Chapter 16: Implementing Quality Concepts

CHAPTER
IMPLEMENTING QUALITY CONCEPTS
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Learning Objectives
After reading and studying Chapter 16, you should be able to answer the following
questions:

1. What is quality and from whose viewpoint should it be evaluated?

2. What is benchmarking, and why do companies engage in it?

3. Why is total quality management a significant philosophy, and what

conditions are necessary to yield its benefits?

4. What types of quality costs exist and how are those costs related?

5. How is cost of quality measured?

6. How can the balanced scorecard and cost management system be used to
provide information on quality in an organization?

7. How can quality be instilled as part of an organization’s culture?

8. (Appendix) What international quality standards exist?

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Terminology
Appraisal cost a quality control cost incurred for monitoring or inspection;
compensates for mistakes not eliminated through prevention activities

Benchmarking the process of investigating, comparing and evaluating a company’s

products, processes, and/or services against either those of competitors or
companies believed to be the “best in class”

Control chart a graphical presentation of the actual process results that indicates
the upper and lower control limits and those results that are out of control

External failure costs are expenditures for items such as warranty work, customer
complaints, litigation, and defective product recalls incurred after a faulty unit of
product has been shipped to the customer

Failure cost a quality control cost associated with goods or services that have been
found not to conform or perform to the required standards as well as all related
costs (such as that of the complaint department); it may be internal or external

Grade (of product or service) the addition or removal of product or service

characteristics to satisfy additional needs, especially price

Internal failure costs are expenditures, such as scrap or rework, incurred on

defective units before being shipped to the customer

ISO 9000 a comprehensive series of international quality standards that define the
various design, material procurement, production, quality-control, and delivery
requirements and procedures necessary to produce quality products and services

Prevention cost a cost incurred to improve quality by preventing defects from

occurring

Process benchmarking benchmarks against companies that are the best in a specific
characteristic rather than just the best in a specific industry

Quality all the characteristics of a product or service that make it able to meet the
stated or implied needs of the buyer; it relates to both performance and value; the
pride of workmanship; it is conformance to requirements

Quality audit a review of product design activities (although not for individual
products), manufacturing processes and controls, quality documentation and
records, and management philosophy

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Quality control (QC) the implementation of all practices and policies designed to
eliminate poor quality and variability in the production or service process; it places
the primary responsibility for quality at the source of the product or service

Results benchmarking is benchmarking in which an end product or service is

examined using a process called reverse engineering; the focus is on
product/service specifications and performance results

Statistical process control (SPC) the use of techniques to analyze where

fluctuations or variations occur in the process

Strategic benchmarking focuses on how companies compete, “seeking to identify

the winning strategies that have enabled high performing companies to be
successful in their marketplaces”

Total quality management (TQM) is a “management approach of an organization,

centered on quality, based on the participation of all its members and aiming at
long-term success through customer satisfaction, and benefits to all members of the
organization and to society”

Value the characteristic of meeting the highest number of customer needs at the
lowest possible total cost

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Lecture Outline
A. What is Quality?

1. Quality includes all the characteristics of a product or service that make it

able to meet the stated or implied needs of the buyer; it relates to both
performance and value; the pride of workmanship; it is conformance to
requirements.

2. Quality was defined as “the pride of workmanship” by Dr. W. Edwards

Deming.

3. It was defined as “conformance to requirements” by Philip Crosby, as well

as the American Society for Quality Control.

4. Production view of quality.

a. Productivity is measured by the quantity of units of good output

generated during a time period, and any factor that either slows down or
stops a production process or that causes unnecessary work
(redundancy) is an impediment to productivity.

b. Activity analysis is the process of detailing the various repetitive actions

that are performed in making a product or providing a service and
classifying them as value-added and non-value-added.

c. A value-added activity is an activity that increases the worth of the product

or service to the customer and for which the customer is willing to pay.

d. A non-value-added activity is an activity that increases the time spent on a

product or service but does not increase its worth or value to the
customer. Eliminating or minimizing such activities improves
productivity and lowers costs.

e. Quality control (QC) includes in its implementation all attempts to

reduce variability and defects in products. Primary responsibility for the
quality of a product or service is placed at the source—the maker or
provider.

f. Statistical process control (SPC) includes techniques to analyze where

fluctuations or variations occur in the process; it is based on the theory
that a process has natural variations in it over time, but uncommon
variations are typically the points at which the process produces “errors,”
which can be defective goods or poor service.

