COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 1 Quality and Environmental Cost Management
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Hansen Mowen Chapter 14 Ed 6
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COST MANAGEMENTAccounting & Control
Hansen▪Mowen▪Guan
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.Cengage Learning and South-Western are trademarks used herein under license.
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Quality and Environmental Cost
Management
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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.
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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
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• 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
Costs of Quality
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Costs of Quality
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Costs of Quality
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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
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Assumes that the total failure cost is simply some multiple of measured failure costs:
Costs of Quality
Multiplier Method
If k = 4, and the measured external failure costs are $3 million, then the actual external failure costs are estimated to be $12 million.
Total external Measured external=failure cost failure costk
where k is the multiplier effect
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Costs of Quality
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.
Market Research Method
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.
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a Actual sales of $5,000,000.
Costs of Quality
b $1,000,000 ÷ $5,000,000 = 20%.
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Costs of Quality
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Quality Cost Information and Decision Making
Strategic Pricing
Revenues (1,000,000 @ $20) 20,000,000$ Quality costs (estimated):Cost of goods sold (15,000,000) Inspection - materials 200,000$ Operating expenses (3,000,000) Scrap 800,000 Product-line income 2,000,000$ Rejects 500,000
Rework 400,000 Product inspection 300,000 Warranty work 1,000,000
Total Estimate 3,200,000$
Product-line Income Low-Level Instrument Group
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New Product Analysis, Project #675
Projected sales potential:44,000 unitsProduction capacity: 45,000 unitsUnit selling price: $60
Quality Cost Information and Decision Making
Cost-Volume-Profit Analysis and Strategic Decisions
Break-even: 50,000 unitsDecision: Reject (breakeven exceeds capacity and potential)
Unit variable costs: $40Fixed costs:
Product development $ 500,000Manufacturing 200,000Selling 300,000 Total $1,000,000
Includes $5 quality costs
Includes $100,000 quality costs
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New Product Analysis, Project #675, Revised
Projected sales potential:44,000 unitsProduction capacity: 45,000 unitsUnit selling price: $60
Quality Cost Information and Decision Making
Cost-Volume-Profit Analysis and Strategic Decisions
Break-even: 50,000 unitsDecision: Reject (breakeven exceeds capacity and potential)
Unit variable costs: $40 $35Fixed costs:
Product development $ 500,000 $500,000Manufacturing 200,000 100,000Selling 300,000 300,000 Total $1,000,000 $900,000
Break-even: 36,000 unitsDecision: Accept
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Quality Cost Information and Decision Making
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Controlling Quality Costs
• 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
Traditional Approach
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Controlling Quality Costs
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
Total Quality Approach
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Controlling Quality Costs
• 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 zero-
defects level
Total Quality Approach
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Controlling Quality Costs
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 quality-improvement program
3. Long-Range Report: Progress with respect to the long-range standard or goal
Quality Performance Reports
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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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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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Defining, Measuring, and Controlling Environmental Costs
• Environmental costs: costs that are incurred because poor environmental quality exists or may exist
• Damage– Direct degradation of the environment– Indirect degradation (unnecessary usage)
• Categories– prevention costs– detection costs– internal failure costs– external failure costs
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Defining, Measuring, and Controlling Environmental Costs
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Defining, Measuring, and Controlling Environmental Costs
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Defining, Measuring, and Controlling Environmental Costs
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Defining, Measuring, and Controlling Environmental Costs
continued
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Defining, Measuring, and Controlling Environmental Costs
Note: “S” = societal costs
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Defining, Measuring, and Controlling Environmental Costs
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Defining, Measuring, and Controlling Environmental Costs
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Defining, Measuring, and Controlling Environmental Costs
COST MANAGEMENTAccounting & Control
Hansen▪Mowen▪Guan
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.Cengage Learning and South-Western are trademarks used herein under license.
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End Chapter 14
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