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Terms in this set (21)
Three views of quality costs
1. Higher quality means higher costs -- performance quality and extra features
2. The costs of improving quality is less than the resulting savings -- conformance quality
3. Extra cost incurred if the product were not built right the first time -- for HP it is about 25-30% of the revenues, much higher for service organizations
Costs of Quality
1. Appraisal costs -- costs of inspection.
2. Prevention costs -- proactive; redesign the product to avoid future costs.
3. Internal failure costs.
4. External failure costs -- most expensive.
1 dollar spent in prevention can save you 10 dollars in appraisal costs and 100 dollars in failure costs -- external + internal
Activity-based costing -- ABC
1. Identify drivers of quality costs.
2. Accounting system should be designed/modified to support the operations and strategic goals.
3. Implementation proved to be difficult.
Quality is measured by the cost of quality which is the expense of non-conformance - the cost of doing things wrong
What will it cost to improve quality? What will it cost to not improve quality? - Basic questions that managers need to ask as they focus on the bottom line and company strategic decisions.
Not doing things right the first time was 25-30%
Cost of quality is the difference between the actual cost of making and selling products and services and the cost if there was no failures during manufacture or use and no possibility of failure
Cost of not meeting the customer's requirements - the cost of doing things wrong
Spend on quality improvement until the added profit equals the cost of achieving it
Some quality costs in U.S. firms indicate 25% of revenues
Poor quality can cost about 25% of the personnel and assets in a manufacturing firm and up to 40% in a service firm -- 20-30% of sales
Three views of quality costs: higher quality means higher costs, cost of improving quality is less than the resulting savings, quality costs are those incurred in excess of those that would have been incurred if performed right first time
Major reason for failure to measure these costs was lack of top management commitment
Zero defects is the absolute performance standard, and the cost of quality is the price of non-conformance against the standard
Measuring quality by calculating the price of waste - wasted time, effort, material
Costs of quality: prevention costs, appraisal, internal, external
Benefits: reduced inventory turn, lead-time, improved ROI & ROA
Quality and cost are a sum, not a difference - complementary, not conflicting objectives
An effective cost of quality planning and control system should be directed toward the basic reason for quality improvement; that is, support of a differentiation strategy
There is little advantage to investing in equipment, overhead, or process improvements that do not add customer value
The measurement and reporting of costs of quality should meet the three-part need to - Report quality costs, Identify activities where involvement is suggested, Indicate interlinking activities
Costs are not incurred or allocated, but rather are caused
Problems are solved by tracing the cause of a quality deficiency
Quality cost information can be used in a number of ways:
Identify profit opportunities - every dollar saved goes to the bottom line. Make capital budgeting and other investment decisions, Improve purchasing and supplier-related costs, Identify redundant systems
Costs are not incurred or allocated; they are caused
Activity-based costing (ABC) "A bean-counter's best friend"
collection of financial and operation performance information that traces the significant activities of a firm to process, product, and quality costs - encourages management to analyze activities and determine their value to the customer
Process control - documents the process flow, identifies requirements of internal and external customers, defines outputs of each process step, and determines process input requirements
Activity analysis - defines each activity within each process and identifies activities as value added or non-value added based on customer requirements
Drivers are the conditions that create or "drive" the need for an activity and hence the resources consumed - if the cost driver relates to a non0value activity, it can be eliminated or reduced - 50% or more of the activities in most businesses are cost added rather than value added
ABC recognizes that activities, not products, consume resources
Costs are driven by factors other than volume or direct labor
Cost drivers are agents that cause activity to happen
ABC might provide guidelines to help engineers design a product that meets customer expectations and can be produced and supported at a competitive cost
ABC basic concept - costs of products and quality can be traced to the drivers of activities that consume the resources which causes these costs