Post on 16-Nov-2014
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Quality Costs and Quality Costs and Productivity: Productivity: Measurement, Measurement, Reporting, and Reporting, and
ControlControl
CHAPTERCHAPTER
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1. Identify and describe the four types of quality costs.2. Prepare a quality cost report and explain the
difference between the conventional view of acceptable quality level and the view espoused by total quality control.
3. Tell why quality cost information is needed and how it is used.
4. Explain what productivity is, and calculate the impact of productive changes on profits.
ObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
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Quality Defined
A quality product or service is one
that meets or exceeds customer
expectations...
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Quality Defined… on the following eight dimensions:
Performance
Aesthetics
Serviceability
Features
Reliability
Durability
Quality of conformance
Fitness for use
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Quality Defined… on the following eight dimensions:
Performance
Aesthetics
Serviceability
Features
Reliability
Durability
Quality of conformance
Fitness for use
How consistently How consistently and well a product and well a product
functionsfunctionsThe appearance of The appearance of tangible products tangible products
(style, beauty)(style, beauty)Measures the ease of Measures the ease of maintaining and/or maintaining and/or
repairing the productrepairing the productCharacteristics of a Characteristics of a
product that differentiate product that differentiate functionally similar functionally similar
productsproducts
The probability that the The probability that the product or service will product or service will perform its intended perform its intended
function for a specified function for a specified length of timelength of time
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Quality Defined… on the following eight dimensions:
Performance
Aesthetics
Serviceability
Features
Reliability
Durability
Quality of conformance
Fitness for use
The length of time The length of time a product functionsa product functionsA measure of how A measure of how a product meets its a product meets its
specificationsspecificationsThe suitability of the The suitability of the product for carrying product for carrying
out its advertised out its advertised functionsfunctions
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Quality Defined
A defective product is one that does not
conform to specifications.
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Quality Defined
Zero defects means that all
products conform to
specifications.
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Quality DefinedThe definition of quality-related activities imply four categories of quality costs:
1) Preventive costs
2) Appraisal costs
3) Internal failure costs
4) External failure costs
Incurred to prevent poor
quality or services being
produced
Incurred to determine
whether products and services conform to
requirements
Incurred when products and
services do not conform to
specifications
Incurred when products and
services fail to conform to
requirements after being delivered
11 -10 Examples of Quality Costs Prevention costsPrevention costs
Quality engineeringQuality training programsQuality planningQuality reportingSupplier evaluation and selectionQuality audits Quality circlesField trialsDesign reviews
11 -11 Examples of Quality CostsAppraisal CostsAppraisal Costs
Inspection of raw materialsTesting of raw materialsPackaging inspectionSupervising appraisalProduct acceptance Process acceptance Inspection of equipment Testing equipmentOutside endorsements
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Internal failure costsInternal failure costsScrap Rework Downtime (defect related) Reinspection Retesting Design changes
Examples of Quality Costs
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Cost of recallsLost salesReturns/allowancesWarrantiesRepairsProduct liabilityCustomer dissatisfactionLost market shareComplaint adjustment
External failure costs
Examples of Quality Costs
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Measuring Quality Costs
The Multiplier Method
The Market Research Method
Taguchi Quality Loss Function
Hidden Quality Costs are opportunity costs resulting from
poor quality.
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The Multiplier MethodThe 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
If k = 4, and the measured external failure costs are $2 million, then the actual external failure costs are estimated to be $8 million.
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The Market Research MethodThe market research method uses formal market research methods to assess the effect of poor quality on sales and market share.
Customer surveys and interviews with members of a company’s sales force can provide significant insight into the magnitude of a company’s hidden costs.
Market research results can be used to project future profit losses attributable to poor quality.
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The Taguchi Quality Loss Function
The Taguchi loss function assumes any variation from the target value of a quality characteristic causes hidden quality costs.
Furthermore, the hidden quality costs increase quadratically as the actual value deviates from the target value.
11 -18 The Taguchi Quality Loss Function$ Cost
Lower Specification
Limit
Target Value
Upper Specification
Limit
11 -19 The Taguchi Quality Loss Function
L(y) = k(y – T)²k = A proportionately 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
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Quality Cost ReportQuality Cost Report Unit Actual Diameter (Unit Actual Diameter (yy) ) y-T (y –T)y-T (y –T)² k(y-T)²² k(y-T)²
1 9.9 -0.10 0.010$ 4.00
2 10.1 0.10 0.0104.00
3 10.2 0.20 0.04016.00
4 9.8 -0.20 0.040 16.00
Total 0.100$40.00
Average 0.025$10.00
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Quality Costs % of SalesQuality Costs % of Sales
Prevention costs:Quality training $35,000Reliability engineering 80,000 $115,000 4.11%
Appraisal costs: Materials inspection $20,000Product acceptance 10,000Process acceptance 38,000 68,000 2.43
Internal failure costs:Scrap $50,000Rework 35,000 85,000 3.04
External failure costs: Customer complaints $25,000Warranty 25,000Repair 15,000 65,000 2.32
Total quality costs $333,000 11.90%
Image ProductsQuality Cost Report
For the Year Ended March 31, 2004
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Relative Distribution of Quality CostsExternal Failure (19.5%)
Prevention (34.5%)
Internal Failure (25.6%)
Appraisal (20.4%)
11 -23 Quality Cost Graph
Cost
0
Percent Defects
100%
Failure Costs
Control Costs
Total Quality Costs
AOL
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Contemporary Quality Cost Graph
Cost
0Percent Defects
100%
Failure Costs
Control Costs
Total Quality Costs
11 -25 Trend Analysis
Quality Costs Actual Sales % of Sales2000 $440,000 $2,200,000 20.0% 2001 423,000 2,350,000 18.02002 412,500 2,750,000 15.02003 392,000 2,800,000 14.0 2004 280,000 2,800,000 10.0
Assume the following data:
11 -26 Multiple-Period Trend Graph:Total Quality Costs
5
10
15
20
0 1 2 3 4 5
% ofSales
Year
11 -27 Multiple-Trend Analysis for Individual Quality Costs
Internal ExternalPrevention Appraisal Failure Failure
2000 2.0%1 2.0% 6.0% 10.0 %2001 3.0 2.4 4.0 8.62002 3.0 3.0 3.0 6.02003 4.0 3.0 2,5 4.52004 4.1 2.4 2.0 1.5
Assume the following quality cost data:
1Expressed as a % of sales
11 -28 Multiple-Period Trend Graphic: Individual Quality Cost Categories
Percentage of Sales
109876543210
0 1 2 3 4 Year
External failureInternal failure
Prevention
Appraisal
11 -29 Productivity: Measurement and Control
Productivity is concerned with producing output
efficiently, and is it specifically addresses the relationship of output and the inputs used to produce
the outputs.
