9

AKUNTANSI MANAJEMEN
DOSEN : MELDONA, MM
Cost of Quality

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Hilton • Maher • Selto
7-3

Cost of Quality (COQ)

Out-of-pocket costs associated with quality

generally fall into two categories:

Costs associated with

activities to correct
failure to control
quality.

Costs associated with

controlling quality.
7-4

Cost to Control Quality

Prevention Appraisal
Activities that seek to Activities for inspecting
prevent defects in the inputs and attributes of
products or services individual units of
being produced. product and service.
•Certifying Suppliers •Inspecting Materials
•Designing for •Inspecting Machines
Manufacturability •Inspecting Processes
•Quality Training •Statistical Process
•Quality Evaluations Control
•Process Improvements •Sampling and Testing
7-5

Costs of Failing to Control

Quality
Internal Failure External Failure
Costs associated with Costs associated with
defects in processes defects in processes
and products that are and products that are
found prior to delivery detected after delivery
to customers. to customers.
•Disposing of Scrap •Warranty Repairs
•Rework •Field Replacements
•Reinspecting/Retesting •Product Liability
•Delaying Processes •Restoring reputation
•Lost Sales
7-6

Costs of Quality (COQ)

It is easier to
COQ is not
MEASURE the
required to be
COQ in
reported in the
organizations
financial
that use ABC
statements.
and ABM.

When COQ is reported,

it is usually expressed
as a % of sales.
 gon
2004

Categories of Quality Costs

• Failure Costs
• Repair Costs
• Appraisal Costs
• Prevention Costs

Cost of Quality
 gon
2004

Failure Costs
• Those costs incurred because poor quality
products do exist
• Can be further divided into sub-categories of:
– Internal failure costs
– External failure costs

Cost of Quality
 gon
2004

Repair Costs
• Those costs incurred if poor quality products
receive further processing
• If this occurs then the previous processing is
wasted cost
• Why would you do this?

Cost of Quality
 gon
2004

Appraisal Costs
• Those costs incurred because poor quality
products might exist
• If these costs are necessary then the process
is flawed and management is guilty
• Why would you permit this?

Cost of Quality
 gon
2004

Prevention Costs
• Those costs incurred because poor quality
products can exist and
• Those costs incurred because management
is committed to prevent poor quality products
from happening
• Why would you not do this?

Cost of Quality
 gon
2004

Preventing Poor Quality Pays

Prevention Costs

Benefit
Appraisal Costs

$ Repair Costs Prevention Costs

Failure Costs Appraisal Costs

• Internal Repair Costs
• External Failure Costs

Before Quality After Quality

Cost Alignment Cost Alignment
Cost of Quality
 gon
2004

Preventing Poor Quality Pays

• Would it not make sense to prevent poor
quality products from happening?
• How can this be done?
• Whose responsibility is this?

Cost of Quality
 gon
2004

How to Prevent Poor Quality

• Prepare to measure costs of quality
– Determine categories of quality costs
– Create measurement system that
captures categories of quality costs
• Assign responsibility to collect data
• Analyse collected data

Cost of Quality
 gon
2004

Determine Quality Cost Categories

• Understand your product
• Understand your process
• Understand where problems occur
• Determine precisely what goes wrong
• Determine what costs represents each problem

Cost of Quality
 gon
2004

Creating Data Collection System

• Create measurement system
– Attempt to harness existing financial
accounting system
– Manipulate existing financial data
– Collect costs as they occur
• Whatever you do ensure costs are accurate

Cost of Quality
 gon
2004

Assign Responsibility
• Make individuals at all levels responsible for
collecting quality cost data:
– If quality cost data is required then make
it the responsibility of the person who
creates the cost to collect the data
• If no one is responsible no one will bother

Cost of Quality
 gon
2004

Analyse Collected Data

• Data on its own is useless

• You must have it analysed to be able to
extract meaning
• Determine what knowledge you require
• Develop an analysis system that provides the
knowledge you require

Cost of Quality
 gon
2004
Useful Quality Cost Knowledge

• What you need to know is useful

• What you do not need to know is useless
• Only ask for knowledge you need to know
• Demand that knowledge is presented so that
it can be understood easily

Cost of Quality
 gon
2004

Management is Responsible

• Management decides what to produce in

terms of Products (goods and / or services)
• Management assigns responsibilities to
produce products
• Management is accountable for effectively
using resources to produce products

Cost of Quality
 gon
2004

“Cost of quality is …
the expense of noncomformance
–
the cost of doing things wrong.”
Crosby, P. 1979, Quality is Free, McGraw-Hill, Toronto

Cost of Quality
7-22

Quality Awards and

Certificates

European
Japan Community
7-23

Managing Time in a
Competitive Environment

We need to
reduce . . .

Less time means quicker response to changing customer

needs and to changing conditions of the marketplace.
7-24

Measuring Results: Process

Efficiency

Process efficiency
 The ability to transform inputs into outputs at
lowest cost.

Production processes
 Result directly in the production of products or
services provided to external customers.

Business process
 Support or enable production processes.
7-25
Measuring Results: Process
Efficiency

Low cycle
time
High High
quality productivity
High
throughput
7-26

Measuring Productivity

Total cost of
Total Factor Value of Goods
= ÷ Providing Goods
Productivity & Services
& Services

Specific productivity measures compare:

Outcomes The scarcest or most
Valued by to valuable resources used to
Customers achieve the outcomes.
7-27

Measuring Cycle Time

The average time necessary to complete and

deliver all good units and dispose of units that
have to be reworked or scrapped because of
defects.

