that there was a trade-off between the costs and
the benefits of improving quality.
 In the 1980s, quality gave organizations a competitive
edge in the global marketplace.
– As a result, managers focused on increasing customer satisfaction
and product or service quality, and organizations recognized the
value of producing highly reliable products.
– Companies emphasized kaizen, or the gradual and ongoing
improvement of products and processes while reducing costs.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Concepts Underlying Quality
(slide 3 of 4)
 As a result of losing market share to high-quality Japanese
goods, Motorola set the goal of Six Sigma quality, which
meant that its customers would perceive the company’s
products and services as perfect.
– It used the DMAIC (define, measure, analyze, improve, control) and
DMADV (define, measure, analyze, design, verify) methods to
improve both existing processes and new ones.
– Thousands of companies have embraced the data-driven
approach of Six Sigma to reduce errors.
– However, Six Sigma has its drawbacks, including diminished
worker morale and invention, and many companies are rethinking
Six Sigma as a business cure-all.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Concepts Underlying Quality
(slide 4 of 4)
 Two respected techniques made popular by Six Sigma are
still widely used and allow managers to understand and
measure quality improvements:
 Benchmarking—the measurement of the gap between the
quality of a company’s process and the quality of a parallel
process at the best-in-class company
 Process mapping—a method of using a visual diagram to
indicate process inputs, outputs, constraints, and flows to help
managers identify unnecessary efforts and inefficiencies in a
business process
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Recognition of Quality
 Many awards and organizations have been established to
recognize and promote the importance of quality,
including:
– Deming Prizes—established by the Japanese Union of Scientists
and Engineers to honor individuals or groups who have contributed
to the development and dissemination of total quality control
– EFQM Excellence Award—presented by the European Foundation
for Quality Management to businesses and organizations
operating in Europe that excel in quality management
– Malcolm Baldrige National Quality Award—created by the U.S.
Congress to recognize U.S. organizations for their achievements in
quality and business performance and to raise awareness of the
importance of quality
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
ISO Standards
 The International Organization for Standardization (ISO) is
a worldwide federation of national standards bodies that
promotes standardization with a view to facilitating the
international exchange of goods and services.
– The ISO 9000 series covers the design, development, production,
final inspection and testing, installation, and servicing of products,
processes, and services.
– The ISO 14000 series provides a management framework to
minimize the harmful environmental effects of business activities
and continually improve environmental performance.
– ISO 26000 provides social responsibility guidance.
– ISO 31000 outlines risk management principles and guidelines.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financial and Nonfinancial
Measures of Quality
 Quality is not something that a company can simply add at
some point in the production process or assume will happen
automatically.
 Managers need to create a total quality management
(TQM) environment by taking these steps:
1.
2.
3.
Identify and manage the financial measures of quality, or the
costs of quality.
Analyze operating performance using nonfinancial measures.
Require that all processes and products or services be improved
continuously.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financial Measures of Quality
(slide 1 of 2)
 The costs of quality are the costs that are specifically
associated with the achievement or nonachievement of
product or service quality. They have the following two
components:
– Costs of conformance: the costs of good quality that are incurred
to ensure the successful development of a product or service
– Costs of nonconformance: the costs of poor quality that are
incurred to correct defects in a product or service
 There is an inverse relationship between the costs of
conformance and the costs of nonconformance.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financial Measures of Quality
(slide 2 of 2)
 The costs of conformance are made up of:
– Prevention costs: the costs associated with the prevention of
defects and failures in products and services
– Appraisal costs: the costs of activities that measure, evaluate, or
audit products, processes, or services to ensure their conformance
to quality standards and performance requirements
 The costs of nonconformance include:
– Internal failure costs: costs incurred to correct mistakes found by
the company when defects are discovered before a product or
service is delivered to a customer
– External failure costs: costs incurred to correct mistakes discovered
by customers after the delivery of a defective product or service
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Quality Ratios
 Common quality ratios and the formulas showing how to
compute them follow.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nonfinancial Measures of Quality
 Managers need a measurement and evaluation system that
signals poor quality early enough to allow problems to be
corrected before a defective product or service reaches
the customer.