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1. for any mix of inputs that will produce a given output, no more of any one input is used than necessary to produce the output
2. given the mixes that satisfy the first condition, the least costly mix is chosen.
Productivity: Measurement and Control
Total productive efficiency is the point at which two conditions are satisfied:
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Technical EfficiencyTechnical Efficiency is the condition where no more of any one input is used than necessary to produce a given output.
Technical efficiency improvement is when less inputs are used to produce the same output or more output are produced using the same input.
Current productivityOutputs:
6
Inputs:
Labor
Capital
4
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Technical EfficiencySame Output, Fewer Inputs
More Output, Same Inputs
Outputs:
6
Outputs:
8Inputs:
Labor
Capital
4
Inputs:
Labor
Capital
3
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Technical EfficiencyMore Output, Fewer Inputs
Technically Efficient Combination I:Outputs:
8
Outputs:
8
Inputs:
Labor
Capital
3
Inputs:
Labor
Capital$20,000,000
3
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Technical Efficiency
Technically Efficient Combination II:
Of the two combinations that produce the same output, the least costly combination would be chosen.
Outputs:
8
Inputs:
Labor
Capital$25,000,000
2
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Partial Productivity Measurement: Measuring productivity for one input at a time.
Partial Measure = Output/Input
Operational Productivity Measure: Partial measure where both input and output are expressed in physical terms.
Financial Productivity Measure: Partial measure where both input and output are expressed in dollars.
Partial Productivity MeasurementPartial Productivity Measurement
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Profile measurement provides a series or a vector of separate and
distinct partial operational measures.
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Profile Productivity Measures
Example 1:
The productivity of both labor labor and materials moves in the same direction:
2003 2004Number of motors produced 120,000 150,000Labor hours used 40,000 37,500Materials used (lbs.) 1,200,000 1,428,571
Partial Productivity RatiosPartial Productivity Ratios 2003 Profile 2004 Profile2003 Profile 2004 Profile
Labor productivity ratio 3.000 4.000Material productivity ratio 0.100 0.105
150,000/37,500150,000/1,428,571
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Profile Productivity Measures
Example 2:
Assume the same data as Example 1 except the material used is 1,700,000 pounds.
2003 2004Number of motors produced 120,000 150,000Labor hours used 40,000 37,500Materials used (lbs.) 1,200,000 1,700,000
Partial Productivity Ratios 2003 Profile 2004 Profile
Labor productivity ratio 3.000 4.000Material productivity ratio 0.100 0.088
150,000/37,500150,000/1,700,000
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Profit-Linked Productivity Measurement
Profit-Linkage Rule: For the current period, calculate the cost of the inputs that would have been used in the absence of any productivity change, and compare this
cost with the cost of the inputs actually used. The difference in costs is the amount by which profits
changed because of productivity changes.
To compute the inputs that would have been used (PQ), use the following formula:
PQ = Current Output/Base-Period Productivity Ratio
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Example:Example: Kunkul provided the following data:
20032003 20042004 Number of motors produced 120,000150,000Labor hours used 40,00037,500Materials used (lbs.) 1,200,0001,700,000Unit selling price (motors) $50$48Wages per labor hour $11$12Cost per pound of material $2$3
Profit-Linked Productivity Measurement
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Profit-Linked Productivity Measurement
PQ (labor) = 150,000/3 = 50,000 hrs.PQ (materials) = 150,000/0.100 = 1,500,000 lbs.
Cost of labor: (50,000 x $12) $ 600,000Cost of materials: (1,500,000 x $3) 4,500,000 Total PQ cost $5,100,000
Cost of labor: (37,500 x $12) $ 450,000Cost of materials: (1,700,000 x $3) 5,100,000 Total current cost $5,550,000
The actual cost of inputs:
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Profit-Linked Productivity Measurement
Profit-linked effect = Total PQ cost - Total current cost
= $5,100,000 – $5,550,000
= $450,000 decrease in profits
The net effect of the process change was unfavorable. Profits declined $450,000
because of productivity changes.
11 -43 Price-Recovery ComponentThe difference between the total profit change and the profit-linked productivity change is called the price-recovery component.
2004 2003 Difference
Revenues $7,200,000 $6,000,000 $ 1,200,000Cost of inputs 5,550,000 2,840,000 2,710,000 Profit $1,650,000 $3,160,000 $-1,510,000
Price recovery = Profit change – Profit-linked productivity change= $1,510,000 – $450,000= $1,060,000
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The EndThe End
Chapter ElevenChapter Eleven
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