Cost of Quality Section A

7/29/2019 Cost of Quality Section A

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COSTOF QUALITY

Aashish AroraAgrim Verma

Gaurav Saini

Vilay Gupta

MBA General (A)

Submitted To:-

Prof. Parmjit Kaur


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IMPORTANT DEFINITIONSOF QUALITY

American Society for Quality: A subjective term for which eachperson has his or her own definition. In technical usage, quality canhave two meanings:

i. The characteristics of a product or service that bear on its ability tosatisfy stated or implied needs;

ii. A product or service free of deficiencies. Philip B. Crosby: Conformance to requirements . The requirements

may not fully represent customer expectations; Crosby treats this asseparate problem.

Peter F. Drucker: Quality in a product or service is not what thesupplier puts in. It is what the customer gets out and is willing to pay

for. ISO 9000: Degree to which a set of inherent characteristics fulfil

requirements. The standard defines requirement as need orexpectation.

Six Sigma: Number of defects per million oppurtunities.


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COSTOF QUALITY

Quality Costing is the sum of costs incurred by the

company in preventing poor quality, the cost incurred

to ensure that the quality requirements are being met,

and any other costs incurred as a result of poor qualityproducts.


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TOTAL QUALITYMANAGEMENT

TQM is the strategic commitment to improve quality

by combining statistical quality control methods with

a cultural commitment to seeking incremental

improvements that increase productivity and lower

cost.

- Deming and Juran


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ISO 9000

Developed by the International Organisation for

Standardisation is a set of five international

standards for quality management adopted by more

than 85 countries.

ISO 9000 was created to enable companies to

effectively document and certify their quality system

elements.


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Consumers may focus on SPECIFICATION QUALITY of

a product/service or how it compares to competitors in themarketplace.

Producers might measure the CONFORMANCE

QUALITY or degree to which the product/service wasproduced correctly.


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Prevention

Actions taken toensure that a

process providesquality productsand services.

Most cost effectiveway to controlquality.

Appraisal

Measuring thelevel of quality

attained by theprocess.

These costs areincurred duringproduction andprior to deliveries

to customers.

Failure

To correct qualityin products and

services before(internal) orafter(external)delivery to thecustomer.

PAF MODEL


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USESOFQUALITYCOSTREPORT

Firstly, the quality cost information helps managers

see the financial significance of defects.

Secondly, quality cost information helps managers

identify the relative importance of the quality

problems faced by the firm.

Quality Cost information helps managers see

whether their quality costs are poorly distributed. In

general, quality costs should be distributed more

towards prevention and appraisal activities and lesstowards failures.


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JURANS COSTOF QUALITY GRAPH


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ROLEOF QUALITY

COSTING


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APPLICATIONSOF QUALITY COSTING

Operational level

Managerial level

Strategic policy level


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ICEBERGMODEL


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CONCEPT

Decision making

Return on Investment (ROI)

Return on Quality (ROQ)

Identification of Cost Drivers Identification of potential areas for improvement

Move from Cost Accounting to Cost Management


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OBJECTIVES

Maximise quality whilst minimising cost.

Measure cost of quality.

Aim to control and reduce it.

Continually monitor it as a measure of progress.


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COST OF QUALITY MODELSGeneric Model Cost/Activity categories

P-A-F Model Prevention + appraisal + failure

Crosbys model Prevention + appraisal + failure +opportunity

Opportunity or intangible cost models Conformance + non-conformance

Conformance + non-conformance +

opportunity

Tangibles + intangibles

P-A-F (failure cost includes

opportunity cost)

Process cost models Conformance + non-conformance

ABC models Value-added + non-value-added


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CROSSBYS MODEL

It is similar to the P-A-F model.

It sees quality as conformance to requirements

Defines CoQ as the sum of price of conformance(PoC) and price of non-conformance (PoNC).

The price of conformance is the cost involved inmaking certain that things are done right the firsttime, which includes actual prevention andappraisal costs

The price of non-conformance is the money wastedwhen work fails to conform to customerrequirements, usually calculated by quantifying thecost of correcting, reworking or scrapping, whichcorresponds to actual failure costs.

O O O


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OPPORTUNITYOR

INTANGIBLECOSTMODELS Intangible costs are costs that can be only

estimated such as profits not earned because oflost customers and reduction in revenue owing tonon-conformance.

This model emphasizes the role of intangible costwithin the overall quality cost scheme.

In this group of models intangible or opportunitylosses cost is incorporated into a typical P-A-Fmodel.

Opportunity losses may be broken down into threecomponents: underutilization of installed capacity,inadequate material handling and poor delivery ofservice


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PROCESSCOSTMODEL

It represents quality cost systems that focus on

process rather than products or services.

Process cost is the total cost of conformance and

non-conformance for a particular process.

The CoC is the actual process cost of providing

products or services to the required standards, first

time and every time, by a given specified process.

The CoNC is the failure cost associated with a

process not being operated to the required

standard


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CONTD...

These costs can be measured at any step of the process. Accordingly, it can be determined whether high non-

conformance costs show the requirement for further

expenditure on failure prevention activities or whether

excessive conformance costs indicate the need for a process

redesign. The use of a process cost model is suggested as a preferred

method for quality costing within TQM as it recognizes the

importance of process cost measurement and ownership, and

presents a more integrated approach to quality than a P-A-F

model.

