Quality Costing

Manufacturing cycle time / manufacturing lead time

time it takes from the moment an order is received by manufacturing to the time it becomes a finished good

The objective of quality costing is

to help management maximize the value customers receive from a product

Pareto diagram

Chart that indicates how frequently each type of defect occurs. Most frequent --> less frequent

Performance failure costs

Company and customer costs go up. Ex: recall, warranty, fixing problems, operating costs, repairs, maintenance

Cause and effect diagram

Root Analysis

Manufacturing cycle efficiency

Value added manufacturing time / manufacturing cycle time

Quality of conformance

a product that meets its design specifications and is free of defects that mar its appearance or degrade its performance is HIGH in this

Value-added activities

activities that customers perceive has adding value to the product

Time driver

any factor that causes a change in the speed of an activity when the factor changes

Quality costs & dimensions

are costs incurred to ensure that a product or service meets customers' expectations. Customers' satisfaction with total experience of a product or service. Quality has two dimensions—features and performance

Average waiting time

average amount of time that an order waits in line while the machine is set up and the order is processed

Three positive behavioral consequences of measuring quality costs

(1) greater responsiveness to customer requirements (2) improved attitudes and aspirations about quality (3) better management of quality costs through visibility. A possible dysfunctional behavioral consequence is creating an incentive to pad budgets.

**LOOK AT CHART**

**LOOK AT CHART**

Properties of a Quality Costing System (TECHNICAL)

- Decision Relevance: quality spending = how much? where? purpose? impact on profitability? - Process Understanding: horizontal flow of info = problems in on department may affect quality problems in another department

Properties of a Quality Costing System (BEHAVIORAL)

- Focus on a customer requirement - Improved attitudes and aspirations about quality - Better management through visibility: how does this impact financial stability? - Budget Padding: Future reduction in failure costs may be used to increase the budget today. Quality cost may be used to pad budget

Nonfinancial Measures of internal business process quality

- Percentage of defective products manufactured - Percentage of reworked products - Number of different types of defects analyzed using control charts (Pareto diagrams) and cause and effect analysis - Number of design and process changes made to improve design quality or reduce the costs of quality

Total quality costs categories

- Prevention Costs - Appraisal costs - Internal Failure Costs - External Failure Costs

Properties of a Quality Costing System (CULTURAL)

- Quality as a way of life - Quality as an ethical value

Advantages of COQ (financial) Measures

- measures focus managerial attention on the effects of poor quality on operating income - total costs of quality help managers evaluate the costs / benefits of incurring prevention and appraisal costs to eliminate internal and external failures - measures assist in problem solving by comparing costs / benefits of different quality improvement programs and by setting priorities for cost reduction

How to construct value index

1. Develop customer ranking of performance dimensions 2. Estimate quality costs related to each performance dimension 3. Compute the Value Index

Steps of the Quality-Management System

1. Understanding customer requirements 2. Establish quality goals 3. Set work processes to meet quality goals 4. Perform work and monitor output 5. Deliver product and monitor customer experience 6. Perform root cause analysis

80-20 Rule

80% of the problems are caused by the 20% defects you have

Step 5. Deliver Product and Monitor Customer Experience

Any costs related to correcting defects discovered by customers are called external failure costs.

Prevention Costs

Cost to avoid quality problems from occurring. Ex: employe trainings, seminars, setting up machines, etc.

Internal Failure

Cost to fix defects before product is delivered. If when we are monitoring, we find an error BEFORE sending it to customers Ex: disposal of defective parts, cost to rework defective units

External Failure

Cost to fix defects discovered by customers. Customer finds an error/defect in the product. Ex: product recalls, warranty repairs

Appraisal costs

Cost to measure and monitor activities. Ex: monitoring costs and inspection / quality controls

Step 1. Understanding Customer Requirements

If customer requires something, then you need to provide that WITH quality performance

Quality includes

Features that customers desire & that the performance level of these features is high

A control chart

Graph of series of successive observations of a particular step, procedure, or observation taken at regular intervals of time. Each observation is plotted relative to specific ranges that represent limits within which observations are expected to fall when caused by random events. Observations that fall outside the control limits are nonrandom and WORTH investigating

Step 2. Establish Quality Goals

How do you make these requirements possible? Establish goals based on what your customers require from you. - 3 sigma = 3 defective / 1,000 = 99.97% nondefective - 6 sigma = 3.4 defective / 1,000,000 = 99.99966% nondefective

Step 6. Perform Root Cause Analysis

If you find out there's a problem with customer's satisfaction, perform root cause analysis for all internal and external failure costs to determine WHY. (tree diagram)

Time

Improving quality so that we build quality in, instead of inspecting quality in, avoids nonproductive time spent in inspection, rework, and product recalls. Time spent on quality related issues.

Step 3. Set Work Processes to Meet Quality Goals

Prevention Costs

Value Index

The ratio of a customer's perceived importance of a performance dimension to a firm's spending on that dimension. When the Value Index is GREATER than one, the importance of that performance dimension to customers is relatively larger than the firm's quality spending for that dimension When the Value Index is LESS than one, the importance of that dimension to customers is relatively lower than the firm's quality spending for that dimension

Traditional costing system vs. Quality costing system

Traditional: - No way to aggregate quality costs in different departments - Usually included in other accounts like overhead. - Stolen or broken units costs are assigned to spoilage --> OVERSTATING quality costs

Life-cycle cost / cost of ownership

cost incurred by customers over the life of the product

on-time performance

delivery of a product / service by the time it is scheduled to be delivered

Quality Cost Report

details the prevention, appraisal, internal and external failure costs that arise from the company's current quality control efforts

An effective quality-management program can provide a positive financial return by

improving quality, reducing cost, and speeding time to market

Statistical Quality Control (SQC) / Statistical Process Control (SPC)

means to distinguish between random and nonrandom variations in an operating process Random: chance fluctuations in the speed of the equipment cause defects to be produced Nonrandom: when defective products are produced as a result of a systematic problem (e.g. mishandling in the design, incorrect speed setting, etc.)

The total cost of a product includes

not only the cost of production, but any additional costs incurred due to quality problems (manufacturer and consumer side)

Quality circles

people that meet on a regular basis to discuss quality

Root Cause Analysis

systematic method of linking a problem, as perceived by the customer, to the underlying causes in order to identify the appropriate corrective action

Statistical process control

technique that is used to detect whether a process is in or out of control

Quality Costing

the measurement and management of costs related to providing a customer's required level of product or service performance. Includes all costs incurred to monitor and prevent problems in product performance, and costs incurred to remedy problems that do occur

Step 4. Perform Work and Monitor Output

to perform work and monitor the output produced to see if quality goals are being met. Example: inspection of output to detect errors. --> Appraisal costs. When defective units are discovered, any costs incurred for correcting the defectives, are internal failure costs