 Nonfinancial measures of performance are used to
supplement cost-based measures. The five categories are:
–
–
–
–
–
Product design
Vendor performance
Production performance
Delivery cycle time
Customer satisfaction
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Product Design
 Most automated production operations use computeraided design (CAD), a computer-based engineering
system with a built-in program to identify poorly designed
parts or manufacturing processes before production
begins.
 Among the measures that managers consider are:
– number and types of design defects detected
– average time between defect detection and correction
– number of unresolved design defects at the time of product
introduction
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Vendor Performance
 Companies analyze their vendors to determine which ones
are most reliable, furnish high-quality goods, have a
record of timely deliveries, and charge competitive prices.
 Managers use measures of quality (such as defect-free
materials as a percentage of total materials received) and
measures of delivery (such as timely deliveries as a
percentage of total deliveries) to identify reliable vendors
and monitor their performance.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Production Performance
 More and more companies have adopted computerintegrated manufacturing (CIM) systems, in which
production and its support operations are coordinated by
computers.
– In CIM systems, most direct labor hours are replaced by machine
hours, and very little direct labor cost is incurred.
 Measures of production quality, parts scrapped,
equipment utilization, machine downtime, and machine
maintenance time help managers monitor production
performance.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Delivery Cycle Time
(slide 1 of 2)
 To evaluate their responsiveness to customers, companies
examine their delivery cycle time, which is the time
between the acceptance of an order and the final delivery
of the product or service.
 The formula to compute delivery cycle time follows:
– Purchase-order lead time is the time it takes a company to take
and process an order and organize so that production can begin.
– Production cycle time is the time it takes to make a product.
– Delivery time is the time between the completion of a product and
its receipt by the customer.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Delivery Cycle Time
(slide 2 of 2)
 Other measures designed to monitor delivery cycle time
include order backlogs, on-time delivery performance,
percentage of orders filled, and waste time.
– The formula to compute waste time follows:
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Customer Satisfaction
 Measures used to determine the degree of customer
satisfaction include:
– the number and types of customer complaints
– the number and causes of warranty claims
– the percentage of shipments returned by customers (or the
percentage of shipments accepted by customers)
 Several companies have developed their own customer
satisfaction indexes from these measures so that they can
compare different product lines over different time
periods.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Measuring Service Quality
 Many of the costs-of-quality categories and several of the
nonfinancial measures of quality apply directly to services
and can be used by any type of service organization.
– Flaws in service design lead to poor-quality services.
– Timely service delivery is as important as timely product shipments.
– Customer satisfaction in a service business can be measured by
services accepted or rejected, the number of complaints, and
number of returning customers.
– Poor service development leads to internal and external failure
costs.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Role of Management Information Systems
in Quality Management
 A management information system (MIS) should identify,
monitor, and maintain continuous, detailed analyses of a
company’s activities, use social media and mobile
technologies, and provide managers with timely measures
of operating results.
– By focusing on activities, rather than costs, an MIS provides
managers with information that is needed to increase
responsiveness to customers and reduce processing time.
– The MIS identifies resource usage and cost for each activity and
fosters managerial decisions that lead to continuous improvement
throughout the organization.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Enterprise Resource Planning Systems
and Software as a Service (slide 1 of 2)
 An MIS can be designed as a fully integrated database
system known as an enterprise resource planning (ERP)
system.
– An ERP system combines the management of all major business
activities with support activities to form one easy-to-access,
centralized data warehouse.
– Advantages of an ERP system are its integration and ability to
communicate within an organization and with other businesses’
databases.
– However, an ERP system is costly to implement and maintain, can
be less than user friendly, and leaves many frustrated.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Enterprise Resource Planning Systems
and Software as a Service (slide 2 of 2)
 The emerging alternative to ERP systems is software as a
service (SaaS).
– SaaS utilizes the Internet, social media, and mobile technologies to
manage all business activities on demand.
– Advantages include low acquisition costs, quick implementations,
predictable pricing, reduced internal support staff, and a
potentially more agile ability to innovate.
– Its primary disadvantage is data security and internal controls, as
multiple company data may co-exist on a shared web
infrastructure as multi-tenants.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.