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g. A control chart is a graphical presentation of the results of a specified

activity. Such charts indicate the upper and lower control limits and the
results that are out of control. (See text Exhibit 16-1.)

5. Quality is often measured from the consumer’s viewpoint.

a. Every customer who acquires a product or service receives a set of

characteristics containing issues such as range of features, convenience,
and promptness in delivery, warranty, credit availability, and packaging.

b. The customer views quality as the ability of a product or service to meet

and satisfy all of the specified needs, not simply whether the product or
service delivers as it was intended, its rate of failure, or the probability of
purchasing a defective unit.

c. Product quality possesses eight basic characteristics. (See text Exhibit 16-
2.)

d. In addition to the quality characteristics listed in Exhibit 16–2, the

following additional quality characteristics apply to service
organizations:

i. assurance, in that customers expect employees to be knowledgeable,

courteous, and trustworthy,

ii. tangibles, in that customers expect quality physical facilities,

equipment, and appearance of personnel,

iii. empathy, in that customers expect a high degree of caring and

attention fro employees.

e. Grade (of a product or service) refers to the addition or removal of

product or service characteristics to satisfy additional needs, especially
price.

f. Value is the characteristic of meeting the highest number of customer

needs at the lowest possible price.

B. Benchmarking (See text Exhibits 16-3 and 16-4.)

1. Benchmarking is the process of investigating, comparing, and evaluating a

company’s products, processes, and/or services against those of companies
believed to be best-in-class.

2. Additional comparisons should be made against companies who are the best
in a specific category rather than simply the best in a specific industry.

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3. Because of the potential for stagnation, comparisons should also be made

against companies that are the best in a specific characteristic rather than just
the best in a specific industry.

4. Three basic types of benchmarking exist.

a. Results benchmarking is benchmarking in which an end product or

service is examined with the focus being on product/service
specifications and performance results.

b. Process benchmarking is benchmarking that focuses on practices and

how the best-in-class companies achieved that distinction.

c. Strategic benchmarking is also nonindustry specific and focuses on how

companies compete, “seeking to identify the winning strategies that have
enabled high performing companies to be successful in their
marketplaces.”

C. Total Quality Management

1. Total quality management (TQM) is a management approach of an

organization, centered on quality, based on the participation of all its
members, and aimed at long-term success through customer satisfaction and
benefits to all members of the organization and to society.

2. TQM embodies four important tenets:

a. To dictate continuous improvement for an internal managerial system of
planning, controlling, and decision making for continuous improvement.
b. To require participation by everyone in the organization.
c. To focus on improving goods and services from the customer’s point of
view.
d. To value long-term partnerships with suppliers.

3. The Quality System.

a. The movement to total quality necessitates the implementation of a

system that provides information to managers concerning the quality
processes so those individuals can plan, control, evaluate performance,
and make decisions.

b. Quality consideration traditionally has not been part of the planning

process, and has usually involved an after-the-fact measurement of errors
due to a certain level of defects being tolerated as part of the “natural”
business process in the United States.

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c. A total quality system needs to be designed so it will promote a

reorientation of thinking from an after-the-fact inspection emphasis to an
emphasis on prevention, continuous improvement, and building quality
into every process and product.

d. A total quality system should accomplish three objectives.

i. It should indicate any existing quality problems so managers can set

goals and identify methods for quality improvements.

ii. The system should also be capable of statistically measuring quality

and providing feedback on quality improvements.

iii. The system should encourage teamwork in the quality improvement

process.

4. Employee involvement at all levels is essential.

a. Top management must develop an atmosphere that is conducive to

quality improvements and set an example of commitment to TQM.

b. Workers should be encouraged to provide feedback and made to feel

they are an important part of the process of success.

c. The encouragement of employee suggestions and the development of

workers who can perform multiple job functions will help improve
efficiency and quality.

5. Product/service improvement will result from TQM.

a. TQM focuses management’s attention to the relationship between the

internal production/service process and the external customer, and
stipulates consumer expectations as the utmost arbiter of satisfaction.

b. A company must first determine who its value-adding customers are and
then understand what they want.

c. Some companies may want to contemplate the elimination of some

customer groups in line with cost-benefit analysis.

