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Albright, T. L. and H. Roth. 1992. The measurement of quality costs: An alternative paradigm. Accounting Horizons (June): 15-27.

Summary by Kathryn Orta
Master of Accountancy Program
University of South Florida, Summer 2001

Quality Related Main Page | Deming Main Page

Albright and Roth discuss the need for newer cost accounting methods that provide information useful in evaluating company operations, as well as product and process quality. The main improvement that the article focuses on is the need for cost accounting methods that reveal and incorporate hidden quality cost that are often ignored and unrecorded. Finally, the authors suggest various cost methods including the controversial Taguchi quality loss function, a method used to estimate the unrecorded quality costs.

Quality/Cost Management and Quality Cost Development

Many companies do not have the capabilities to provide data necessary for evaluating quality. However, there has been a recent increase in the focus on quality management. This recent emphasis on quality is though to be a result of the increase in the quality of products that are being produced by foreign competitors.

Throughout the past four decades quality cost concepts have developed in a variety of areas. Development initially occurred in the area of industrial engineering. Then the federal government influenced quality cost development when it began to evaluate the quality costs control measures in its regulations. Companies were eventually required to provide information regarding prevention costs and costs related to nonconformance. The third area where quality cost concepts developed was that of accounting literature, which provided an arena for discussions. Examples of some of the issues discussed in the accounting literature include the accountant's role in quality cost measurement, new guidelines for quality cost reporting and the various levels of expenditures in organizations.

Quality Cost Concepts

As defined in the article, quality costs are cost incurred because poor quality can exist or because poor quality does exist. These costs are incurred in order to ensure that quality standards are met or because quality standards have not been met. Quality costs can be divided into three groups: prevention, appraisal, and failure.

Prevention costs are costs incurred because poor quality can exist. These expenditures are incurred to prevent defective units or poor quality units from being produced.

Appraisal costs are also costs that are incurred because poor quality can exist. These costs are associated with expenditures that identify nonconforming units before the are delivered to customers.

Failure costs are costs incurred because poor quality products do exist. Douglas Montgomery states that the amount of dollars spent on prevention and appraisal activities will reduce the costs associated with failures.

There are problems associated with trying to make a quality cost system operational. First, it is often difficult to estimate the failure costs. Second, the idea that many of the failure costs are driven by defective rates makes it hard to evaluate the quality costs. Third, it is erroneous to assume that all units that fall within a range of a target value will be equally desirable. This causes a problem because of the hidden costs that create the variability in relation to the targeted specifications.

Estimating Hidden Costs

One method used to estimate hidden costs is the "multiplier effect". This method estimates the hidden cost by multiplying the known quality costs by a constant. Another method uses market research to estimate hidden costs. Firms using this method study changes in their market share and customer base to see how poor quality is reflected in their business. A third method used to estimate hidden quality cost is the "Taguchi Quality Loss Function," which measures the loss to society due to poor quality products.

Taguchi Quality Loss Function

The TQLF, unlike the traditional method, estimates the loss that occurs from producing products that vary from the target value. It is thought that anytime there is a variation from the target value there are hidden quality costs, regardless of whether or not the measurements fall within the acceptable range.

The TQLF model suggests that costs increase quadratically as actual product characteristics vary from the target value. In other words the loss is quadrupled each time the deviation form the target value doubles.


One example of variability, which causes an increase in costs, deals with the production of paperboard. In this example, the costs of production increase as the paperboard product deviates from the specified dimensions. If the paperboard is too thick, then costs are increased because the product has extra pulp, which takes more time to manufacture, is more costly to transport, and causes more wear and tear on the machines.

Another example involves the production of cassette tapes. Additional costs are created from wasted materials that are applied in excess. Also variation in the thickness of the material will affect the quality of the sound, which could result in customer dissatisfaction. The thickness could also cause cost to rise due to problems involving the housing of the thick film.

Uses of TQLF Estimates

The estimates derived using TQLF help managers improve operations and lower costs. They can measure actual performance and progress towards quality goals can be evaluated. By reducing variability, managers will be able to reduce costs and thereby increase cash savings. The reduction in variability and costs will be seen in the improvement of profits and quality.


Related summaries:

Albright, T. L. and H. Roth. 1993. Controlling quality on a multidimensional level. Journal of Cost Management (Spring): 29-37. (Summary).

Albright, T. L. and H. P. Roth. 1994. Managing quality through the quality loss function. Journal of Cost Management (Winter): 20-37. (Summary).

Anderson, S. W. and K. Sedatole. 1998. Designing quality into products: The use of accounting data in new product development. Accounting Horizons (September): 213-233. (Summary).

Carr, L. P. 1995. How Xerox sustains the cost of quality. Management Accounting (August): 26-32. (Summary).

Carr, L. P. and L. A. Ponemon. 1994. The behavior of quality costs: Clarifying the confusion. Journal of Cost Management (Summer): 26-34. (Summary).

Deming, W. E. 1993. The New Economics for Industry For Industry, Government & Education. Cambridge: Massachusetts Institute of Technology Center for Advanced Engineering Study. Chapter 10. (Summary).

Fargher, N. and D. Morse 1998. Quality costs: Planning the trade-off between prevention and appraisal activities. Journal of Cost Management (January/February): 14-22. (Summary).

Gabel, N. 1991. Is 99.9% good enough? Training Magazine (March). (Summary).

Hughes, S. B. and D. M. Willis. 1995. How quality control concepts can reduce environmental expenditures. Journal of Cost Management (Summer): 15-19. (Summary).

Kettering, R. C. 2001. Accounting for quality with nonfinancial measures: A simple no-cost program for the small company. Management Accounting Quarterly (Spring): 14-19. (Summary).

Kim, M. W. and W. M. Liao. 1994. Estimating hidden quality costs with quality loss functions. Accounting Horizons (March): 8-18. (Summary).

Lucier, G. T. and S. Seshadri. 2001. GE takes six sigma beyond the bottom line. Strategic Finance (May): 40-46. (Summary).

Martin, J. R. Not dated. Constrained optimization techniques. Management And Accounting Web.

Martin, J. R. Not dated. Summary of the 1992 PBS Program Quality or Else. Management And Accounting Web.

Morse, W. J. 1983. Measuring quality costs. Cost and Management (July-August): 16-20. (Summary).

Pasewark, W.R. 1991. The evolution of quality control costs in U.S. manufacturing. Journal of Cost Management (Spring): 46-52. (Summary).

Roehm, H. A., D. Klein and J. F. Castellano. 1995. Blending quality theories for continuous improvement. Management Accounting (February): 26-32. (Summary).

Roth, H. P. and T. L. Albright. 1994. What are the costs of variability? Management Accounting (June): 51- 55. (Summary).

Rust, K. G. 1995. Measuring the costs of quality. Management Accounting (August): 33-37. (Summary).

Sedatole, K. L. 2003. The effect of measurement alternatives on a nonfinancial quality measure's forward-looking properties. The Accounting Review (April): 555-580. (Summary) and (JSTOR link).

Shank, J. K. and V. Govindarajan. 1994. Measuring the "cost of quality": A strategic cost management perspective. Journal of Cost Management (Summer): 5-17. (Summary).

Sjoblom, L. M. 1998. Financial information and quality management - Is there a role for accountants? Accounting Horizons (December): 363-373. (Summary).

Taguchi, G. and D. Clausing. 1990. Robust quality. Harvard Business Review (January-February): 67-75. (Summary).