Introduction to Cost
Accounting
Maryanne M. Mowen and Don R. Hansen
14-1
© 2011 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 and
14
Environmental Cost
Management
14-2
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
A quality product or service is one that meets or
exceeds customer expectations.
Quality is customer satisfaction.
Quality of conformance is a measure of how a product
meets is specifications.
Zero defects means all products conform to
specifications.
Robustness means exact conformance to target value.
14-3
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
• Costs of quality – costs that exist because poor
quality may or does exist
• Control activities: performed by an organization to
prevent or detect poor quality
• Prevention and appraisal activities
• Control Costs: costs of performing control activities
• Failure activities: performed by an organization or its
customers in response to poor quality
• Failure costs: costs incurred by an organization
because failure activities are performed
14-4
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
Defining Quality Costs:
1) Prevention costs
2) Appraisal costs
3) Internal failure costs
4) External failure costs
14-5
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
Examples of Quality Costs by Category
14-6
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
• Hidden Quality Costs are opportunity costs resulting
from poor quality
• The Multiplier Method
• The Market Research Method
• The Taguchi Quality Loss Function
14-7
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
The multiplier method assumes that the total failure
cost is simply some multiple of measured failure
costs:
Total external failure cost = k(Measured external
failure costs)
Where k is the multiplier effect
14-8
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
The market research method uses formal market
research methods to assess the effect of poor
quality on sales and market share.
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.
Market research results can be used to project
future profit losses attributable to poor quality.
14-9
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
The Taguchi loss function assumes any variation
from the target value of a quality characteristic
causes hidden quality costs
Furthermore, the hidden quality costs decrease
quadratically as the actual value deviates from the
target value.
14-10
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
The Taguchi Quality Loss Function
L(y) = k(y-T)2
Where:
K= A proportionally constant dependent upon the
organization’s external failure cost structure
Y = Actual value of quality characteristic
T = Target value of quality characteristic
L = Quality loss
14-11
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
The Taguchi Quality Loss Function
14-12
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality 1
Quality Loss Computation Illustrated
14-13
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reporting Quality Costs 2
Quality Cost Categories: Relative Contribution Graphs
14-14
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reporting Quality Costs 2
14-15
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reporting Quality Costs 2
Strategy to reduce quality costs recommended by the
American Society for Quality Control:
The strategy for reducing quality costs is quite simple:
(1) take direct attack on failure costs in an attempt to
drive them to zero; (2) invest in the ‘right’ prevention
activities to bring about improvement; (3) reduce
appraisal costs according to results achieved; and (4)
continuously evaluate and redirect prevention efforts
to gain further improvement. This strategy is based
on the premise that:
• For each failure, there is a root cause.
• Causes are preventable.
• Prevention is always cheaper.
14-16
© 2011 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 Cost Information and
Decision Making 3
Reporting quality costs improves
• Managerial planning
• Control
• Decision making
Managers need quality cost information for
• Strategic Planning
• Cost-Volume-Profit Analysis
Companies may also assess the quality of its supplies through ISO
9000 international quality standards
apply to the way a company ensures quality – like testing
products, training employees, keeping records, fixing defects.
14-17
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Controlling Quality Costs 4
The Total Quality Approach
Zero-defect standards reflects a philosophy of total
quality control and calls for products and services to
be produced and delivered that meet the targeted
value.
14-18
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Controlling Quality Costs 4
The Total Quality Approach
1) Progress with respect to a current-period standard
or goal (an interim standard report)
2) The progress trend since the inception of the
quality-improvement program (a multiple-period
trend report)
3) Progress with respect to the long-range standard or
goal (a long-range report)
14-19
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Controlling Quality Costs 4
Multiple-Period Trend Graph: Total Quality Costs
14-20
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Controlling Quality Costs 4
Multiple-Period Trend Graph: Individual Quality Cost
Categories
14-21
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Controlling Quality Costs 4
Multiple-Period Trend Graph: Relative Quality Costs
14-22
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Defining, Measuring, and
Controlling Environmental 5
Costs
Ecoefficiency is the ability to produce competitively
priced goods and services that satisfy needs while
simultaneously reducing negative environmental
impacts, resource consumption and costs.
Producing more goods and services using less
materials, energy, water, and land, while at the same
time, minimizing air emissions, water discharges,
waste disposal and the dispersion of toxic
substances.
Complementary and supportive to sustainable
development – development that meets the needs of
the present without compromising the ability of future
generations to meet their own needs.
14-23
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Defining, Measuring, and
Controlling Environmental 5
Costs
The Ecoefficiency Paradigm
1) Reduce the consumption of resources
2) Reduce the environmental impact
3) Increase product value
4) Reduce environmental liability
14-24
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Defining, Measuring, and Controlling
Environmental Costs
5
Ecoefficiency Relationships
14-25
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Defining, Measuring, and Controlling
Environmental Costs 5
• Environmental costs: costs that are incurred
because poor environmental quality exists or may
exist
• Environmental costs can be classified in four
categories
• Prevention costs
• Detection costs
• Internal failure costs
• External failure costs
14-26
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Defining, Measuring, and Controlling
Environmental Costs
5
Classification of Environmental Costs by Activity Type
14-27
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Defining, Measuring, and Controlling
Environmental Costs 5
Relative Distribution: Environmental Costs
14-28
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Defining, Measuring, and Controlling
Environmental Costs
5
An Environmental Financial Report
Three types of Benefits:
1) Additional revenues: revenues that flow into the
organization due to environmental actions
2) Current savings: refer to ongoing savings of costs that
had been paid in prior years
3) Cost avoidance (ongoing savings): refer to reductions
in environmental costs achieved in the current year
14-29
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Defining, Measuring, and
Controlling Environmental 5
Costs
Environmental Financial Statement
14-30
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Environmental Costing 6
Full environmental costing: the assignment of all
environmental costs, both private and societal, to
products.
Full private costing: the assignment of only private
costs to individual products
14-31
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
End of
Chapter
14
14-32
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