6. Long-term supplier relationships.

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a. Adopting a TQM philosophy encourages companies to review their

entire supply chain and establish long-term relationships with preferred
suppliers.

b. Given the substantial amount of outsourcing that is now being used,

companies need to be certain that they are “linking up” with suppliers
that will enhance product quality and customer satisfaction.

c. Many of these relationships will result in single sourcing or certification

of suppliers.

D. The Baldrige Award

1. The 1987 Malcolm Baldrige National Quality Improvement Act established

the Malcolm Baldrige Quality Award as the embodiment of TQM in the
United States.

a. The Baldrige Award focuses attention on management systems,

processes, and consumer satisfaction as the tools required to achieve
product and service excellence.

b. Entrants for the award are in five areas: manufacturing, service, small
business, education, and health care.

c. To win the Baldrige Award, applicants must demonstrate excellence in

seven categories. (See text Exhibit 16-5.)

d. The Deming Prize, named for W. Edwards Deming, is Japan’s equivalent

of the Baldrige Award and has even more rigorous requirements.

E. Benefits of TQM

1. Some critics of TQM have called it nothing more than a management fad that
does not work when practical attempts are made to implement its concepts.

2. However, most companies using TQM have cited many positive outcomes
and benefits, such as those included in text Exhibit 16–6.

F. Types of Quality Costs

1. Quality costs are categorized into three types.

a. Prevention cost is a cost whose purpose is to improve quality by

preventing product defects resulting from dysfunctional processing.

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b. Appraisal cost represents quality control costs incurred for monitoring

that compensate for mistakes not eliminated through prevention
activities.

c. Failure cost is a cost representing an internal loss, such as scrap or

rework, or an external loss, such as warranty cost, cost of handling
customer complaints, litigation cost, or the cost of recalling defective
products.

d. Internal failure costs are expenditures, such as scrap or rework, incurred

on defective units before being shipped to the customer.

e. External failure costs are expenditures for items such as warranty work,
customer complaints, litigation, and defective product recalls incurred
after a faulty unit of product has been shipped to the customer.

2. The TQM philosophy stipulates that total costs will decrease as quality
improvements are made in an enterprise.

a. Productivity will increase if non-value-added activities are eliminated

and technologically advanced equipment is installed.

b. The lowering of costs allows the company to contain (or reduce) selling
prices; customers, satisfied with the higher quality at the same (or lower)
price, believe that they received value and will therefore buy more.

c. Such factors create greater profits for the company for reinvestment and
research activities that will in turn generate new products or services of
higher quality.

d. Alternatively, the profits can be used to train workers to provide

products and services of even higher quality than are currently available.

e. This cycle of benefit will continue in a company that is profitable and

secure in its market share—two principal goals of an organization.

3. Two types of cost exist which constitute the total quality cost of a firm: (1)
cost of quality compliance or assurance and (2) cost of noncompliance or
quality failure. (See text Exhibit 16-8.)

a. Costs of compliance equal the sum of prevention costs and appraisal costs.

b. Costs of noncompliance are the results of production imperfections and are

equal to internal and external failure costs.

4. Information relating to production quality or the lack thereof is included in

inspection reports, SPC control charts, and customer returns or complaints.

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5. Information concerning quality costs is partially included in the accounting

records and supporting documentation.

a. Quality costs historically have not been accorded separate recognition in

the accounting system.

b. Actual or estimated costs must be used in attempting to determine the

cost of quality.

c. A system in which quality costs are readily available or determinable

provides useful information to managers trying to make spending
decisions by pinpointing the areas that would provide the highest cost-
benefit relationships.

d. Refer to text Exhibit 16–9 for points in the production–sales cycle that
quality costs are usually incurred. An information feedback loop should
be in effect to link the types and causes of failure costs to future
prevention costs.

G. Measuring the Cost of Quality

1. Prevention and appraisal costs that are prudently incurred should ideally
result in zero failure costs.

2. Pareto analysis is one way management can decide where to concentrate its
quality prevention cost dollars by classifying the causes of process problems
according to the impact on an objective.

3. A company that aspires to engage in TQM and continuous improvement

should record and report its quality costs separately so that managers can
plan, control, evaluate, and make decisions relating to the activities that
cause the costs. Simply having quality cost information available does not
necessarily enhance quality.