This model also helps in continuous improvement policy on

key processes within the organization and innovates where

appropriate


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STRUCTUREOF PROCESSCOSTMODEL


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ACTIVITYBASEDCOSTING MODEL

Prevention-appraisal-failure (PAF) approach (both old andnew) and process cost approach are the two main approachesto measuring CoQ. However, these approaches still cannotprovide appropriate methods to include overhead costs inCoQ systems

These deficiencies could be overcome under activity-basedcosting (ABC) developed by Cooper and Kaplan of HarvardBusiness School.

ABC uses the two-stage procedure to achieve the accuratecosts of various cost objects (such as departments, products,customers, and channels), tracing resource costs (includingoverhead costs) to activities, and then tracing the costs ofactivities to cost objects.

It is an alternative approach that can be used to identify,quantify and allocate quality costs among products, andtherefore, helps to manage quality costs more effectively.


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ABC CONTD...

It can be easily concluded that the PAF approach ofCoQ is activity-oriented, the process cost approachof CoQ is process-oriented, and ABC is activity-oriented for the cost assignment view and process-

oriented for the process view.An integrated CoQ-ABC framework was proposed

in 1998 and it was stated that the cost and non-financial information achieved from the integratedCoQ-ABC system can be used to identify the

magnitude of the quality improvement opportunities,to identify where the quality improvementopportunities exist, and to continuously plan thequality improvement programs and control qualitycosts .


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TWO-DIMENSIONALMODELOF ABC


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Six Sigma

Sigma

Is a measurement Scale upon which improvements can be

gauged.

Six Sigma

Is a methodology that drives business improvement.

Is a management System for governing the high impact

improvement efforts.


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Some of the Six Sigma Companies


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DMAIC

Definethe project goals and customer (internal and external) deliverables

Measurethe process to determine current performance

Analyzeand determine the root cause(s) of the defects

Improve the process by eliminating defects

Contro lfuture process performance

When To Use DMAIC

When a product or process is in existence at your company but is notmeeting customer specification or is not performing adequately.

The causes are not explicitly known.

The project is strategically important

DEFINE MEASURE ANALYSE IMPROVE CONTROL

What is

impor tant ?

How are we

doing ?

What is

wrong ?

What needs

to be done ?

How do we

guarantee

performance ?

Six Sigma Models - DMAIC


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Road Map Six Sigma Implementation


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Techniques For Identifying And Analyzing

Quality Problems

Control Chart

Pareto Diagram

Cause & Effect Diagrams


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Control Chart

Graph of a series of successive observations of a particular

step, procedure, or operation taken at regular intervals of time.

Indicates upper and lower statistical control limits, and an

average line, for samples or subgroups of a given process.


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Ways to analyze pareto data

Pareto Chart-A way to stratify data.

Pareto Analysis is used to organize the data to show which major

factors make up the subject being analyzed. Frequently it is

referred to as the search for significance.

The Pareto chart is arranged with its bars descending in order,

beginning from the left.

The basis for building a Pareto is the 80/20 rule. Typically,

approximately 80% of the problem(s) result from approximately20% of the causes.


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Ways to analyze pareto data


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Invented by Professor Kaoru Ishikawa of Tokyo University.

Also called the fishbone diagram.

The most frequently recurring and costly problemsidentified by the Pareto diagram are analyzed using these

diagrams.

The major purpose of the CE Diagram is to act as a first

step in problem solving by generating a comprehensivelist of possible causes.


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Other tools of quality control

Check sheet

The scatter diagram

Flow chart

The histogram


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Check sheet

The check sheet is a document used for

collecting data in real-time and at the location

where the data is generated.

The document is typically a blank form that isdesigned for the quick, easy, and efficient

recording of the desired information, which can

be either quantitative or qualitative.

When the information is quantitative, thecheck sheet is sometimes called a tally sheet.


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Check sheet


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Scatter Diagram

A tool for analyzing relationships between two

variables.

It can suggest various kinds of correlations

between variables with a certain confidence

interval.

A scatter diagram is used to prove or disprove

cause and effect relationship.


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Scatter Diagram


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Flow chart

Aflow chart reflects the cause and effect and the

sequential linkage among various process

activities.


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HISTOGRAM

A Histogram is a graphic summary of variation in a

set of data.


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Quantify the size of the quality problem.

Identify major opportunities for cost reductions.

It helps in Identification of opportunities for reducing customer

dissatisfaction and associated threats to product saleability.

Measures the results of quality improvement activities.

Align quality goals with organizational goals.

Set Cost Reduction Targets.


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The system is more complex

Different types of expenses and allocation of expensesDifferent forms and formulas to collect the data and preparing the reports.

It is expensive

Installing and maintaining cost accounting system requires more man powerand resources.

If the expenses incurred in ascertaining the cost is more than what is derived

from it, then the process of cost accounting is meaningless.

Not suitable for small scale unitsThrough the traditional accounting, small scale units can control the cost

effectively.


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Need preparation of frequent reconciliation to verify accuracy

Preparation of reconciliation statements with financial accounts

Leads to unnecessary increase in workload.

Does not control Cost by itself

It only bring out the possibility of areas which needs control.

If the organization does not have a efficient management, the reports and

results brought out by the cost accountant is useless.

Lack of cooperation of employees:

Depends heavily on the cooperation of employees concerned. Lack of

cooperation of employees will affect the overall results.

Inapplicability of costing method and technique

Differ from organization to organization

Depends on the nature of business and the type of service/product

manufactured by the firm.


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It serves the information need of the management

It only serves the requirement of information needed by the management not by

shareholders etc.

Duplication of Work

Many industrial units function effectively and control the cost effectively with the

financial accounting. Preparing cost accounting is unnecessary for them and it

involves duplication of accounting work.


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Cost of Quality Section A

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