Summary by Lisa Anderson
Master of Accountancy Program
University of South Florida, Summer 2003
Managers of companies in the United States have spent a great deal of time trying to implement lean manufacturing methods that the Japanese competitors have been able to achieve. One of the main objectives is to achieve total quality management. Total quality management is aimed at waste-free production of defect free products. Management accountants have developed new financial and non-financial measures to help support quality performance. However, accountants support of quality management is weakened by traditions of historical reporting and a focus on one aspect of quality – conformance to design specifications. More specifically, cost accounting systems have been redesigned to be able to report costs of quality using a framework developed by two quality experts.
The Cost of Quality Framework is an economic framework developed by quality experts Juran and Feigenbaum. This new reporting combines costs of quality with non-financial quality indicators used to assess quality performance objectives. These changes in reporting bring new roles for management accountants.
Before going any further it is important to understand what is meant by the term quality. There are eight fundamentals of high quality products. They are:
conformance to specifications,
product aesthetics, and
These eight dimensions can be grouped into two categories of quality management activities:
Design-quality - intrinsic fit between a product’s design specifications and customer needs and preferences and
Conformance quality - how consistently manufacturing produces the product to stated design specifications.
Quality management can take place at various stages of the firms value chain. Quality management that occurs in the development or production stage is associated primarily with achieving design quality. In later stages the focus is primarily on insuring conformance quality.
There are two categories of quality costs, conformance costs and non-conformance costs. Conformance costs include costs of preventing non-conformance and costs of appraising conformance to specifications. Non-conformance includes costs of quality failures that are internal or, in the worst case, external to the firm.
The Cost of Quality framework below is shown by the solid lines and relates quality spending and quality performance costs. This suggests an “optimal” level of quality spending and quality performance that relates to the minimum of the sum of conformity and nonconformity costs. Critics such as Crosby reject this model and argue that "quality is free" and that companies should strive towards achieving "zero defects". Anderson and Sedatole argue that these conflicting opinions are not incompatible if the cost of quality model is thought of as a static view of a dynamic process. They point out that there are several situations in which the optimal defect level would shift to the right as indicated in the illustration below. For example, if competitors were to improve their quality over time, consumers would become more demanding and, implicitly increase the cost of external quality failures. But even if managers recognized that the long run equilibrium, or optimum is at the zero defect level, investment constraints, lack of complete cost data associated with quality and resistance to change might prevent them from adopting the zero defect strategy in the short run.
It is important to understand what conformance means. The traditional method for identifying defective products involves a comparison between characteristics of products as produced to design specifications. Typically, there is a “tolerance limit” assigned as a target value. As long as the products fall within a given range (a goalpost), the products are considered equally valuable. Products that fall outside of the goalposts are considered defective.
Taguchi views the goalpost idea as inappropriate and hypothesizes that the quality losses are a quadratic function with a value of zero at the nominal value (N) in the graphic illustration above. But the losses differ from the goalpost concept as indicated by the shaded areas in the graphic. Any deviation from the nominal value (N) causes losses to society equal to L(x) as shown in the illustration. However, the authors say that they have found no evidence that the Taguchi function is applicable, or that firms are using the Taguchi's loss function approach.
One major limitation is that the current accounting approaches emphasize managing quality costs in the manufacturing of a product. This means that the product design is taken exactly as the engineers have produced it, with little or no input from accountants. These types of operational cost reductions are not a strong means for reducing costs and improving overall quality of the product. It is typically accepted that 80% of product costs are non-negotiable once the product design and process technologies have been established.
Anderson and Sedatole suggest three ways to involve accountants in the design quality phase of product production. First, engineers and accountants should develop a cost estimation system that allows for a dynamic representation of the company’s capabilities. Second, accountants should expand their efforts at developing improved product costs in the area of quality losses. And, third, to extend ABC & COQ systems to design activities in a manner that allows the comparison of manufacturing COQ and design COQ.
Cost of Quality: The Texas Instruments Example
In 1992 Texas Instruments was awarded the Malcolm Baldridge National Quality Award for their use of management accounting to support the implementation of quality management practices. In the early 1980’s Texas Instruments developed an elaborate set of quality performance reports. They were designed to reflect the quality challenges of each business unit. Each business was also required to include the components of conformance and non-conformance quality costs in its report. Each business unit developed a slightly different COQ system, reflecting the variances in their respective environments.
Texas Instruments shows how historical accounting cost data can be used to provide a snapshot of the conformance and non-conformance spending. This shows the company how they are doing over time. It allowed Texas Instruments to measure quality in financial terms.
Use of Cost Data in Product Design: The Boeing Example
In the late 1960’s, Boeing was near bankruptcy. The airplane industry had a lot of up-front R&D costs that extended from development until the first unit was actually delivered. The airplane manufacturer developed a new interest in managing risks of new product development. A group was developed and assigned the task of reviewing the development and production experience in four past productions programs. The study took three years to complete and yielded a new approach for managing new product development.
The new product development had two components: program definition and cost definition. The new product development program was used in the design of the Boeing 767. The program definition took four and a half years and cost $100 million. The new program included three new concurrent activities. They were to develop marketing data to determine customer needs, select product architectures that meet these needs, and evaluate technological advances to determine whether they offer better value and should be incorporated into the design. The cost definition took only seven months and used a tool developed out of a prior product development project, parametric cost estimating. This involves statistical analysis between costs and characteristics of the proposed product.
The Boeing example showed how firm specific cost and productivity data could be used to improve traditional engineering cost estimates in the earlier stages of product development.
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