4. A firm’s chart of accounts can be extended to accommodate either separate

tracing or allocating quality costs to new accounts. (See text Exhibit 16-10.)

a. Coding transactions representing quality costs permits such transaction

types and amounts to be reformatted so that reports detailing the costs of
quality can be furnished. (See text Exhibit 16-11.)

b. Formulas for calculating an organization’s total cost of quality, using

prevention, appraisal, and failure categories should be utilized. (See text
Exhibit 16-12.)

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5. High quality allows a company to improve current profits, either through

lower costs or higher prices—but management is often more interested in
business objectives other than short-run profits.

H. Obtaining Information on Quality from the Balanced Scorecard and CMS

1. A firm must manage organizational costs so that a reasonable value-to-price

relationship can be achieved. Companies lacking cost management skills
cannot expect to succeed in the long run.

2. One management accounting tool that is useful in implementing strategy is a

balanced scorecard (BSC), which can be used to view the total quality
management strategy from four perspectives:

a. learning and growth,

b. internal business,

c. customers, and

d. finance.

3. Financial accounting is monetarily based and, therefore, does not directly

measure nonfinancial organizational activities.

4. A strategic CMS differentiates between costs that add value and those that
do not so that managers and employees can work to reduce the nonvalue-
added costs and enhance continuous improvement.

a. Additionally, many activities critical to success in a quality-oriented,

global marketplace are related to time—a nonmonetary characteristic.

b. A useful cost management accounting system ensures availability of

information related to nonmonetary occurrences (such as late deliveries
or defect rates) and incorporates that information into a balanced
scorecard so that management can achieve total quality management and
profitability goals.

c. Thus, a strategic cost management accounting system reports more of the

costs and benefits of organizational activities than do financial accounting
reports.

d. Having strategy-based information included in a balanced scorecard

allows managers to make informed assessments of the company’s
performance in the value chain, its position of competitive advantage (or
disadvantage), and its progress toward achieving the organization’s
mission.

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I. Quality as an Organizational Culture

1. Quality must be perceived as a moving target, which is why TQM

exemplifies the principle of continuous improvement.

2. Performance standards must be set continuously higher for everyone in the

organization to convey the sense of working toward a common goal.

3. Committed and consistent top management leadership is the catalyst for

moving the company culture toward an esprit de corps in which every
individual becomes obsessed with surpassing customer expectations.

4. Management can effectively stimulate the cultural change by providing and

sustaining an environment in which employees know the company cares
about them, responds to their needs, and appreciates and rewards excellent
results.

5. Companies move along a quality continuum toward the achievement of

world-class status. (See text Exhibit 16-14.)

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Multiple Choice Questions from CMA Examinations

1. The four categories of costs associated with product quality costs are:
a. external failure, internal failure, prevention, and carrying.
b. external failure, internal failure, prevention, and appraisal.
c. external failure, internal failure, training, and appraisal.
d. warranty, product liability, training, and appraisal.
e. warranty, product liability, prevention, and appraisal.

The correct answer is b. (CMA December 1995, 3-12)

2. The cost of scrap, rework, and tooling changes in a product quality cost
system are categorized as a(n):
a. external failure cost.
b. internal failure cost.
c. training cost.
d. prevention cost.
e. appraisal cost.

The correct answer is b. (CMA December 1995, 3-13)

3. The cost of statistical quality control in a product quality cost system is

categorized as a(n):
a. external failure cost.
b. internal failure cost.
c. training cost.
d. prevention cost.
e. appraisal cost.

The correct answer is e. (CMA December 1995, 3-14)

4. All of the following would generally be included in a cost-of-quality report

except:
a. warranty claims.
b. design engineering.
c. supplier evaluations.
d. lost contribution margin.

The correct answer is d. (CMA adapted)

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5. Listed below are selected line items from the cost-of-quality report for
Jennifer Products for the last month.
Category Amount
Rework $ 725
Equipment maintenance 1,154
Product testing 786
Product repair 695

What is Jennifer’s total prevention and appraisal cost for the last month?

a. $786
b. $1,154
c. $1,940
d. $2,665

The correct answer is c. (CMA adapted)

$1,154 + $786 = $1,940

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