Total
Average Good Units
= Processing ÷
Cycle Time Produced
Time
7-28

Measuring Throughput
Efficiency
A measure of the amount of time spent adding
value compared to the total cycle time.

Total
Throughput Value-added
= ÷ Processing
Ratio Time
Time
7-29

Measures of Capacity

Process It is possible
Capacity for “capacity
A measure of Practica demand” to
exceed
a process’s
ability to
transform
l practical
capacity.
resources
into valued
Capacit
products and
services. y
7-30

Measures of Capacity

Used Capacity In some

is the amount cases, “used
of the capacity” can
practical actually
capacity that exceed
is actually “practical
used. capacity.”
Used
Capacity
7-31

Managing Quality + Time +

Productivity + Capacity = JIT

The objective of JIT is to . . .

•purchase materials
• produce products
•and deliver products
. . . just when they are needed.
7-32

Managing Quality + Time +

Productivity + Capacity = JIT
The goal is to manage costs so that the savings
associated with JIT exceed the cost of
implementing JIT

Cost savings: Implementation costs:

•Inventory warehouse rent •Employee retraining
or cost •Technology improvement
•Inventory managers and •Exposure to work
personnel stoppage risks.
•Less warranty cost
7-33

Traditional “Push”
Manufacturing - Example
Computer Manufacturer

Forecast Sales Order components Store Inventory

Make sales Prepare

Begin Production in
from finished Production
Anticipation of Sales
goods inventory Schedule
7-34

JIT “Pull” Manufacturing -

Example
Computer Manufacturer

Customer Create Production Generate component

places an order Order requirements

Goods delivered Production begins Components

just in time as parts arrive are ordered
7-35

JIT Success Factors

1. 2. Flexible
Commitment Capacity.
to quality.
3. Reliable
Supplier
4. Smooth Relations.
Productio
n Flow.
5. Well- 6. Reduced
trained cycle and
workforce. response
times.
7-36

Quality At Any Cost?

Which is
more
important?
7-37

Total Quality Management (TQM)

Customers will Improved quality that

seek out the exceeds customer
highest quality expectations will
product. generate more revenues
that exceed the cost of
quality.

Therefore,
quality is
“free”.
7-38

Total Quality Management (TQM)

W. Edwards Deming
Quality can be and
proposed that improving
should be improved
quality reduces cost and
continuously.
improves profitability.
Revenues
Total Revenues & Costs

Max Profit
Cost

Max Quality

Quality
7-39

Return on Quality (ROQ)

Profit is maximized The optimum quality level is

at the optimum always achieved before maximum
quality level. attainable profit is reached.

Cost
Total Revenues & Costs

Revenues
Max Profit

Optimum Quality

Quality
7-40

Lead Indicators of Quality

Variation indicates poor quality. To

measure variation, there are several tools
that can be used:

Histograms Run Charts Control Charts

90
80
70
60
A graphical display of the 50
40
frequency distribution of 30
20
attributes. 10
0
Mon. Tues Wed. Thur. Fri.
7-41

Lead Indicators of Quality

Variation indicates poor quality. To

measure variation, there are several tools
that can be used:

Histograms Run Charts Control Charts

100
80
60
A graph showing trends 40
20
in variation over time. 0
.
es

i.
.
on

ur
ed

Fr
Tu

Th
W
M
7-42

Lead Indicators of Quality

Variation indicates poor quality. To

measure variation, there are several tools
that can be used:

Histograms Run Charts Control Charts

100
80
60
40 Notice
A run chart
that this
withprocess
upper
20
0 andseems
lower to
control
be outlimits.
of
control on Fridays.
.
es

i.
.
on

ur
ed

Fr
Tu

Th
W
M
7-43

Diagnostic Information

While lead indicators tell that there IS a

problem, diagnostic tools help determine
WHAT the problem is.

Cause-and- Scatter
Effect Diagrams Diagrams

Flow Charts Pareto Charts

7-44

Cause-and-Effect Diagrams
Other

Wrong Trucks
directions Flat Tire
from customer Breakdown
Defect =
Late
Ice Deliveries
Rain or Too slow
Road snow
Don’t know
Work Poorly the route
Trained
Road Drivers Sometimes called “fishbone”
Conditions
or Ishikawa diagrams
7-45

Scatter Diagrams

A plot of two variables that might be related. A

Patterns often indicates a causal relationship.
Avg. Response Time (Min)

50
40
30
20 This pattern indicates
10 a causal relationship.
0
0 5 10 15 20
Freq. of Incorrect Info
7-46

Flowcharts
Taking Phone Orders
A graphical Prepare Invoice in
duplicate.
Gather customer
information

illustration of SI2 Notify

sequential linkages Sales

Invoice
SI1 Customer
in writing.

among process Items on

No Cancel
sales SI2
hand?
activities. Yes
invoice. Sales
Invoice
SI1

Select items and

Standardized place on conveyor.

Update perp.

Inventory
symbols are used to

records.
Initial SI1 and inventory
attach to items. records.

represent decisions, Sales SI1

Sales SI2

actions, documents, Invoice

Invoice

and storage devices. Send goods and

invoice to customer N
7-47

Pareto Charts
A histogram of causes of errors or errors arranged in
order of frequency or size. Helps in prioritizing
actions to address problems.

80

70

60

50

40

30

20

10

0
Late Delivery Defective Incorrect Bill Backorders Wrong Item
Produce
7-48

Customer Satisfaction

Common tools for

The degree to measuring customer
which satisfaction
expectations of  Phone Surveys
product attributes,  Questionnaires
customer service,  Focus Groups
and price have  # of Customer
been met or Complaints
exceeded.  “Phantom” Shoppers
7-49

End of This Chapter

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